Mpany Law Assignment Option 2

COMPANY LAW- ASSIGNMENT OPTION 2

Please include an Assignment cover sheet.Mark = 7.5/30Marker = Kristen MinutilloComments = your assignment question 2 is generally quite good, but please make sure you follow the 4 step process properly. Further discussion and application of relevant legal principles would have helped you gain the additional marks. Unfortunately you have not outlined the correct legal principles in question 1.

Question 1

Step 1: Samantha loaned the company she owned $50,000. The loan to the company had

the following characteristics:

It was not beneficial to the company as it was made to cover an inflated purchase of

the business.

It required the company to repay Samantha, the sole Director and shareholder of the

company the loan amount.

These features of a transaction characterize a director related transaction (Latimer 2012,

85). In the scenario the company is being folded up and there is a question of whether the

loan by Samantha to the company takes precedent over the debts owed by other unsecured

creditors. In Australian corporation law, liquidators are mandated to investigate transactions

that may unfairly interfere with the right of unsecured creditors to claim debts from a

company under liquidation (Latimer 2012, 79).

Under the definition in Section 588FDA subsection 1 of the Corporation Act 2001 the

following transactions are considered unreasonable director-related transactions if:

The company made a payment.

There is transfer, disposition or conveyance of the company’s property.

Company issues securities including share options.


Company incurs an obligation to issue securities, make payment, transfer, dispose or

convey property.

In Section 588FDA subSection 3 of the Corporation Act 2001 the payment or issue will

be or is made to:

A company director.

An associate of a company director.

On behalf of the persons mentioned above.

Your step 1 needs to be succinct – usually 1 sentence is all that’s required. For eg

“The area of law is company law, specifically focusing on incorporation and the

separate legal entity doctrine.” Unfortunately you have not outline the key area of

law. The additional discussion on sections should be in your step 2.

Mark = 0/1

In the Irac method I am familiar with you are supposed to outline the area of law and

discuss the legal issues in the first step. From the facts I was able to identify director

related transaction as the legal issue to be addressed in this question. The other

steps in the analysis are targeted at analyzing director related transactions instead of

the separate legal entity principle and therefore the many mistakes

Step 2: The purpose of distinguishing Director-related transactions in Company law

comes about because of the need to protect unsecured creditors during liquidation of a

company. Directors may have entered into transactions in the company whose only aim is to

frustrate creditor’s effort to recover their debt. Thus a liquidator has to investigate if all the

transactions entered by the company with director related entities are reasonable (Latimer


2012, 84). For a transaction to be considered unreasonable a number of conditions have to

be fulfilled, under the Corporation Act Section 588FDA sets out unreasonable transactions as

those that are entered to without regard to:

The benefit to be accrued by the company in entering the transaction.

The possible detriment to the company if it enters into the transaction.

One of the most important factors in determining which transactions can be set aside

during liquidation is the timing of the transaction. In the Corporation Act Section 588FDA

(6A), an unreasonable director related transaction is voidable only if it took place four years

prior to commencement of liquidation proceedings. These sections are not the paramount

concern of this question

From my analysis of the question I found director related transactions to be the main

issue instead of the incorporation and separate legal entity principle as identified by the

lecturer

In unreasonable director related transactions only the amount of undervalue in the

transaction can be recovered (Latimer 2012, 92). This is set out in the Corporation Act

Section 588FF.

Your step 2 does not focus on the correct law. A primary focus needs to be on the Salomon case, sections 114 and 124. Further case law is also required in your discussion – the Lee or Macaura cases should have been discussed. Consider including further discussion on incorporation and liability, as well as further discussion on secured creditors.

Mark = 0/9

Step 3: The actions of Samantha in selling the business to her limited company can be

said to constitute unreasonable director related transaction. The transaction entered by

Samantha requires the company to make payment to her and thus is covered by Corporation


Act paragraph 588FDA 1 (a) (ii) that categorizes transactions. Secondly, the payments are to

be made to Samantha herself the sole director and shareholder of the company therefore

fulfilling the requirement for Corporation Act paragraph (b) (ii) which requires that the

recipient of a payment, issue or disposition be director of the company under liquidation.

Thirdly, the transaction to buy a business at an inflated value is of no benefit to the

company. In contrast, paragraph (C) requires that reasonable transaction be of net benefit to

the company. Similarly, in Woodgate v Fawcett [2008] NSWSC 868 the court ruled that

transactions that were detrimental to the company were to be considered unreasonable.

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457

transactions that have no commercial justification and benefit to the company involving the

directors parents were considered unreasonable director related transactions.

Finally, the transaction had taken place within 4 years to the commencement of

winding up the company and therefore satisfies Corporation Act Section 588FDA (6A) which

only considers transaction unreasonable director related transactions if they took place

within a period of 4 years prior to commencement of liquidation process (Latimer 2012,

105). In this case, Samantha had inflated the cost of her business by $50,000, the same

amount of money she loaned the company to complete the purchase. Therefore, the

liquidator can apply for the setting aside of Samantha’s debt $50,000 as it would have the

effect of making the transaction reasonable. The Corporation Act Section 588FF provides

that only the amount of undervalue can be recovered in unreasonable director related

transactions.

Your step 3 needs to apply the Salomon case, Macaura and Lee and sections 114 and

124. You should be discussion how the separate legal entity applies, and therefore the debt


is separate from Samantha, and that as a secured creditors she is entited to the money

ahead of unsecured creditors.

Mark = 0/4

Step 4: The debate over whether shareholders or director loans to their own

company should be considered before those of outside creditors is hotly contested in legal

circles. In this case, Samantha will not be able to recover her $50,000 loan to her company as

she has clearly engaged in unreasonable director related transaction when lending the

money to the company. The company would not have needed the loan if she had not

inflated the value of her business. In effect, the application of this rule means, the prospects

of the company’s unsecured creditors to be compensated is increased.

Your step 4 should highlight that Samantha is entitled to the money as the separate

legal entity principle applies.

Mark = 0/1

Mark question 1 = 0/15

Question 2

Step 1: Australian Company law offers protection to people dealing contractually with

companies; in that one does not need to concern himself with the internal management of

the company while transacting business with the company. From the facts, the legal issue

that is in contention is whether Windy Willow Winery Pty Ltd is bound by the contract made

by Ian and Anne to purchase equipment from Vinotec Limited. In the Corporation Act Section

124, a company has the power and authority to enter into contracts. However, the law

recognizes that a company is a fictitious person and needs people to act on its behalf. In the

Corporation Act Section 126, the capacity and legal power of a company in contract making

is vested in individuals representing the company (Latimer 2012, 128). According to


replaceable rule 2 or Section 198A of the Corporation Act 2001, directors have the right to

direct the company and while acting on behalf of the company all the company’s legal

capacity is conferred on them. According to replaceable rule 4 or Section 198C of the

Corporation Act, directors of a company may confer their legal capacity on the managing

director. However, Corporation Act Section 129(1) which allows a person dealing with a

company to assume all the company internal affairs are in order including compliance with

the replaceable rule or the constitution.

Try to make your step 1 more succinct by merely outlining the topics of internal governance

and corporate liability in contract. Some of the discussion above should be in your step 2

instead.

Step 2: These rules clearly give the directors of a company the power to deal and

contract with the outside world on behalf of the company. However, in some instances the

company may refuse to honour a transaction on the argument that the person who entered

the transaction on their behalf did not have the capacity to bind the company to the

contract. In such, a situation a creditor of the company may result to the assumptions in

Corporation Act Section 129(1) or what is known as the indoor management rule in common

law (Latimer 2012, 128). Good (2) here you should also need to outline section 124, 125,

198A and additional relevant case law (some of this you have outlined in your step 1 instead,

so I have given you some marks, but please make sure you check the 4 step process

structure).

Mark = 4.5/10

Step 3: When Ian and Anne Frost as directors of Windy Willow Winery Pty Ltd decided to

purchase the Wine presses and other winery equipment they were acting on behalf of the

company. According to the Corporation Act replaceable rule 2 which the company follows a


company is run according to the direction of its directors. Directors also have the mandate to

exercise all the powers of the company under Corporation Act Section 198C including the

capacity to contract. Despite this, the company may argue that its constitution limits the

powers of the two directors and prevents them from entering into contracts above $40,000.

In view of replaceable rule 2, in the Corporation Act allows companies to limit the powers of

directors to act on behalf of the company and therefore this is a valid argument for the

company to exit the contract entered on its behalf by Ian and Anne.good (1) However, if the

company is allowed to make this argument Vinotec Ltd may lose the equipment supplied to

Windy Willow Winery Pty Ltd or make losses incurred in supplying the same. Due to this

problem Vinotec ltd is allowed to rely on the assumptions in the Corporation Act Section 129

that Ian and Anne as directors of the company were adhering to the company constitution

and replacable rules in purchasing the equipment on behalf of the company. Similarly, the

Royal British Bank v Turquand (1856) 119 ER 886 helped establish the principle of the indoor

management rule. In Northside Development Pty Ltd v Register-General (1990) people

dealing with a company are allowed to make assumptions that its internal management is in

order1. However, Vinotec’s reliance on the assumptions in the Corporation Act Section 129 is

limited by conditions set in Corporation Act Section 1282. In this Corporation Act Section, if

Vinotec had actual knowledge or implied knowledge that Ian and Ann did not have the legal

capacity to enter into transaction above $40,000 on behalf of Windy Willow Winery Pty Ltd,

then they cannot rely on the assumption in Corporation Act Section 129. Good (1)

You you have applied is good, but you also need to apply the additional sections and case

law from step 2 in order to gain the additional marks – particularly sections 125 and 127.

Mark = 2/4

1

2


Step 4: It can be concluded that Windy Willow Winery Pty Ltd has a binding contract with

Vinotec for the purchase of the Wine Presses and other winery equipment. It is clear that

both Ian and Anne had the legal capacity to enter into contract on behalf of Willow.

Although, they contravened the company constitution by entering into a contract with

Vinotec of $50,000 well above the limit of $40,000 this would not have been apparent to

Vinotec. In this case, Vinotec is able to rely on the indoor management rule or the

assumptions in Corporation Act Section 129 to maintain that he has a legally binding

contract with Windy Willow Winery Pty Ltd despite the fact it contravenes the companies

constitution. Therefore, Vinotec is able to rely on statutory protection for creditors who may

be fleeced by companies that enter into transactions and later deny that the person who

acted on their behalf lacks the legal capacity to bind them to the contract.

Your step 4 is good, but consider making it more succinct – 1-2 sentences is all that’s

usually required. You also need to be clear that even though there is a breach the contract

isn’t necessarily invalid (s125)

Mark = 1/1

Mark question 2 = 7.5/15


Bibliography

Corporation Act 2001, cth

Latimer, Paul. 2012. Australian business law. Sydney: CCH Australia Limited.

Northside Development Pty Ltd v Register-General (1990)

Royal British Bank v Turquand, (1856) 119 ER 886

Woodgate v Fawcett [2008, NSWSC 868

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457

Your textbook should have also been used as a reference

Documents

Mpany Law Assignment Option 2