LAW3311 – COMPANY LAW

Assignment submission template

Name: Chris Hacking

Student number: u1096399

Questions answered : 1&2

Word count (without footnotes) (maximum allowed 2800): 1785.

State any approved extension date (and attach the course leader’s approval):

ASSESSMENT CRITERIA

Each of the questions in the assignment will be assessed against the following criteria. The
relevant marks are as indicated next to each question.
Assessment Criteria

Each of the questions in the assignment will be assessed against the following criteria. The relevant
marks are as indicated.

Criterion HD A B C F
Legal Problem-
solving
12 marks

Identifies Correctly Correctly Identifies Identifies at No clear

legal identifies all identifies most legal least one legal identification
issue/proble legal issues most legal issues issue relevant of legal issues
m relevant to issues relevant to to the case but relevant to the
4 marks the case. relevant to the case but more detail is case and/or
the case. more detail is required. issues
required. identified are
not relevant.

4 3 2.5 2 0 – 1.5

Question 1 /4

Question 2 /4

Total

Evaluates Outlines all Outlines all Outlines some Outlines some Lack of
relevant legal relevant legal relevant legal relevant legal relevant legal relevant legal
principles. principles, principles, principles, principles but principles or
4 marks citing citing citing citation of those
applicable applicable applicable applicable identified are
cases and/or cases and/or cases and/or cases and/or incorrect; no
statutory statutory statutory statutory attempt to
provisions; provisions; provisions; at provisions evaluate
Contrary legal some contrary least one needs more contrary
arguments are legal contrary detail; No arguments.
identified and arguments are argument is contrary
evaluated. identified and identified and argument is
evaluated. evaluated. identified and
evaluated.

4 3 2.5 2 0 – 1.5

Question 1 /4

Question 2 /4

Total

Develops Stated Stated Stated Stated Stated

logical conclusion conclusion conclusion is conclusion is conclusion is
conclusions. answers the broadly broadly broadly aligned not aligned
4 marks. question and answers the aligned with with the with the
logically ties question and the question question and question and
together the ties together and ties ties together fails to tie
 legal some legal together some some legal together legal
arguments for arguments for legal arguments for arguments
and against and against arguments for and against the either for or
the the and against application of against the
application of application of the particular legal application of
particular particular application of principles particular legal
legal legal particular principles
principles principles legal
principles

4 3 2.5 2 0 – 1.5

Question 1 /4

Question 2 /4

Total

Criterion HD A B C F

Research Far exceeds the Exceeds the Uses the Provides one or Provides far
required required required two fewer fewer original,
number of number of number of original sources appropriate
appropriate appropriate appropriate, than required sources than
4 marks
original sources original sources original sources and/or some are required
not appropriate. AND/OR
There is evidence
of plagiarism,
collusion,
cheating or other
misconduct

4 3 2.5 2 0 – 1.5

Question 1 /4

Question 2 /4

Total

Effective Communicate Communicate Communicate Communicatio Communicatio

written s clearly, s clearly and s with some n is reasonably n is unclear or
communicatio concisely and concisely clarity using clear and does not
professionally using written written broadly conform to the
n
using written expression expression conforms to expression and
expression and and the expression formatting
and formatting formatting and formatting required for
4 marks
formatting that is that is required for the task.
that is appropriate generally the task.
appropriate for the task. appropriate
for the task. for the task.

4 3 2.5 2 0 – 1.5

Question 1 /4

Question 2 /4

Total
COMMENTS

Marks according to criteria:

Deduction for late submission

Total
START WRITING YOUR ANSWERS HERE

Question 1
A preliminary review of the information provided suggests that Peter has engineered a contract that is
advantageous to himself, at the expense of William, Henry and their company. If this can be substantiated
through evidence based legal analysis, Peter’s behaviour constitutes a severe conflict of interest. If it can be
reasonably concluded that Peter acted in a negligent or fraudulent manner, the optimal outcome is that the
contract with Asian Epicurean Delights Ltd (AEDL) is declared void.

Furthermore, William and Henry may be entitled to remedies in order to rectify the situation. This may also
include being released from their contractual obligation with AEDL as a result of Peter’s misconduct. Continued
are the primary legal issues relating to Peter’s conduct and its interaction with Australian corporate law.

Peter’s Role Within the Company

In order to determine what Peter’s responsibilities were towards his peers, it must first be determined what
position he had within the company. Because his position is not explicitly stated, it must be inferred by his
actions. According to s 9 of the Corporations Act 2001 (Cth), a corporate officer is defined as:

(b) A person:

(i) who makes, or participates in making, decisions that affect the whole, or a substantial part of the business of the
corporation; or

(ii) who has the capacity to significantly affect the corporation’s financial standing; or

(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding
advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their
business relationship with the directors or the corporation)1.

What constitutes substantial or significant decisions is highly contextual, and relies on evidence and relevant
precedent. A general guide for determining an officer is found in Shafron v ASIC2. “[T]he inquiry required by
this paragraph of the definition must be directed to what role the person in question plays in the corporation. It is
not an inquiry that is confined to the role that the person played in relation to the particular issue in respect of
which it is alleged that there was a breach of duty3.”

Therefore, the role of the appellant was not be determined solely by his conduct regarding the relevant issue that
inspired the inquiry. While JHIL is a far larger company than the prospective Downunder Wines, the appellant
Peter Shafron was in a similar role to our Peter as general counsel of JHIL. Shafron’s summarized defense was
that he was acting in an advisory capacity and on behalf of other executives 4. Therefore he could not have been
considered to have been participating in substantial decisions affecting the company as a whole.

Cousin Peter may argue a similar defense, that as a solicitor his role was simply that of an advisory regarding
the establishment of a company. It must be then countered that Peter’s activities constituted the majority of the
company’s decisions up until that point. Beyond establishing decisions relating to his legal expertise, Peter took
it upon himself to sign a contract with a vendor on behalf of the company, using his own alleged experience
regarding the foreign wine market.

Viewed as a whole, Peter was a de-facto managing director who had made every significant decision regarding
the company other than its purpose and title. A title that failed to be registered successfully due to his lack of
due diligence regarding its availability. Thus, Peter was not simply acting in an advisory or secretarial role and

1
This definition was introduced by the Corporate Law Reform Program Act 1999 (Cth).
2
Shafron v Australian Securities and Investments Commission [2012] HCA 18.
3
Ibid, [23].
4
Ibid, [22].
was therefore an officer of the company. The small size of the company and its short existence add further
weight to the importance of his decisions.

It is also important that William and Henry also establish themselves as directors of the company, for reasons
that will become apparent later. Just as Peter can be established as managing director through his conduct,
William and Henry should provide all information and documentation that proves that they had a substantial
role in the company during its incorporation.

Peter’s Conflict of Interest

As an officer (arguably the most important officer of the company), Peter was entrusted with several fiduciary
duties regarding his position. This includes avoiding a conflict of interest, a situation which typically involves a
director exploiting an opportunity for the benefit of themselves or a third party, to the detriment of the
company5. While fiduciary duty has been described as ‘a concept in search of a principle 6’, a general
explanation of the fiduciary duty and conflict of interests has emerged in case law. From Hospital Products Ltd
v United States Surgical Corp (1984) 156 CLR 41:

“It has been often said that a person who occupies a fiduciary position ought to avoid placing himself in a
position in which his duty and his interest, or two different fiduciary duties, conflict. This is rather a counsel of
prudence than a rule of equity; the rule being that a fiduciary must not take advantage of such a conflict if it
arises7.”

In short, what is good for a director should also be good for the company 8.

Peter’s unfavorable contract that he entered into with Epicurean cannot be considered mere error or poor
negotiating skills9. The other principals of the wine company had a reasonable expectation that Peter would
deliver a favorable outcome to all their interests. As Peter has a stake in Epicurean, he has personally improved
his standing and that of his fellow stakeholders to the detriment of Australian / DownUnder Wines.

This is beyond a mere possibility of conflicted interests 10. It is a clear conflict of interests with a related
company11 that was not disclosed to the other members of the board12. Based on the precedents referenced above
and others such as Hydrocool Pty Ltd v Hepburn (No.4)13 and Demetriou v Gusdote Pty Ltd (2010)14, Peter has
committed a clear breach of duty due to his blatant and undeclared 15 conflict of interests.

The Validity of the Contract

Sub-section (5) of s 191 of the Corporations Act states that the fiduciary duty to disclose a conflict of interest
before said conflict occurs, does not apply to a proprietary company with only one director. It is for this reason
that William and Henry must firmly establish their roles as directors who entrusted responsibility onto Peter as a
leading director with legal and market experience. Unfortunately for them, a director contravening s 191 does
not affect the validity of any act, transaction or agreement 16. This statute has also been affirmed in case law17.

5
Corporations Act 2001 (Cth) s 191.
6
Sir Anthony Mason, “Themes and Prospects”, in Finn P D (ed) Essays in Equity (1985) p 246.
7
Dean and Mason JJ, quoting Sir Frederick Jordan.
8
See; Allen v Gold Reefs of West Africa [1900] 1 Ch 656; Mills v Mills (1938) 60 CLR 150.
9
Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch 399.
10
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; [1843-1860] All ER Rep 249.
11
Canberra Residential Developments Pty Ltd v Brendas (2010) 188 FCR 140.
12
Woolworths Ltd v Kelly (1991) 22 NSWLR 189, Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437.
13
(2011) 83 ACSR 652.
14
(2010) 78 ACSR 566.
15
Corporations Act 2001 (Cth) s 192 (1).
16
Ibid, [4].
17
Roden v International Gas Applications (1995) 18 ACSR 454. See also Craven Textile Engineers Ltd v Batley
Football Club Ltd [2001] BCC 679 (CA) at [25]-[30] for a similar example in parallel British law.
There is also no basis for the company or other directors receiving compensation as a result of Peter breaching
his fiduciary duties18.

The only possible avenue for William and Henry escaping the terms of the unfavourable contract without
incurring damages, is establishing that the contract was not ratified by the company within a reasonable time
frame after the contract was signed 19. Aztech Science v Atlanta Aerospace (Woy Woy 20) demands that an express
or implied ratification by the company be present. If the ratification can be determined to not exist (the overall
awareness and approval of the contract by the other directors is not stated), then Peter becomes personally liable
to pay damages to the other party to the contract 21. While William and Henry would not receive compensation
for Peter’s misconduct, this would free them from any compensation obligations owed to Epicurean.

A caveat is that Henry, as a solicitor, may have thought ahead and provided himself with a release that releases
him of any liability owed to Epicurean22.

Question 2
The legal construct of a corporation as an entity leads to potential issues when the leadership of that company
are in procedural conflict with each other. In a standard contract between two persons, it is assumed that a party
of sound mind agrees with their own decision. This would also be extended to an agent signing on their behalf,
such as a legal counsel. A company board however, can be comprised of numerous individuals who have their
own opinions regarding important decisions involving the company. It is for this reason that there are statutory
rules and company constitutions defining and regulating the conduct of company officers.

A company usually practices discretion when it comes to displaying the internal management and rules of the
company to outsiders23. It is for this reason that a third party must assume on good faith that a company
representative has the required authority to enter the company into a valid contractual relationship. This is
known as the “Indoor Management Rule” 24. Established in common law with the Turquand25 case, the general
guideline is that an outsider can ‘make the assumption that company officers had duly complied with the
company's rules’26.

This has been affirmed in modern Australian case law. The High Court stated in 207 of Northside Developments
Pty Ltd v Registrar-General27 that ‘persons dealing with a company in good faith may assume that acts within
its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of
internal management have been regular’.

In Australian statute, the Indoor Management Rule is codified in s129 of the Corporations Act 2001 (Cth):

Constitution and replaceable rules complied with

18
Castlereagh Motels Ltd v Davies-Roe (1966) 67 SR (NSW) 279.
19
As above n 15, s 131 (1)(b).
20
[2005] NSWCA 319.
21
As above n 15, s 131 (2).
22
Ibid, (1).
23
A recognition of a company’s right to privacy and the challenges that creates with outsider relations appears
in cases such as Smith v Hull Glass (1852) 11 CB 897 at 927-8; 138 ER 729 at 741; Pacific Coast Coal Mines Ltd v
Arbuthnot [1917] AC 607.
24
David Morrison, ‘The Continued Role of the Common Law Indoor Management Rule Due Inquiry Exception’
(1996) 12 QUT Law Review 28-40.
25
Royal British Bank v Turquand (1856) 6 E&B 327.
26
As above n 23, 29.
27
(1990) 170 CLR 146.
1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as
replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the company that is available to the public
from ASIC, to be a director or a company secretary of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or
company secretary of a similar company.

While Tom violated the company constitution by not seeking board approval before entering into the contract,
he was the company secretary and did manage to convince another director to co-sign the contract. A company
contract without a seal is assumed to be valid if it has been signed by the company secretary and another
director28. It is reasonable for the site owner to assume that the signatories were following company guidelines
when they entered into the contract.

There appears to be limited options for Midas Ltd to legally avoid the obligations of the contract it has entered
into with the site manager. Based on the information provided, it cannot be alleged that the site owner was
consciously aware that Tom was in breach of the company constitution 29. The circumstances of the transaction
also make it unlikely that the inquiry exception to the rule will apply30.

In conclusion, it seems most likely that Midas Ltd will continue its contractual obligations with the site owner.

28
Corporations Act 2001 (Cth) s129 (5).
29
Ibid, s 128. This was established in the common law in Howard v Patent Ivory Manufacturing Co (1888) 38
Ch D 156.
30
Northside Developments Pty Ltd v Registrar-General (1990) CLR 146. See also Custom Credit Holdings Ltd v
Creighton Investments Pty Ltd (1985) 3 ACLC 248.