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Company Law for Mention in Corporate Act

Question:

Describe about the Company Law for Mention in Corporate Act.

Answer:

Before discussing the remedies available to the shareholders of the company, we are taking a brief look on the duties of directors of Happy Days Limited towards the shareholders of the company. Following are the general duties of the director’s mention in Corporation Act 2001:

Directors must fulfill their duties with the care and diligence & they have complete information about the financial aspects and they did not engaged in any trading activity in case of insolvency of the company.

They exercise their duties and powers for the proper purpose.

They did not use their position for their own personal advantage, which cause harm to the company.

Act honestly and carefully while dealing with company or with others on behalf of the company (ASIC, n.d.).

There are many legal obligations of the directors, it is the duty of director to understand those obligations and regularly make compliances with them.

Give priority to the interest of company, creditors and shareholders of the company.

Directors does not use any information of the company for their own benefit or for someone else benefit (ASIC, n.d.).

In this case Board of Directors of Happy Days Limited took three decisions, from which Walter and Shirley are not satisfied. In this paper we discuss about the statutory remedies available to Walter & Shirley as a member of the company. Following are the brief note on the decisions taken by directors:

Firstly, directors refuse to pay dividend so that retained earnings of the company can be used for the future growth of the company. As per Section 254T of Corporation Act 2001:

(1) There are some circumstances in which company can pay dividend:

(a) Assets of the companies must exceed from the liabilities of the companies before the declaration of dividend.

(b) Dividend payment must be fair and reasonable to the shareholder’s of the company.

(c) Dividend payment must not affect the ability of the company regarding payment to its creditors.

(2) Calculation of asset and liabilities for the purpose of payment of dividend must be according to the accounting standard in force at that time (Commonwealth Consolidated Acts, n.d.).

As per Section 254U of Corporation Act 2001, there are some other provisions also regarding payment of dividend:

(1) Board of Directors of the company has right to decide whether dividend is payable or not and they can fix:

(a) Amount of the dividend payable to the shareholders of company.

(b) Time on which payment is made.

(c) Decide the method of payment that means whether cash is paid, assets are transferred or shares are issued.

(2) Interest on dividend is not paid (Commonwealth Consolidated Acts, n.d.).

Power regarding payment of dividend is completely vest in the Board of Directors of company, shareholders cannot raise question regarding non-payment of dividend. Directors of Happy Days Limited is authorized to make decision of nonpayment of dividend and kept the retained earnings for the future growth of company. So in this case Walter & Shirley do not have any legal remedy regarding nonpayment of dividend. Power to pay dividend is totally vest in the board of directors of the company. If directors of the company decided to keep the surplus as retained earnings for the future growth of the company, then their decision cannot be challenged by the shareholders of the company.

Directors of company are not authorize to make payment of dividend to some shareholders,  if they are declaring dividend then it must be for all shareholders of the company & rate of dividend must be same (How to Law, n.d.).

Secondly, directors of the Happy Days Limited decided to diversify the business of the company, they are trying to buy apartment in Melbourne which is presently set up for students. They want to use these buildings as an accommodation for retirees. Walter & Shirley are angry with the decision of directors and think that old Australians do not like such small space apartments.

Directors take one more decision to increase the fees by 30% on existing communities. According to directors fees is increased because of increasing demands of the residential regarding facilities & activities and current revenue is not sufficient for these demands, but Walter & Shirley believes that increment in fees is for collecting funds for new project in Melbourne.

Walter & Shirley and their friends try to meet with the directors of Happy Days Limited, but directors refuse to meet them. After the refusal of directors they sit in the protest in the headquarters of the company.

Corporation Act 2001 provides many statutory remedies to the members of the company. Walter & Shirley as a member have many rights and remedies against the company and board. Some of those remedies are mention below:

Oppression Remedy

Injunction

Winding Up Order

Statutory Derivative Action

Chapter 2F defines the rights and remedies available to members of the company. Section 232-Section 235 defines the oppressive conduct of affairs (Australian Government, n.d.):

Section 232: Grounds on which court grant relief under Section 233:

(a) The conduct of the affairs of the company; or

(b) Any act which is actual or proposed by or on behalf of the company or any omission by or on behalf of the company; or

(c)  Any resolution or proposed resolution passed by the members of the company or by any class of members of a company; is either:

(d) Contradict with the member’s interest; or

(e) Which is oppressive, unfair and discriminative against the member or members of the company (Commonwealth Consolidated Acts, n.d.).

Section 233: following are the orders which court can make:

(1) Under this Section court can make any order which is appropriate for the company, following are the orders which court can make:

(a) Court can order for winding up of the company;

(b) Court can order for modification of constitution of the company.

(c) Court can order for regulating the conduct of the company in future.

(d) Court can order the company for purchasing shares from member or person, in case if shares are transmitted to that person or member by will or by operation of law;

(e) Order for purchase of shares, so that share capital of the company can be reduced.

(f) Order for the company to start, discontinue or defend the specified proceedings.

(g) Court can authorize such a member to whom shares are transmitted by will or by operation of law to start, defend or discontinue any proceedings in the name of the company or on behalf of the company.

(h) Court can appoint a receiver or manager for managing the assets of the company.

(i) Court can also restrict a person from doing an act of specified nature.

(j) Court can also instruct a person for doing a particular act.

(2) Court can make order of Winding Up of company for this section, and following are the provisions for winding up of companies are also applied:

(a) Court makes order under Section 461 of Corporation Act 2001.

(b) Make such changes which are necessary.

(3) If court repeals or modifies the constitution of company or order the company that the company have to adopt a new constitution then company cannot ignore the order of the court and also company has no power to modify the constitution of the company under section 136, if such change is inconsistent with the order of the court, unless;

(a) Order of the court gives power to the company to change or repeal the constitution;

(b) Before changing the constitution company obtains the leave of the court (Commonwealth Consolidated Acts, n.d.).

Section 234: persons who can apply for order under Section 233:

(a) Application can be filed by the member of the company; member can filed application even if the application relates to such act which is:

(i) Not in the capacity of member; or

(ii) Not in the capacity of another member, as a member.

(b) Person whose name is removed from the register of members and reason of such removal is selective reduction.

(c) Application can be filed by a person who ceased to be a member of company and the application is related to the situations which result in such cessation.

(d) Person who has shares of company by the transmission of shares.

(e)  Person authorized by the ASIC for investigating the:

(i) Affairs of the company.

(ii) Matters which relate with the affairs of the company (Commonwealth Consolidated Acts, n.d.).    

Section 235: person requires filing the order:

(1) Applicant requires filing the copy of order made under Section 233 with the ASIC within 14 days of passing the order.

(2) If applicant commits offence mention in subsection (1), then this is an offence of strict liability (Commonwealth Consolidated Acts, n.d.).    

In 2000, Statutory Derivative Action is started in Australia. The action is defined in part 2F.1A of the Act. Section 236 gives power to the member of the company to start proceedings on behalf of the company or intervene in the proceedings in which company is a party. Section 237 provides the criteria for the operation under Section 236.

This action is an answer to the shortcomings which exist in the remedies because of which the company is not able to act.

This action gives power to shareholders of the company in which shareholders can file application on name of the company.

This action is successful in state courts as well as federal courts (University of Western Sydney Law Review, n.d.).

As per section 1324 of corporation act 2001, court can grant injunction against the act of the company on the application of the member or creditor whose interest is affected by the action of the court (Commonwealth Consolidated Acts, n.d.).

Section 236: Initiate or intervene the proceedings on behalf of the company:

(1) A person can initiate the proceedings on behalf of the company or intervene in any proceedings, in which company is party, if:

(a) (i)  The person is the member or previous member of the company, or he entitled to be registered as a member.

(ii) He is an officer or previous officer of the company.

(b) Leave is granted under Section 237 to that person.

(2) If person initiate proceedings on behalf of company it must be initiated from the name of company (Commonwealth Consolidated Acts, n.d.).    

In this case decision taken by the directors of Happy Days Limited to diversify the business and purchase a new building in Melbourne is contradict with the interest of the members of the company. According to Walter and Shirley directors of the company are making a big mistake. They also have a doubt that directors of the company increase the fees of existing commodities for raising fund for new project in Melbourne.

Walter & Shirley can file application to the court under section 232 of corporation act 2001, for seeking the relief under section 233 of the corporation act 2001. According to Section 232 of Corporation Act 2001, application can be filed against the company if conduct of the company or there is any act actual or proposed on behalf of the company contradicts with the interest of the members of the company. In this case Board of Directors of Happy Days Limited is initiating a new project in Melbourne which is not in the interest of the members of the company. Therefore Walter & Shirley can file application under section 232 of the corporation act 2001.

In a famous case Hillam v Ample Source International Limited trial judge give an order under section 233 of corporation act 2001, for winding up of company Bonython Metals Group Pty Ltd (“BMG”). During trial judge find that the BMG was unfair with the shareholder Ample Source who has 25% holding of BMG. Judge fined that conduct of BMG was oppressive.

It was find during the trial that Mr Hillam, director and CEO of BMG made many payments which are not authorized from the funds provided by Ample Source. Mr Hillam also restrict the Ample Source to access the financial records of the company, holding meeting of board of directors of the company and passing necessary resolutions which contradict the terms of shareholders agreement. Therefore court order for winding up of the company under section 233 of corporation acts 2001(Holding Redlich, 2012; Thomas Reuters, 2013).

Walter & Shirley can obtain the remedy under Section 233 of Corporation Act 2001, following are the information on behalf of which they can seek for the remedy:

Directors of Happy Days Limited decided to diversify the business. They are buying building in downtown Melbourne, which is presently used as accommodation for students. They are planning to use this building as accommodation for retirees, but according to Walter & Shirley directors of the company are not taking right decision because old Australians did not like apartments in such a small space, and the decision of directors contradicts with the interest of members.

 Directors decided to increase the fees on existing communities by 30%. As per the explanation given by the directors fees is increased because residents are demanding more facilities and current funds are not sufficient for those facilities. Walter & Shirley think that directors want more funds for their new project in Melbourne.

Walter & Shirley want to meet with the directors but directors refuse to meet them. As we discussed above there are some general duties of directors according to which directors have some fiduciary duties towards the shareholders of the company. It is the duty of director to answer the questions raised by the shareholders of the company, but directors of Happy Days Limited refuse to meet with the shareholders which results in protest in the headquarters of the company by the members of the company.

Chairman of the company made some very rude remarks on television about the Walter. He also said that Walter is not fit and proper person to be a resident and he should move out of the village. Chairman of the company cannot make such remarks for the members of the company. They are the guard of the interest of the members of the company. They cannot make such remarks against the members of the company.

Walter & Shirley can apply for remedy under Section 233 of the Corporation Act 2001. Court can grant following reliefs:

Court can order for winding up of the company;

Court can order for regulating the conduct of the company in future.

Court can appoint a receiver or manager for managing the assets of the company.

Court can also restrict a person from doing an act of specified nature.

Court can also instruct a person for doing a particular act.

References:

ASIC, Directors - What are my duties as a director, Retrieved on 6th September from: http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 254T, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254t.html.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 254U, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254u.html.

How to law, Shareholder dividends, Retrieved on 6th September from: http://www.howtolaw.co/shareholders-dividends-392237.

ASIC, Directors' key responsibilities, Retrieved on 6th September from: http://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-key-responsibilities/.

Australian Government, Federal Register of Legislation, Retrieved on 6th September from: https://www.legislation.gov.au/Details/C2015C00003.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 232, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s232.html.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 233, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s233.html.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 234, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s234.html.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 235, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s235.html.

Austlii, University of Western Sydney Law Review, Corporations Act 2001 - SECT 235, Retrieved on 6th September from: http://www.austlii.edu.au/au/journals/UWSLawRw/2002/4.html#Heading7.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 236, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s236.html.

Commonwealth Consolidated Acts, Corporations Act 2001 - SECT 1324, Retrieved on 6th September from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1324.html.

Holding Redlich (2012), Oppressed minority shareholders and appropriate relief - Is winding up a solvent company an extreme step, Retrieved on 6th September from: http://www.holdingredlich.com.au/dispute-resolution-litigation/oppressed-minority-shareholders-and-appropriate-relief-is-winding-up-a-solvent-company-an-extreme-step.

Thomas Reuters, Corporations Legislation 2013, Retrieved on 6th September from: http://legal.thomsonreuters.com.au/browse/law-annuals/pdf/keysectionannotation.pdf.

 

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