Consequences of Termination of Contracts Assignment Sample

Corporations Law - Question 1

Issue-

This case shall be considering the contractual relationship amongst both the parties and the consequences of termination of contracts.

Legislation-

Common law

Termination of contract

Remedies

Application-

1. Common Law

The terms of a contract can be expressive or in an implied format. Express contract means when a contract is written where all the essentials of a contract get mentioned like the date of commencement of the contract, the duties of both the parties etc. While judging such contract the court considers the intention of the signing parties like the time between the making and signing of the contract, or did the statement by either of the parties was not reduced to writing; or where on the parties did rely on the statement of the other party who has expertise in that area; or how much the statement mattered to both of the parties. In Dick Bentley Productions v Harold Smith (Motors), it was held that where an experienced party tells something to an inexperienced party, then that shall be interpreted as a contractual term and not as representation. Similarly in the given facts, when Bob Builders told Kumar that for renovation, they ought to take permission from the Council, that amounted to having a contractual relationship between the two.

There is a concept called the parole evidence rule. This rule states that if a contract is reduced in writing, and if the statement hasn’t been mentioned in the contract, then that gets excluded, laid in Mercantile Bank of Sydney v Taylor. However, there are certain exceptions to this rule. First, if the as per trade and commerce, it is a customary thing for entering into a contract, as held in Hutton v Warren. So when Bob builders being experienced in this construction business, he should have incorporated the clause of seeking permission from the Council in the contract. second, as held in Van Den Esschert v Chappell, if the agreement does not mention all the terms agreed by the parties. Hence the most crucial point of the contract being subject to the permission of the Council should be mentioned; and others.

Termination of contracts-

Three ways can terminate a contract. First, as per performance, under Cutter v Powell case, the performance of the contract must be exactly what is was decided by the parties. Second, by breach of any condition or warranty. Under Tramways Advertising Pty Ltd v Luna Park, a test of essentiality was conducted to see that the terms of a contract are condition or warranty. If condition, then as per Poussard v Spiers; Associated Newspapers Ltd v Bancks, the victim party can claim for damages or terminate the contract, as being an essential term of the contract. Hence, the part where the permission of the Council is to be received, that is condition. If a warranty, then as per Bettini v Gye, the victim party can only claim damages as being a non-essential term of the contract. Third, through frustration where neither of the parties could be blamed for non-performance of the contract.

2. Remedies

A party can only be liable for this if due to the breach of contract, he suffered from losses or as held in Hadley v Baxendale, Victoria Laundry v Newman, where the loss was not due to the breach of the contract but was pondered by the parties at the time of contract. As per Commonwealth of Australia v Amann Aviation Pty Ltd; Robinson v Harman, the quantum of the damages can be assessed, situating the innocent party, had the performance of the contract taken place, he would not have suffered, which Kumar suffered by loosing a contract worth $100,000 and the profit of two months; or as per Chaplin v Hicks; Howe v Teefy, where there is no chance of recovery. So the losses suffered by Kumar cannot be recovered as the time has passed.

Conclusion-

The condition of being passed by the Council was not mentioned in their contract, so Kumar can take a plea of an exception under the parole evidence rule, where if the term is a customary thing and a person under the profession is familiar with it, then that must be mentioned in writing in the contract. Therefore, Bob Builders breached the contract as per performance as he was supposed to start the renovation work as soon as the approval came, but he did not do that. He delayed the project by another two months. Due to this Kumar suffered the loss of profit of two months and also a contract of $100,000. Therefore he is entitled of damages from Bob Builders for the breach of contract and the loss he suffered due to the delay in fulfilment of the contract.

Corporations Law - Question 2

Issue-

This problem entails the companies relation with outsiders and what are directors duties.

Legislation-

The Corporation's act (Cth), 1986

Application-

1. Meaning of Director

As per section 9 of the Cth act, a person is appointed as a director or appointed as an alternate director. It includes de facto and shadow directors too. As per sec 198A, the business is to be managed under the scrutinization of the directors. The directors have the power to transfer the shares as per section 1072F, or call a meeting as per section 249C and distribute dividends as per section 254U. so the passing of resolution on the issue of new shares was statutory valid. It is the statutory duty of a director, as per section 181, to discharge his duties in the best interest of the company. He should not have any ulterior motives and should work in good faith in the company. So whatever the directors of Account co did was for the benefit of the business.

As per Howard Smith v Ampol Petroleum [1974] case, there is a two-step test to determine whether a director had acted in good faith or not. First, the question of law meaning for what purpose the power was conferred; and second, the question of fact meaning for what purpose the question was exercised. So as for Account Co ltd, they by issuing new shares to the shareholders wanted to levy out the 19 per cent shares Managemart ltd had. ‘Proper purpose' can be best explained by the power of board of directors to issue shares as per section 124 and 198.

2. The consequence of breaching as per section 180, 181, 182, 183.

As civil offences, if breached any duty as per section 180-183, then as per section 1317E, the company shall declare declaration or orders of the contravention; or as per 1317G, be levied a penalty of $200,000; or as per section 206C, disqualified from the management; as per 1317H, compensate the company for the damages it suffered.

For criminal offences, like where the director is intentionally dishonest and reckless, as per section 184, shall be liable for a fine of $360,000 or imprisonment for maximum 5 years.

3. Company and its relations with outsiders

For any of its decision against the outsiders, the board of directors and members of the company shall, in a general meeting, shall have a common consensus and have like-mindedness for deciding over any issue. This is done in three ways. First, as per section 127(2), the document should be executed with a seal, attested by necessary witnesses; second, as per 127(1), the document executed without seal by signed by the required members; third, use any procedure given in the constitution. Since the question is silent over this part, assuming that where the shareholders aka the directors, wanting to save their company from takeover, they shall be having consensus of the rest of them and must have duly signed the resolution without any influence.

4. Authority to act for the company

A person is said to have actual authority, express or implied as per section 198A. It can also be delegated from a person having actual authority. A person having an apparent authority, there must be a holding out or given by someone with actual authority on which the outsider relied upon as per Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964].

5. Indoor management rule as per section 129.

As held in Royal British Bank v Turquand case, the indoor management rule states that for an outsider, where the members of the company act in good faith and without any indiscretions, they are to assume that the working of the company is as per the procedures and policies in the statutes. Therefore, for Managemart ltd, the resolution passed by Account co ltd on the issue of new shares, has to be interpreted took place according to the statutory provisions. However as per section 128(4), if the knowledge of the outsiders is put on inquiry, then this mechanism fails as per Northside Developments Pty Ltd v Registrar General.

Conclusion-

The directors of the Account Co Ltd, who are shareholders of the company, unanimously on 5th January 2019, passed an order where they declared that all the shareholders shall be entitled to a new share who registered on or before 31st December 2017, excluding Managemart Ltd. As per this new share policy, the existing holder of the shares shall have additional three shares for each existing share free of cost, curbing themselves from the hostile takeover. It shall be presumed that they had a consensus of all for this order. They have the authority under section 198 to decide what is in the best interest of the company. Under section 181, whatever the directors did was for the best interest of the company to prevent it from being taken over and hence they did not breach their duties as per common law or the Cth act

Corporations Law - Question 3

Part (a)

Issue-

This problem entails the director's duty to avoid insolvent trading.

Legislation-

The Corporation's act (Cth), 1986

Application-

1. Overview

Under section 588G, directors of the company owe a duty that when their company becomes insolvent, they are too prevent their company from incurring debts. This section applies when the director of the company has some debt, or the company was before insolvent or at that time when it incurred the debt; or when the company was incurring debt, there was suspicion of the company’s insolvency. Electrical products was on its verge of being insolvent and therefore Roger had this duty to duly pay the liquidators.

2. Definition of insolvency as per section 95A.

Insolvency is judged based on cash flow and not upon the balance sheet of the company. There are two presumption to this fact- first, as per section 588E(3), if the company was insolvent for 12 months before winding up, then it is deemed insolvent and as per section 588E(4), failure to keep financial records, is a basis of insolvency. According to ASIC v Plymin case, insolvency can be determined by continue loss where liquidity ratio is below 1 or overdue taxes or no alternative to finance or creditors are unpaid etc. The question mentions nothing about the dates but do say that there were unpaid creditors worth $1,000,000. So this concludes, that Electrical products was insolvent.

3. Contravention of section 588G(2)

The director is failed to prevent a company incurring debt where he had this idea that there could be chances of insolvency. The only defence that he can take is under section 588H. as per 588H(2), if he director can prove at somewhere he did expect that the company can be solvent or remain solvent as was held in Metropolitan Fire Systems v Miller (1997) case or as per section 588H(3) he gave the responsibility to some responsible and competent person as held in ASIC v Plymin case or as per section 588H(4), he was sick and unable to work or for some other good reason as held in Morley v Statewide Tobacco [1993] case or as per section 588H(5) he took all reasonable steps to save the company from insolvency. Roger cannot be claiming any of the defences since none of them are true in his case. He failed to prevent the insolvency and that was the reason why he sold the business to Roger Electrical Pty Ltd.

4. Consequences under section 588G

Since its civil wrong, therefore under section 1317E, the company had to declare it through an order; or under section 1317G a penalty of $200,000; or under section 206C, the member or director gets disqualified from the management or as per section 1317H, compensation for the damages. This shall depend on the demand of the petitioner and the decision of the court.

5. Compensation to the liquidator under section 588M(2).

Where the liquidators of the company have to suffer losses, they are entitled to compensation. If the liquidator agrees, then an unsecured creditor too can claim compensation under section 588M(3). Hence, the liquidators can incorporate the unpaid creditors along with the suit against Roger.

Conclusion-

For the given problem, so as per section 588H, Roger had this idea of Electrical Products business going to be insolvent that's why he sold it to Roger Electrical Pty Ltd. Along with that, he took out debenture worth $100,000 despite having unpaid creditors worth $1,000,000. Then he sold his house worth $1,500,000 in the name of his wife when his business was tanking, so this clearly shows that he had no intention of paying his liquidators. Therefore the liquidators can sue Roger for the debts he owes to them under section 588M(2). They can also take recourse of section 588G where knowing the company being insolvent, the director represented fraudulently.

Part (b)

Issue-

Is the buying of shares from minority shareholders by the majority shareholders legal?

Legislation-

The Corporation's act (Cth), 1986

Application-

1. The Legal capacity and powers of the company

Section 124 says that a company has legal capacity and powers of an individual. Under section 232, an individual or group of an individual can obtain a court's order if the conduct of the company is against the interests of its members, prejudice, or discriminatory against the members of the company. Therefore the minority shareholders can claim help under this section 232.

2. Alteration of the constitution and Replaceable rule as per section 135 and 136.

According to section 135(2), a company can replace the replaceable rules, one or more than one, by having a constitution. A company can repeal or modify the constitution by special resolution as per section 136(2).

Section 9 says that this can be done if a notice is served within 21 days to the Australian Securities and Investment Commission (ASIC), under section 249H(1) and passed by at least 75% of the members present to vote on the resolution. However, there are certain limits on this provision too. As per the Bluescope Steel case, for the protection of minority shareholders, to alter a constitution, their permission is necessary to be taken. Under section 232, the alteration can be invalid if it is improper or oppressive. Therefore for amending the constitution of Big Hopes Pvt ltd, this procedure has to be followed.

Conclusion-

For the legality of buying of shares by majority shareholders of the minority shareholders shall not be legal. It is a sheer violation of the interests of the minority shareholders that their shares are being bought by majority shareholders. The majority of shareholders will have the same powers and command over the company at a much lesser investment. Therefore under section 232, the minority shareholders can obtain a court order to estop this move of Big Hopes Pty Ltd.

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