Sample on Company Law

Question 1

The directors of Production Ltd. are considering to purchase a new machine for their factory from one Jack Bloggs. However, it has been identified that one of the directors Mrs. Betty Bloggs is wife of Jack.  Hence, in accordance to the given facts it can be said that Betty has an indirect interest in the proposed transaction. Further, the company does not have a constitution.

Section 177 of the Corporation Act imposes a duty on the directors of the company to avoid circumstances which have the potential to create a direct or indirect interest in a transaction or any dealing by the company (French, and. et.al, 2014). Therefore, it is duty of a director to ensure promotion of interests of the company at all times and in case of any such conflict appraise the other directors of the exact interest of the director. Section 177 (2) further provides that such interested or related directors are required to declare the extent of the interest at a director's meeting or through a notice under Section 184 or 185 of the Act. The law also makes a distinction between the public companies and private companies and specifically provides that a private company without the constitution can authorize a conflict of interest until and unless there is no invalidation for such authorization. The House of Lords in the case of Aberdeen Rly Co. v. Blaikie (1854) has opined that the fiduciary duty of a director is to be loyal to the company and in situation of a conflict of interest a mandatory declaration shall be made by such a director (Wells, 2015). In addition, the director shall not be liable to vote in the director's meeting on the concerned transaction.

In accordance to the given facts and the relevant law stated herein above the company is required to develop a constitution to govern the activities of the company. In furtherance to which Betty Bloggs being the interested director for the proposed transaction shall be made liable to either serve a notice to all the directors before the meeting in accordance to Section 184 or 185 of the Act or make a direct declaration at the directors meeting. The situation of conflict of interest can be said to arise as Betty, one of directors to the company, is wife of the Seller of the machine with which the proposed transaction is to be undertaken. Hence, in such a situation Betty has an indirect interest in the said transaction and causes the arisen of the situation of conflict of interest. In pursuance to the same, section 177 of the Act is attracted to make Betty an interested director. Further, it is important to highlight that she cannot be counted in the quorum of the director's meeting and cannot not even vote for the resolution to be passed for approval of the concerned transaction. In addition, any profits extracted from the transaction shall be that of the company and the director shall have no relation with it (Kershaw, 2012).

Thus, it can be concluded that the current situation attracts the applicability of Section 177 which mandates the related/interested director, Betty Bloggs to stay out of the quorum of the director's meeting, even if she is present in the said meeting.

Once the interested director fulfils the duties under section 177, the duties of the other director under Section 180 comes into play. Section 180 requires consent and authorization of other members of the meeting to validate or invalidate the conflict situation in relation the proposed transaction (Enriques, 2015). Further it shall also be determined if the declaration so made by the director is valid under law or not.

In the given scenario the other directors of Production Ltd. shall on receipt of a notice or a declaration in director's meeting in pursuance to section 177 of the Act are under an obligation to ensure that the situation of conflict of interest has in fact arisen and the interested director is required to stay out of quorum and voting to be held in the meeting (Sealy, Len, and Sarah, 2013). The other directors are required to act in accordance to the general duties imposed on them by the Act. Once, the conflict situation is authorized the directors shall decide on the proposed transaction on an arm’s length price and treat it as any other transaction.

In the given scenario Betty Bloggs is the sole proprietor of the Production Pvt. Ltd. and has decided to enter into a transaction to purchase new machine from her husband John Bloggs. In such an event wherein the director is making a purchase of a machine from the husband, then the obligations imposed on the director shall be different from those imposed on the directors of other companies. It is important to highlight that Sole proprietorship firm has no separate identity from its owner. Hence, transactions entered into by the firm/company shall be considered as entered into by the proprietor thereby imposing a direct liability on him. Section 186 is also attracted by the circumstance so created. The provision requires the director of the firm to make a declaration in this regard in accordance to law, which shall be considered during the next meeting if it is declared through notice (Dustmann, Christian, and Tommaso, 2014). It has also been provided by the courts and established by the House of Lords that this section shall not have any effect on the application of section 231 of the Act.

In pursuance to the above stated law it can be inferred that Betty being the sole proprietor of Production Pvt. Ltd. is under an obligation as per section 186 to make a declaration either through a notice or during the meeting. However, this shall have no impact on the functioning of the transaction and the process of undertaking the contract shall be carried out in accordance to section 231 of the act. In addition, it is important to highlight that the profits realized by the company shall be that of Betty and there is no separation of profits in such a scenario. Therefore, it can be concluded that Betty being the sole proprietor shall be under an obligation to make a declaration but this law shall have no affect on the working of the transaction.

Question 2

Kelvin-Decline Ltd. are operating to manufacture and supply fashion clothes, which they now intend to move to China, against the resolution passed by the members of the company with 80% votes at the Annual General Meeting. However, it has been observed that the company is devoid of any constitution and is not even registered under the prevalent laws of the nation. Hence, the management of the company needs to incorporate under the Corporation Act and develop an Article of Association and Memorandum of Association for governance of its activities.

Members resolution not to sell facility

In the instant case it has been observed that the members of the company pass a resolution with 80 % of the votes in favour of not moving the factory to China. The resolution was passed in a duly called AGM by the directors of the company. Section 292 of the Corporation Act specifically requires the resolution to be written and in effect to be in consistence with the enactments and also the constitution of the company. In addition, it shall not be defamatory or vexatious in nature. Section 283 of the Act provides that a resolution passed by majority of the members i.e. more than 75% of the voting rights, then in such a case a special resolution is said to be passed by the members under the Companies Act (Baird, 2013).

On analysis of the relevant laws it can be inferred that the resolution passed by the members cannot be invalidated by the directors of the company and non-adherence of the resolution shall be considered as against the company laws. Hence, the directors move to ignore the resolution passed by the majority of the members shall be completely in violation of the laws and shall further make them liable under the provisions of the Act.

Removal of Director

The members of Kelvin-Decline Ltd. pass a resolution to remove the director, against the move of the director to ignore the resolution passed by the 80% of the members at the AGM. In accordance to law, Section 168 of the Act provides that a director may be removed by an ordinary resolution in a duly called upon meeting (Armour and Wolf-Georg, 2013). For conducting a valid meeting, the provision further mandates serving of a special notice. In addition, the resolution passed by the members shall not be defamatory or frivolous as per section 292 of the Act.

In accordance, to the given facts the resolution passed by the members do not satisfy the requirements of Section 168 and Section 292 of the Act and hence, shall stand invalid in the eyes of law.

Replacement of Managing Director

In light of the law stated above in terms of section 168 and section 292 it can be concluded that any resolution passed in connection to removal of the MD shall also be invalid in the eyes of law.

In accordance to the Company Act, a director may be removed from his position before the expiration of his tenure only if an ordinary resolution is passed in a meeting called upon by a special notice to remove a specific director (Dolzer, Rudolf and Christoph, 2012). In addition, the resolution passed by the members to remove the director was in reaction to the decision of the directors to ignore the initial resolution passed by 80% majority. This could amount to a violation of section 292 of the Act.  

Question 3

Rebecca owns fully paid and partly paid shares in Narrow Pvt. Ltd. and Wide Ltd. She now wishes to transfer the share to Jess for which she has submitted appropriate documents with management of both the companies. Section 770 of the Act provides for registration of transfer and specifically provides that in the event the transfer in not delivered in a proper instrument, the requested transfer shall not be allowed by the company (Enriques, 2015). In addition, it is mandatory for the instrument to be stamped in accordance to the Stock Transfer Act 1982. the directors of the company can reject the transfer unless the requested transfer is for only one class of shares and is in favour of not more than 4 transferees. It has also been established that the constitution or the Share Agreement can restrict the transfer of shares.

In the given scenario Narrow Ltd. has acted might have acted in accordance with the Agreement so entered between the two. In the event the agreement does not provide for any clause restricting the transfer the company can be said to have acted in a wrong manner. In such an event Rebecca can move the court to claim he r right of transfer of shares which are even fully paid. In the case of Wide Ltd. It can be inferred that the rejections might be on the premise that the requested shares were partly paid up. Or the share agreement included any restriction to this effect.

Hence, it can be concluded that the companies have the power to refuse to record a transfer under few circumstances and in such situation the shareholder has no recourse.

Conclusion

On analyzing the company law with respect to various scenarios it can be concluded that the applicability varies from case to case. In addition, the companies to be incorporated in the nation are required to prepare a constitution for the functioning of their processes on the basis of which they can be incorporated under the provisions of Corporation Act.

You may also like to read: 

• Initiate Legal Action In The International Court Of Justice

UPTO50%

Avail The Benefit Today!

To View this & another 50000+ free

Enter Email

Submit