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Requirement
QUESTION
David was in the business of manufacturing fibreglass boats. He decided to register a company named Dave’s Boating Pty Ltd and transfer his business to the company.
In January 2016, David enters into a contract to supply 5 boats to Perth Sea Rescue for $100,000 and signs the contract as “agent of Dave’s Boating Pty Ltd.”
In July 2016, Dave’s Boating Pty Ltd was registered. David becomes the managing director and appoints Angela as the sales manager of the company. The following clauses are contained in Dave’s Boating Pty Ltd’s constitution:
a) The company will only manufacture fibreglass boats; and
b) Angela will be the factory manager of the company and has a spending limit of $25,000 without the approval of the managing director.
Angela attended a trade expo where she saw a machine that manufactures boats from a high tensile plastic and she was so impressed with the machine that she placed an order for it for $40,000 from Bioplastic Ltd. Before the sale order was processed, Bioplastic Ltd had telephoned Dave’s Boating Pty Ltd, and asked to speak to the managing director. As David was absent, the phone call had been taken by a clerk who happened to be passing David’s office when the phone rang. The clerk did not describe himself to the caller and told Bioplastic Ltd that Angela was a senior executive of the company and the purchase would no doubt be in order.
Dave’s Boating Pty Ltd decides that the high tensile plastic machine will not be profitable as plastic boats will be suitable for lakes and shallow water ways and not for oceans. They advise Bioplastic Ltd that:
(i) the contract is to be terminated on the grounds that it is invalid and unenforceable and because the company's constitution does not permit the company to engage in any activities other than manufacturing fibreglass boats, the company has no capacity to enter into such a contract; and
(ii) Angela does not have the authority to purchase a $40,000 machine and therefore Dave’s Boating Pty Ltd is not bound by the purchase agreement.
REQUIRED:
With reference to the Corporations Act 2001 (Cth) and case law where applicable, you are required to answer the following questions:
Discuss three main advantages for David of incorporating Dave’s Boating Pty Ltd compared with the type of business he was operating before registering the company.
Discuss the procedure that David would have had to follow under the Corporations Act 2001 (Cth) to register Dave’s Boating Pty Ltd, including the creation of the company’s internal management rules.
Discuss David’s liability if Dave’s Boating Pty Ltd could not fulfil the order to Perth Sea Rescue. In answering this question, note that the contract was entered into in January 2016 and the company was registered in July 2016. You are required to use the 4 step process in answering this question.
Solution
Answers
The three main advantages for David by incorporating Dave’s Boating Pty Ltd. are:
It will simplify and clarify the management and ownership of the money and various assets of the company along with the bank accounts held in the name of the company. Also, it is easier for the associations to enter into contracts.
If in case smaller companies apply for small business loans, then the company requires to prove that it is actually a business. Therefore, lenders and investors will seek the company’s business registration as well as other application requirements before approving for a loan.
The firms that are incorporated find it easier to attract capital investments because the investors become confident they would not be legally obliged to contribute more funds if in case the company gets into financial problem.
According to the Section 112 and 113 of Corporation Act, 2001, David needs to classify and type of the company that is required. The proprietary companies that can be registered under this act are – limited by shared and unlimited with share capital. So, his company’s name is optional and followed by Pty Ltd.
Now, for registration and lodgment, David needs to comply with the Section 117 of Corporations Act, 2001. As per the provisions, he has to follow these guidelines:
To register a company, a person is required to lodge an application with Australian Securities and Investments Commission (ASIC).
The application needs to state –
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Type of company to be registered
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Company’s proposed name
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Names and addresses of all the members
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Family names, date and place of birth of members who consent to become director.
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Family names, date and place of birth of members who consent to become company secretary.
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The address of company’s proposed registered office.
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Details of issued shares.
The company’s internal management is governed by the provisions of Section 134, 135 and 136 of Corporation Act 2001, that talk about constitution and replaceable rules. According to these provisions, the company constitution is contract between company and each member, company and each director and secretary, member and each other member. The replaceable rules, on the other hand, as per the Corporations Act, are basic set of rules that are used for managing the company. If the companies do not form constitution, its management can use the replaceable rules.
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Facts
Issue
Is David liable if Dave’s Boating Pty Ltd could fulfill the order to Perth Sea Rescue?
Rule
In January 2016, David entered into a contract with Perth Sea Rescue to supply it with 5 boats for $100,000 as he was in the business of manufacturing boats. The contract was signed on the part of David as “agent of Dave’s Boating Pty Ltd”. However, his company was registered in July 2016.
The applicable laws in this case is Partnership and Pre-Registration Contracts.
According to Section 131 of Corporation Act 2001, which talks about the contracts without registration, the provisions are:
If anyone enters into a contract on behalf of a company before it is registered, then the company becomes bound by the contract and can make profit, if the company is registered and ratifies the contract within agreeable time or reasonable time after the contract was signed.
The person will be liable to pay damages to the party to pre-registration contract if the company so registered does not ratify the contract, if – time is agreed by both parties or within reasonable time after contract was signed.
If proceeding are brought in the Court regarding not ratifying the pre-registration of contract, then as per the order, the company has to do any of the following:
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Pay all the damages
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Transfer the property received by the company
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Pay an amount to a party to the contract
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If in case the company fails to perform even after the ratification of pre-registration contract, then it will have to pay all or part of the damages.
Application
In the present case, David had a pre-registration contract with Perth Sea Rescue. So, he is bound with a valid contract with Perth Sea Rescue. He is responsible to perform his duties as per the contract. Now, after the registration of his company, Dave’s Boating Pty Ltd, it was required that the company had to ratify the pre-registration contract. So, if he and his company fails to do all of that, he will be liable to pay the damages to Perth Sea Rescue as per the Section (3), (4) of Corporation Act, 2001.
Conclusion
If it was proven that David violated the spirit of pre-registration contract and ratify the contract neither in agreeable time nor within any reasonable time, the directors of Perth Sea Rescue can seek their legal rights of damages.
Facts
Issue
Whether the contract with Bioplastic Ltd. will be enforceable
Are the two grounds provided by Dave’s Boating Pty Ltd. enough for terminating the contract?
Rules
Angela being the sales manager of Dave’s Boating Pty Ltd. placed an order for a boat made up of high tensile plastic for $40,000 from Bioplastic. So, at that time she was acting as an agent on behalf of Dave’s Boating Pty Ltd. in this scenario, the applicable law will be the law of agency and partnership.
In Australia, particularly, the law of agency refers to a relationship that involves authority and capacity in a person, called Agent, for the purpose of creating or affecting legal relations between the main party, called Principal, and third parties. The Section 126 of Corporation Act 2001 talks about agent exercising the company’s power to make contracts. Now, the relationship between agent and principal is determined in a number of ways –
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By agreement: it sets out as to what agent its authorized to do and the location and timing of what the agent would be allowed to act.
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By operations of law: it arises when there is necessary for the agent to safeguard the principal’s interests and his act would be an honest endeavor in the principal’s best interests.
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By ratification: it arises when the conduct of the agent is ratified at a later date by the principal.
After the decision being taken by Dave’s Boating Pty Ltd. to terminate the contract with Bioplastic Ltd., it did so by citing the constitution of the company. So, the second applicable law in this scenario will be the law regarding the limitations of company powers on account of constitution of company.
So, as per the Section 125 of Corporation Act 2001, constitution will limit powers and set out objects of the company. As per its provisions:
In case of a company having a constitution, it may have restriction or prohibition regarding company’s exercise of any of its powers. The exercise of power cannot be completely termed invalid just because the constitution suggests otherwise.
If the constitution sets out company’s objects. Even then an act contrary to constitution cannot be completely termed as invalid.
Application
When Angela had interacted with Bioplastic during the trade expo, she placed an order. The fact that she was representing her company and being in a responsible position of making certain business decisions on behalf of it. So, at this moment of time, it was clearly very easy to conclude for Bioplastic that Angela had made an offer to them as she proactively placed an order to them, probably because she was highly impressed by their technology.
After that when Bioplastic Ltd. telephoned Dave’s Boating Pty Ltd. in order to speak to the managing director and take further information regarding the company and Angela. However, it couldn’t talk to the MD while a clerk intimated to it on that very same phone call that Angela was a senior executive and could take decisions and therefore, there would be no doubt in the order. Then there remained no doubt regarding the offer made by Angela and Bioplastic had to accept it. So, an agreement was formed between the two companies.
So, all of these facts suggest that Bioplastic Ltd. made every possible efforts to take due diligence on its part. So, Dave’s Boating Pty Ltd cannot simply terminate the contract because the constitution did not permit to involve in the different activity other than specified in it. But, the law also says that even if the constitution is not being followed, the contract cannot be completely made invalid. Moreover, as per Section (2) of Corporation Act 2001, any company can modify or repeal its constitution or provision of constitution.
Conclusion
It may be argued that, the company has to keep its business interests high and decisions have to be made for the benefit of the company and its employees. So, in this case, if the company feels that the high tensile plastic machine will not be profitable as plastic boats will be suitable for lakes and shallow water ways and not for oceans, its position is quite justified. So, it is concluded that the whole contract and terms and conditions would be looked again.
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Australian Tax & Accounting | CCH Iknow Iknow.cch.com.au
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CORPORATIONS ACT 2001 Austlii.edu.au
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Corporations Act 2001 Legislation.gov.au
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Lexisnexis Australia – Lexisweb – Practical Guidance (2016) Lexisweb.lexisnexis.com.au
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Probst, Walter, "Principal And Agent: Liability Of Agent To Third Party For Contract Made Without Authority" (1937) 36 Michigan Law Review
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Register Company? - Some Pros And Cons Of Registering A Company In Australia incorporator.com.au https://www.incorporator.com.au/pros-cons-company.asp
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