Question Based on Corporation law


Key Topics


Wayne, Erin, Alan and Kirk are all ex-police officers and have decided to start a private security business. They are willing to invest their own money into the business but are concerned about any extra liabilities in case the business fails. Their lawyer recommends that they should register a company for the business. They agree and instruct their lawyer to register a company to be called WEAK Security Pty Ltd. In the meantime, Wayne agrees to sell his property to the company for a profit of $700; and Alan enters into a contract with Chen to supply computers for WEAK Security Pty Ltd. once it is registered. After the company is registered, they decide to adopt a constitution. Amongst other things, the constitution provides that employees can only be terminated if they violate the company’s Code of Conduct. Another clause of the constitution provides that Wayne, Erin, Alan and Kirk, each be allotted 100 shares in the company. They employ Rodger as a receptionist in the office. Rodger is given strict instructions that he is not to enter into contracts on behalf of the company. Walter is a used car salesman and a good friend of Rodger. Rodger tells Walter about his new position at WEAK Security Pty Ltd and mentions that he has been instructed not to enter into any contracts on the company’s behalf. Walter tells Rodger that he has been trying to sell a truck and it would be perfect for the security business. Walter shows Rodger the truck and lets him drive it. Rodger agrees that the truck would be a great addition to the security business and thinks the price Walter is offering is very reasonable. Rodger agrees to buy the truck on behalf of WEAK Security Pty Ltd.
1. Although Rodger has not violated the terms of the Code of Conduct, the shareholders of WEAK Security Pty Ltd decide to terminate his employment. Can Roger challenge the decision of WEAK Security Pty Ltd to terminate his employment? [10 marks]
2. To ensure that the company has more capital, Wayne, Erin and Alan want to ensure that each of the members double their shareholding. How should the lawyer advise them regarding this? [10 marks] MLC 203 Corporations Law, 2018 Page 3 of 3
3. After Chen supplies the computers to WEAK Security Pty Ltd, it refuses to ratify the contract. Can Chen enforce the contract? Against whom? [10 marks marks]
4. Can Walter enforce the contract against WEAK Security Pty Ltd? [10 marks]


Back ground about the case :

The four, ex-police officers decides to start a company for security services in the name ofWEAK Security Pty Ltd.  Promotes and members of the company are Wayne, Erin, Alan and Kirk. As a part of the capital contribution, Wayne agreesto sell his property to the company for a profit of $700, Alan enters into a contract with Chen to supply computers to company after its registration. The constitution of company clearly mentions that the employees of the company are terminated from the corporation in case of violation of company’s code of conduct.  Each member of the company own a shares of 100. 
After the incorporation of company, Rodger is appointed as a receptionist in the office of company, and he was strictly instructed to not to enter into any type of contracts on behalf of company.Even after know such facts, he enters into the contract with his friend Walter, who was a car salesman, to buy a truck suitable for the security business. Here both seller and the buyer (representative of the company) both knows that the Rodger is not empoweredto buy a truck on behalf of theWEAK Security Pty Ltd.

Question -1

After having the primary knowledge about the back ground of the given case, following issue are arise 
Rodger strictly restricted to not to enter into the contract on behalf of company, and  even after know this fact, Rodger enters to into the contract with his friend Walter to buy a truck on behalf of the company.Knowing this act of Roaders the member of the company had decided to remove the Rodger on the ground of violation of companies code,. Now what options are available with Roaders to challenge the validity of the action of company, and is the company had correctly taken decisions. 
The Article of asocial and the constitution is an agreement between the companies and its member, the said document can restrict or imposed some obligation on the member of the company. The said documents does not restrict to outsiders(employees). 

Every employees are under obligation to follow the instruction and direction as if given by the employers,the implied rules of general laws state that the employees are bound to follow the instruction and directions with the objective to achieve the goal and objective to the corporation. Non following of instruction and direction of employer are always management of companies to terminate the employees.further, it is also stated in the general laws that employees are bound to do as per the instruction and directions of employer, however act or action, direction of employee are not again the public policy or again the general law of land.  

Some of the act which knows as a serious misconduct and employees are terminated even though such act, does not amount to violation of companies code of conducts. 
Under the fair work Act and fair work regulation,  the employee may be terminated from the employment for serious misconducts for failing to caring out lawful and reasonable instruction that is consistent with the contract of employment. Suchbreach or breach of action may be a reason for disciplinary action, such action shall also be including the sport termination from employments.  Here if the nature of action is high level of misconduct then employee may be terminated without giving pre notice. 

Fair work regulation 1.07 (2) what is serious misconduct 
A)    The deliberate behaviours of the employee which is inconsistence with the condition of contract of employments 
B)    The action which amount to serious and immediate risk to the health and safety to the persons or the intangible assets of the corporation.
After having an understanding of given case and with analysis the rule general and corporate laws. We can conclude the following 
A)    Employee cannot challenge the act of Member or management of company, on the ground of non-violation of company’s code of conduct.
B)    Employer isempower to terminate the employees on the ground of dishonest act or non-following of instructions of employer.   
So considering the facts of the case and following the applicable provision of  the corporation act, we are conclude that employer is completely empowered to terminate the employer on the ground of non-following of instructions and direction of management .Secondly employee cannot challenge the act of member or managements on the ground of non-violating the term of companies code of conduct, as the constitution of company is not bind the outsiders of the company.

Question -2

The second question of the given case states that what requirement are to be followed by the company  for addition share capital or what are the provision for raising of fund through issued of capital 
Out of the various modes for rising of funds, a private limited company may adopt an options of issuing the share to meet their financial requirement. Basically company can adopt an option of 

A)    Borrowing of funds from the investors ( debt borrowing either short term of long term) and or
B)    Issues the equity shares to investors
Section 124 empowers a company to invite a current or prospective shareholders for subsection of security of company.  Only a public limited company can invite a general public for subscription of share but for the proprietor or private limited company invitation to general public is restricted.  They can invites the members and individual for subscription of shares. 

Process to rising of funds by issuing exiting share holders 
?     The proprietary corporation is bound to make an offer to existing shareholders before inviting the outsiders for subscription of shares.  
?    Process for the calling of meeting of Board members of company and draft a resolution for same 
?    Make a required changes in Article of Associated if  required , any close in AOA rusticating a company for rising of addition capital 
?    Circulate a notice among the all interested parties 
?    Call a meeting band pass a resolution for rising of fund through issue of share capital 
?    Meeting of member is also called with an objective to approve the decision so taken at board meeting 
?    Pass a resolution in the meeting of board, and draft a copy for the resolution 
?    File a documents with various regulators with the objective to compile the requirements of corporation Act.  

In given case if said corporation is interested to rise an additional funds through issue of shares capital than the above stated steps are required to followed, necessary changes in the AOA is also required to be made.  Approvals and consent is also required to be taken from various interested parties. 

In order to double the share capital, the above stated steps are required to be followed along with the consent of all interested and associated parties. The consent of member is essential, so while advising the Wayne, Erin and Alan to double the share capital, it is essential to follow the above stated steps. 


Question -3

Before the incorporation of company, one of member Alan enters into a contract with Chen to supply computers for WEAK Security Pty Ltd. once it is registered. After the registration of company, chinsupplies the computer to company, however company refuse to ratify this contract, here we have to state the validity of such contract.   

The promoters executes the various contract before the incorporations of the company, such contract are knows as the pre incorporate contract. In the pre incorporate contract, the one party is a company which yet to come in exits while the party is any of the outsiders.The pre incorporation contract are executed by promotes through empowerment of Article of association on behalf of the company which yet to be incorporate. Since the company is not incorporate yet, it cannot be the party of agreement so in case of company is not incorporate or the company fails to adopt the contract, in such a case the promoters will be held liable for such contract. 
The pre incorporation contract will be bond the company, if the company after its incorporation, adopt such contract, than such rectified contract will bind the company and has a validity in term of informant of company. The second party to agreement can enforce the corporation to discharge their obligation arise under the contract, as if pre incorporate contract is adapted by company after its incorporation with the same term and with same condition. 
Pursing to the provision of general law, the person executing the pre incorporate contract, has a no authority to act as agent, as before the incorporation of company, there is no identity of principles, so the possibility of establishment of agent principle relationship are not there. (Kellner v Baxter). 
In short, the pre incorporation contract has a no legal validity, for the company after it being incorporates. Further this statement is supported by arguments that the corporation was non in existence while execution of contract, secondly the contract executed by the promoter was and during such time company was not in existence, lastly for pre incorporation contract the promoters are exclusively liable.  

After going through the issue in the given case and after understanding the requirement of corporation Act and in English law. 
It can be judge that the contract executed between the Allen and Chen is a pre incorporation contract, so all the rules, condition and judgment made and published for the pre incorporation contract will be applies in the given situation. 

The contract entered by the Allen with Chen to supply the computer to the WEAK Security Pty Ltd, Is a pre incorporate contract. Company can refuse to ratify such contract, as it can take a stand that it was not in existence or it has a no identify while execution of contract, as well as it can also take a stand that the person who had executed the contract with you was not empower or authorise in any way to do such acts.
NowChen can enforce the contract from Alen, as promote shall be excusive liable for the pre incorporation contract. 


Question -4

The contract entered into by the employees of the company to buy a truck for company, can be enforceable. Person with whom the contract was entered into by employee of company can enforce the contract aging the company.   
Where any outsiders deal with the company, that it is presumed that the outsider has a knowledge about the bylaws or the constitutions of company, and such outsider cannot take a stand that it had no knowledge about the constant of Article of association or Document showing the constitution of company.
Further where ever we are taking about the duties and authorise of the responsible persons of corporation  as well as taking about the internal management of the company, the rules of Indore management will be applied, the rules state that the outsider are not award about the internal activities of company hence, they can take a stand for that they are unaware about the internal activities of the company, their liabilities for any such act, which influence by the internal activities will be nil or limited. However the rules of Indore management will not be applied where the outsider had a knowledge about the internal activities.
Considering the facts of the case and applying the above stated provisions, we can concludes following facts. 
?    The employees Rodger was strictly restricted to enter into the contract with outsider on behalf of the company 
?    This facts was known to Walter before officer truck for company 
?    The act is company again the instruction of member 
?    So the provision of Indore management will not be applied In given case 
?    The article of associating will bind the member with the company and not to the outsiders.
Considering all the facts of case as well as the applicable legal aspect, we can conclude that the contract to buy the truck can be enforceable only by company, and it is completely voidable from company’s points of views. Walter is not in position to enforce with company. In short said company may or may not accept the contract to buy a truck andit is voidable from the company’s points of view.

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References (2018). The Employer/Employee Relationship – Lawful and Reasonable Instructions » CCIQ. [online] Available at: [Accessed 17 Apr. 2018]. (2018). Pre incorporation contract. [online] Available at: [Accessed 17 Apr. 2018].
Lawyers, D. and Burrows, +. (2018). Can an employer sack an employee for not following directions?. [online] Available at: [Accessed 17 Apr. 2018]. (2018). [online] Available at: [Accessed 17 Apr. 2018]. (2018). Pre-incorporation contracts: legal enforceability. [online] Available at: [Accessed 17 Apr. 2018].
Recruiting Resources: How to Recruit and Hire Better. (2018). Employee Code of Conduct Company Policy Template. [online] Available at: [Accessed 17 Apr. 2018]. (2018). What Is a Pre-Incorporation Contract?. [online] Available at: [Accessed 17 Apr. 2018].

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