Law Assignment On The Case Of JRCT Musical Pty Ltd

Question

Task: Robert, Clara, Johann and Teresa are extremely talented musicians. They decide to form a company to run a music teaching business. They decide to call the company JRCT Musical Pty Ltd and when they register the new company with ASIC, they list themselves as the only directors and only shareholders. As the initial shareholders, they each receive one ordinary share, with each share entitling the holder to one vote in a general meeting of members. The company has a constitution but it only includes the following two articles:
Article 1 - Subject to any rules and procedures set out in this constitution, the business of the company is to be managed by or under the direction of the directors.
Article 2 - The company cannot enter into any contract that will require the company to pay more than $5,000 in any calendar year unless that transaction has been approved by ordinary resolution in a general meeting of members.
The constitution does not exclude the replaceable rules. The replaceable rules therefore apply to the company, with the exception of any replaceable rule that conflicts with an article in the company’s constitution.
At their first board meeting, the directors pass a resolution to appoint Teresa as Chief Executive Officer (CEO) of the company, ‘effective immediately’. They decide that they will prepare a formal written employment contract for Teresa at a later stage but in the meantime, they encourage her to start working as CEO. Teresa asks whether the board would be happy for her to order business cards for them all and whether it would be okay if her own business card indicates that she is CEO. The others all agree to this.
Ludwig works in a musical instruments warehouse and is a good friend of Teresa. Teresa tells Ludwig about her position at JRCT Musical Pty Ltd and mentions that she feels like a very powerful business person even when she is not allowed to enter into any contracts over $5,000 on the company’s behalf. Ludwig tells Teresa that he has been trying to sell a Baby Grand Piano and it would be a great acquisition for the music teaching company. Ludwig shows Teresa the Baby Grand Piano and lets her play all sorts of music for one hour. Teresa agrees that the piano would be a great investment for the new company and the price of $10,000 is an once-in-a-lifetime opportunity. She provides Ludwig with a copy of her newly printed business card indicating that she is the CEO of JRCT Musical Pty Ltd and Ludwig drafts a contract for the sale of the Baby Grand Piano. She mentions that she will need to get approval at a general meeting of members of JRCT Musical Pty Ltd.
Teresa then goes home and sends Robert, Clara and Johann an email telling them that a general meeting of members of JRCT Musical Pty Ltd will take place at 8 am on the following day at her home. Her email explains that the purpose of the meeting will be to vote on whether the company should sign the contract for the sale of the Baby Grand Piano. She attaches a copy of the contract to the email.
Teresa then calls Robert, Clara and Johann to tell them to check their emails and to ask whether they can attend the general meeting. Only Robert is able to attend. Clara and Johann are not available at the proposed time and they both complain to Teresa about the short notice and request that she re-schedule the meeting at a later time so that the proposed resolution can be properly considered and debated. Teresa ignores their requests and the next day she and Robert meet at the scheduled time and place and they both vote in favour of the resolution to sign the contract.
After Robert leaves, Teresa drafts the minutes of the meeting, recording that the resolution has been passed. She has heard that company contracts should be signed by two directors, so she signs her own name and forges Robert’s signature. She indicates under the signatures that she and Robert are directors of JRCT Musical Pty Ltd and that they are signing on behalf of the company.
Teresa then visits Ludwig and gives him the signed contract. Ludwig expresses surprise that Teresa was able to organise a shareholders’ meeting in such a short time period. Teresa explains that there are only four shareholders in the company and that they are all very flexible, so it is quite easy to organise a meeting at short notice. Ludwig thinks Teresa looks a bit guilty when she says this and he suspects Teresa may not be telling the truth about the shareholders’ meeting. Nevertheless, Ludwig thinks to himself that, since the contract has been signed by two of the directors of JRCT Musical Pty Ltd, he should have no problem in holding JRCT Musical Pty Ltd to the contract.
At the next board meeting of directors of the company, Clara and Johann express considerable disappointment that Teresa went ahead with the contract for the acquisition of the Baby Grand Piano without properly consulting with them. They tell Teresa and Robert that they do not think that the meeting at Teresa’s home was a valid general meeting of members. They propose a board resolution stating that JRCT Musical Pty Ltd is not bound by the contract for the Baby Grand Piano and that the company will not make any payments under the contract. Robert, who is disappointed that Teresa forged his signature, votes with Clara and Johann and the board resolution passes by three votes to one.
Teresa then contacts Ludwig to let him know that JRCT Musical Pty Ltd wants to cancel the contract. In the meantime, Ludwig turned down the possibility of selling the Baby Grand Piano to another corporate customer who offered $15,000. Ludwig is convinced that he is bound by the contract with JRCT Musical Pty Ltd. Ludwig tells Teresa that JRCT Musical Pty Ltd must honour the contract and threatens legal action to hold the company to the contract.
THE QUESTION
Teresa comes to see you for advice. Advise Teresa regarding the likelihood that a court would require JRCT Musical Pty Ltd to honour the contract with Ludwig.

Answer

Issues
The major issue outlined in this case of law assignment is Can JRCT Musical Pty Ltd be compelled to enforce the contract that is made with Ludwig?

This issue can be resolved by resolving three sub issues.

1. Whether there exist any indiscretions with respect to procedure that is followed in the members general meeting? If yes, whether the resolution which is passed by Robert and Teresa is enforceable?
2. Can JRCT Musical Pty Ltd be compelled to enforce the contract that is made with Ludwig under common law rules?
3. Are the statutory assumptions part of the 2001 Act is relied upon by Ludwig?

Relevant law
When any business is registered with the ASIC, then, such business is a distinct lawful object in law and is termed as corporation. Section 124 of the Corporation Act 2001 considered in the present context of law assignment ensures that upon registration a business has all the controls and volume that of an person and is ensured in (Salomon v Salomon & Co Ltd , 1897). (Gibson & Fraser, 2014)

The corporation is owned by the shareholders or the members. However, a company being an artificial person is controlled and manged by the company officers called the directors. 

The members and the members meetings
The members are the owners of the company. Generally, the members are not entitled to interfere in the management. However, there are several rights that are conferred upon the members and one of which is the right to call members meeting and to pass resolutions.

The members meeting can be annual or extraordinary general meeting.

Any director the member can call an EGM. Any meeting apart from AGM is an EGM.

In an EGM, the members decide to deal with the unexpected business transactions and to deal with issues that requires resolution of the shareholders. As per section 249F of the Act, the members holding 5% of the votes can call for the meeting. There must be some proper purpose for calling of the meeting.

As per section 249H and section 249HA, it is stated herein law assignment that there is a need to gave a notice of 21 days prior to the meeting. The announcement should be provided to other members and managers as per section 249J and 249K. The notice must specify the time and place of the meeting. (Australia, 2011)

The members than can pass the resolutions.

Resolution by majority is ordinary resolution.

Resolution by 75% of voting is special resolutions.

Invalidation of resolution
As per section 1322 (1) of the Act 2001 considers in this aspect of law assignment, the court cannot have the power to invalidate the proceedings that are carried out in general meeting only because there are some procedural irregularities. But, the irregularities are such high that it may cause substantial injustice which cannot be cured and then the court may invalidate the proceedings.

The irregularities are procedural only when there is n proper quorum or there is defect in notice and on these grounds the proceedings cannot be invalidated. (AICD, 2014)

The Directors
The directors are the person who manages the affairs of the business. As per (Lee v Lee’s Air Framing Ltd , 1961)Lee v Lee’s Air Framing Ltd [1961] AC 12, a corporation is a discrete lawful object and the directors are the authorised agents. Any outsider who is dealing with the directors is actually dealing with the company and the directors are the agents to establish an association and are held in (Macaura v Northern Assurance , 1925).

As per section 9, it is stated in this law assignment that the director is the person who is appointed at the post of the director. Further, any person who is complying with the duties of the director are also consider as directors and thus includes de facto and shadow directors. (Gibson & Fraser, 2014)

Authority of the directors
The directors who make any company bound by their acts must have power to carry on such activities. The company and the director’s acts under the law of agency, wherein the principal is the company and the directors are its agents who are permitted to bind the company by their actions.

When the contract is made directly-substantive authority in the case of law assignment
Normally, all the contracts that are made by the director are found to be binding provided such contract are written and signed by the directors who have specialist to arrive into such contracts. The agreements are obligatory when it is contracted by the mediators who have specialist to enter into contracts. Generally, the directors, corporation secretary and the managing directors have substantive specialist to arrive into bonds directly.

When the contracts are made indirectly – actual and apparent authority
When an agent enters into contract under his real or ostensible specialist, them, such contracts with the strangers are binding on the company.

Express Actual authority happens when the corporation particularly confer power to an agent either in writing or orally to enter into any particular contracts in this case of law assignment. 

Implied actual authority rises when the manager is located in such a place that it is inferred that the manager is authorised to act on corporation behalf. For instance, (James & Thomas, 2020)

1. Through position in the company - the managing director is inferred to be under the authority to bind the company by his actions.
2. Acquiescence – When the company allows the agent act at a certain position for a period of time then, also the agent is deeming to have authority to bind the company;

In this law assignment, it is clear that apparent authority exists when a representing is made by the company to any third-party portraying that the agent does possess an authority, which in reality he does not, then, the mediator is consider to have ostensible specialist and the acts carried under such apparent authority is binding on the company. It is necessary that the outsider must have relied on such representation before entering in the contract.

Contracts made outside authority – Indoor Management Rule
When any contract is made by the agent with the outsider, then, all such contracts are valid when the same are made under the agent’s authority. However, those contracts which are made outside the authority are generally avoided by the company on account of ultra-virus acts.

But, with the passage of time it was realised that it is great hardship for the outsiders who are dealing with the agents on the presumption that the agents have the authority to bind the company by their acts. The Indoor Management Rule is normally applicable which emphasis that the outsider may presume that all the internal management procedure must be followed before making any contract by the agent unless and until there is no reason for the outsider to suspect the same. However there are few exceptions: (Chapple & Lipton, 2002)

1. When the outsider who is entering in the contract have actual data of the indiscretion;
2. The stranger bombs to make reasonable enquiries before making the contract which he is supposed to do in such reasonable situations.

Statutory assumptions
Section 128 of the Act 2001 considered in this segment of law assignment submits that any being who is trade with the company or an agent must make the assumptions that are established under section 129 of the Act, 2001, provided the stranger he comes with clean hands.

However, as per section 127 of the Act 2001 contemplated in the law assignment, the assumptions under section 129 of the Act can be relied upon by the outside even when there fraud or forgery by an agent upon the outsider, provided the outsider himself is coming with clean hands.

The assumptions established under section 129 include the following points outlined in this law assignment:

Section 129 (2) - (4) of the Act submits that that the officers, secretary, officers and agents are duly appointed. Further, all the persons have duly comply with their duties.

As per Section 129 (5) of the Act , the documents are performed validly if properly signed as per section 127 (1) of the Act. as per section 127 (1), when there is no company seal on the document, then, the document is said to be validly executed provided it is engaged by 2 managers or a director and secretary.

As per Section 129 (6) of the Act, the documents are performed validly if there is seal as per section 127 (2) of the Act and witnessed. As per section 127 (2) when there is mutual seal then the text is implemented validly if it is signed by 2 director or a director and secretary. (Chapple & Lipton, 2002)

Company constitution and object clause
Apart from complying with the requirements of the 2001 Act and the rules of the ASIC, the corporation is also empowered to frame its own rules and regulations with the help of framing of Constitution along with Replaceable Rules under section 141 of the Corporation Act 2001 or may run by both.

One of the clauses noted in the law assignment that are made part of the constitution is the object clause. The object clause defines the reasons for which the company is established. It is the duty of the directors that they must carry on their actions within the arena of the object clause.

However, when any act is carried out outside the object clause then such act is termed as ultra-virus acts are treated as void and not enforceable in law.

Initially, when any outsider deals with the company he must be aware of the object clause and this is called the constructive notice rule and is held in (Ashbury Railway Carriage & Iron Co v Riche , 1875). However, this constructive notice rule is shed away with because of the range of activities within which the company now operates.

As per section 125 of the Act, 2001, it is clear on this law assignment that no act will termed to be an ultra-virus act just because it is outside the possibility of the object clause.

Thus, any contract that is made by the company director which is outside the scope of the object clause is not held to be valid and the company is obligated to honour such contracts provided that the outsider comes with clean hands.

Application of law
Robert, Clara, Johann and Teresa formulate a company named, JRCT Musical Pty Ltd and are its directors and shareholders. Every shareholder have 1 share with 1 vote, thus, making the voting right of every shareholder to 25%. As per the constitution, the business is to be managed by the directors and no contract can be entered which is more than $5,000 unless the same is approved in the company’s general meeting by ordinary resolution.

Teresa was appointed as CEO and she started working with immediate effect. Business cards are also printed wherein she was designated as CEO of the company.

Sub issue 1
Now, Teresa being the member of the company is authorised to call for a members meeting. She is the shareholder of the company with 25% voting rights. Thus, the details provided on this case of law assignment illustrates that she is authorised to call the members meeting.

Now, an email is sent by her to all the other shareholders of the company wherein the purpose of the meeting is mentioned along with the place and time of meeting, thus, there is compliance of Act 2001.

However, only Robert attended the meeting. On the other hand Clara and Johann complained that the notice is too short and that Teresa must reschedule the meeting. However as per section 1322 (1) of the Act, these are mere procedural irregularities and thus this will not invalidate the meeting.

Further to pass an ordinary resolution, there is a need of 50% of the voting. Both Teresa and Robert met at the conference and both favoured the resolution. Thus, there is a complete validity in passing the resolution keeping aside the procedural irregularities.

Thus, it is argued within this law assignment that the resolution is valid and is enforceable in law.

Sub issue 2
As per the facts obtained in this law assignment, Ludwig is the friend of Teresa. Teresa tells Ludwig of her position in JRCT Musical Pty Ltd. She further mentions that even though she is not permitted to arrive into contract that are beyond $5,000 but tells her that she has a powerful position in the company to enter into contracts. To prove the same Teresa shows Ludwig her printed cards which show that she is the CEO of the company. They both entered into a contract wherein Teresa agreed to buy a Baby Grand Piano @ $10,000.

At this point it is argued in this law assignment that as per the constitution of the corporation, Teresa is not permitted to enter into contracts for an amount which is beyond $5,000. Thus, she does not have the authority to so and this fact is bought in the knowledge of Ludwig.

However, when Teresa shows her printed card which depicts her as CEO of the company, then, Teresa is acquired with substantive authority. Not only this, by printing CEO on the cards, the company by making a representation has given an apparent authority on Teresa and Teresa is thus authorised to act in the manner and the acts which every CEO can carry on, that is, to make agreements on behalf of the corporation.

Further, Teresa also tell Ludwig that she is in need of the approval in the general meeting, since the approval in the general meeting is found to be valid and have only procedural irregularities,

By applying the rule of Indoor management in this case of law assignment, it is submitted that Ludwig can rely that all the internal management procedures are comply with unless she has some substantial doubt. But, her doubt is also clarified from the fact that Teresa is the CEO of the corporation and to prove the same printed card is presented.

Thus, the contract that is made amid Ludwig and Teresa is valid and enforceable in nature in common law.

Sub issue 3
 It is submitted that Ludwig can enforce statutory assumptions and enforce the contract.

This is because and it is argued herein law assignment that a valid ordinary resolution is passed by Teresa and Robert by calling a general meeting of the members.

Further, even though the contract that is made is not within the scope of the constitution, but, by applying section 125 of the Act, no transaction is invalid merely because it is outside the object of the constitution.

Further, as per section 128 of the Act, Ludwig can accept that the agreement that is made by Teresa is valid by relying on the assumptions that are made under section 129. As per section 129 (6), in order to execute the contract without seal it is necessary that the contract must be signed by two directors. Thus, it is argued on this law assignment that Teresa signed the agreement and fakes the name of Robert. It is submitted that as per section 127, forgery of the signature will not invalidate the assumptions of section129 and Ludwig can still rely on the same.

Thus, it is argued that considering that Ludwig has no doubt that the signatures of Robert are forged, it is submitted that he can trust on the molds of section 129 and section 127 and thus, the contract that is provided by Teresa is valid and enforceable in law.

Conclusion
It is thus concluded and argued in this section of law assignment that the contract that is made amid Teresa and Ludwig is a valid contract as the members meeting is valid and there are mere procedural irregularities. Further, Ludwig can trust on assumptions of section 129 and section 127 and has no reason to believe that there is any kind of forgery. Thus, there is a binding contract amid the parties and the company must honor the contract that is made amid Teresa and Ludwig.

Bibliography
AICD, 2014. AICD. [Online]
Available at: https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-4-6-director-tools-me-agms_a4_web.ashx#:~:text=Section%201322%20(1)%20of%20the,be%20remedied%20by%20any%20order
[Accessed 17 June 2020].

Ashbury Railway Carriage & Iron Co v Riche (1875).

Australia, 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. s.l.:CCH Australia Limited.

Chapple, L. & Lipton, P., 2002. Corporate Authority and Dealings with Officers and Agents. s.l.:CCH Australia.

Gibson, A. & Fraser, D., 2014. Business Law 2014. Law assignment s.l.:Pearson Higher Education AU.

James, N. & Thomas, T., 2020. Business Law. s.l.:John Wiley & Sons.

Lee v Lee’s Air Framing Ltd (1961).

Macaura v Northern Assurance (1925).

Salomon v Salomon & Co Ltd (1897).