An entity is a legal corporation that comes into existence when it is created under a statue for the purpose of carrying business activities. In the eyes of law, a company is treated a separate legal person that can sue or be sued. Corporate law governs the legal disputes of an entity that it face in conducting the commercial activities. It is also known as business law or enterprise law or sometimes company law. It must be abide by the organizations in order to carry its business without any legal hindrance. The report provides light on the contract and corporation law along with the application of relevant case
Part A: Contract Law
An agreement becomes a contract when it is accepted and enforced by the law and there must be some consideration involved in the dealing. A contract may be executed in writing or verbally. Contract law provides the laws or regulations for legally enforcing certain promises. In Australia, it is predominantly governed by the common law, but other regulations or laws are also provided to be applicable in common law of contract, especially, in the areas of consumer protection.
In the case of Kleinwort Benson Ltd. (plaintiff) V Malaysian Mining Corporation (defendant), , defendant took a loan from merchant bankers for investing its subsidiary trading company in London. For this, the defendant wrote a 'comfort letter' stating about its policy is to ensure the solvency of its subsidiary company so that it can meet its liabilities occurred in respect to the bank. Primarily, a loan amount of £5 Million was sanctioned, and after getting a similar letter from the defendant, it further granted the facility to raise the limit to 10 Million. After some years, the subsidiary entity went into liquidation. In such a situation, the merchant bankers considered these letters to make the company pay for the outstanding loan amount of its subsidiary (Kleinwort Benson Ltd. V Malaysian Mining Corporation, 1989). The defendant alleged that the intention of the letter was not fathomed by both the parties to legally bind or create legal obligation to repay the amount. The issue was that whether the statements or assertions was provided with an intention to create legal obligations regarding the repayment of the loan amount. The case raised a question on the legal validity of the contract and whether it was bound under the contract law.
Letter of comfort (LoC) is also called “letter of intent”. It is a letter that is prepared only in vague terms. It is a communication from a party to a contract to the other party, that implies an initial willingness to get into a contractual obligation. However, the motive for creating the letter is not to legally bind but to morally bind on the parties involved in the contract. In typical sense, it is written and given by an entity to a bank or financial institution (Ayres and Schwartz, 2014). To an extent, it can be said to be a guarantee only when the party writing it has specifically mentioned the intention of legal obligation of the parent company under such contract. Under the common law in Australia, whether a LoC can create legal relationship will depend on the language used in the letter as there is no statutory definition or meaning is available. Further, it has been provided that there will not be any future warranty but is merely a statement on the part of defendant's policy.
According to the common law in Australia, it is clear that the legal binding nature of the LoC will be determined from the words mentioned in the letter. To get a clearer meaning on the legality, an example of a similar case that has been decided in the past can be taken. In the case of Banque Brussels Lambert SA v Australian National Industries Ltd. (1989), the Spedley Securities Ltd. Wanted to obtain a loan of $5 million from Banque Brussels. There was a condition, to provide an assurance about the loan will be paid off completely within the specified time to get the loan. Australian National Industries (ANI), parent company of Spedley wrote a letter to Banque Brussels.
The letter acknowledged the amount of loan sanctioned to Spedly, together with the approval of the parent company. ANI, clearly stated that it will not reduce its shareholding in the subsidiary company below 45% in the complete duration of the transaction. In case of any such reduction, the Banque Brussels will be provided a 90-day notice.
Along with this, letter also mentioned, after the above-mentioned notice is served, the Banque Brussels will give a 30-day notice to ANI to repay the outstanding loan amount. Furthermore, it contained an assurance about Spedley being solvent enough to pay the amount so obtained. However, during this whole procedure, ANI sold its shares in Spedly without serving notice to the Banque Brussels. This impeded the ability of Spedley to pay their loan. The issue was whether the letter given by ANI to Banque was legally binding and enforceable or not.
The court held that, language used will determine the legal obligation of LoC. Such a letter will be legally binding because it has been carried out commercially. Also, it will be enforceable by law as it contains specific promises. The promise was to serve a 90-day notice by ANI before disposing shares held by it and to secure the financial capacity of Spedley to repay the loan amount (Fitzpatrick and et. al., Business and Corporations Law 3rd ed. (2017).
Part B: Corporations Law
Corporations law is the principal legislation regulating companies. It regulates matters such as the formation and operation of companies in conjunction with a constitution that may be adopted by a company. This law also takes care regarding duties of officers, takeovers and fundraising. The law is administrated by a single national regulatory authority, the Australian Securities and Investment Corporation (ASIC) (Allen, 2017).
The issue is related to Australian Securities and Investment Corporation v Vizard (2005), case law. In this case Vizard who was appointed as a non-executive director of Telstra corporation Ltd which is known as Australian and Overseas Telecommunications Corporations Ltd which was incorporated under incorporation law. As Vizard is non executive director of the company possess various confidential information relating to company and its future plans. As a director it was Vizard's responsibility to keep companies information safe and not use this information for any personal benefit. Confidential information means information that is not disclosed by the company and disclosure of the information will have a large effect on companies stock prices and its future actions. It is found that Vizard has used information that is provided to him in the position of a director and used this information for personal benefit. Chef Executive Officer of the company provided information to directors regarding merger with some other company and there proposal regarding this merger (Australian Securities and Investment Corporation v Vizard, 2005). Merger in two companies is confidential as it have large effect on share price of the company. Use of this information for personal benefit by director is considered as breach of duty.
As per corporations law it is the duty of the director to act in good faith and to exercise powers for a proper purpose. Rule specifies some fiduciary duty of director to exercise their discretion bona fide in what the directors consider to be in the interest of the company. The duty to exercise power for a proper purpose requires directors to exercise their powers for a proper purpose and not for any other purpose or to obtain some private advantage. Statutory duty of a director as per section 181(1), directors and officers must exercise their powers and discharge their duties in good faith in the best interest of the corporation and for proper purpose. As per section 185 (1) has no effect in addition to and not in derogation of general law or any other rule of law. If the director is performing all the duties and responsibility honestly in the best interest of the company then it is considered fair. It will be considered as breach of duty when act of director in no way is considered in the best interest of Australian Securities and Investment Corporation. In the given case of Australian Securities and Investment Corporation v Vizard it is seen that director has not acted in good faith. Information which was confidential to the company is used for personal benefit of the director and it is considered that there is breach of duty. This breach of duty leads to misconduct by the director and held responsible for this breach (Wells, 2012).
From the mentioned case study it is clearly stated that Vizard the non-executive director of the company has breached the duty. This case study needs to be examined by using relevant examples relating to the same issue to provide a clear decision held in the case. Regal (Hastings) Ltd v Gulliver, 1942 is the leading case regarding rule against directors and officers from taking corporate opportunities in violation of their duty of loyalty. The court held that a director is in breach of his duty if takes advantage of an opportunity that the corporation would be interested in but unable to take advantage. Fact of the case is that directors of the company without getting permission of the shareholders of the company sold the business and made profits out of this. A breach of fiduciary duty is performed by the directors. Decision provided by Court of Appeal was against directors. But House of Lords revised the decision and held that directors of the company also possess some share and they acted for the benefit of the company. Instead of this it was held that use of fiduciary position is used by the directors to make profits for the company and no fraud is involved. From the above case law it is clear that breach of duty is carefully evaluated by the judge in the court. Before providing any decision all the relevant case laws are considered to provide judgement (Hiller, 2013).
According to the above case scenario it can be concluded that Vizard by not performing his duties in good faith leads to breach in section 183 of Corporation Act 2001. This section defines that director and other officer of the company must not improperly use information provided to them due to their position to gain an advantage for themselves. This also includes they should not use the information to cause detriment or harm business of company. Breach of section 183 is prohibiting conduct by Vizard. Breach of duty leads him to get penalised that can be maximised up to amount of $200000 or any civil proceedings. This is despite the fact that a contravention holds great potential for profits and may cause much harm. As per corporation maximum penalty that can be provided to him is imprisonment for a period not exceeding five years plus a fine not exceeding $200000. together with this punishment he was not allowed to be a director of any other company for a period of ten years. All these punishments provided to director to increase importance of duties and responsibilities of directors. Providing punishments helps company to maintain confidential information and perform business activities in profitable manner.
- McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
- Ayres, I. and Schwartz, A., 2014. The no-reading problem in consumer contract law. Stan. L. Rev. 66. p.545.
- Fitzpatrick J, Symes C, Veljanovski A & Parker D, Business and Corporations Law 3rd ed. (2017), LexisNexis Butterworths Australia.
- Allen, W. T., 2017. Our schizophrenic conception of the business corporation. In Corporate Governance (pp. 79-99). Gower.
- Hiller, J. S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics. 118(2). pp.287-301.
- Wells, H., 2012. Corporation Law is Dead: Heroic Managerialism, Legal Change, and the Puzzle of Corporation Law at the Height of the American Century. U. Pa. J. Bus. L. 15. p.305.