Reference no: EM13305852

A, B and C have, for a number of years, run a small unincorporated electrical manufacturing firm. They recently decided to incorporate a proprietary company to run the business.Prior to incorporation there was a discussion between A, B and C about whether the company, when created, should expand the business to include a retail outlet, or whether the business should simply continue as it is.A was in favour of the expansion, while B and C were reluctant (although they did not reject the idea completely).The discussion ended without any decision being made.

B and C were responsible for arranging the registration of the company, to be known as Zap Pty Ltd.As part of this process they decided to use the replaceable rules as the constitution but with the following changes.There is a clause that restricts the company's business to the manufacture of electrical goods, specifing that the company does not operate as a retailer of such goods.Another clause states that no single director may bind the company to any contract for the purchase of machinery without the agreement of each of the other directors. There is also a clause that varies the replaceable rule in section 198B of the Corporations Act by deleting subsection 198B(2).

A was not aware of the contents of the constitution and, prior to registration, she began negotiating for the company to lease shop premises which would be suitable for retail activity.She found a suitable shop.The lessor was anxious that the lease should commence immediately, but A managed to persuade him to agree that the lease would commence when the company ratified the contract, which would be 'as soon as possible'.On 1 April A signed the lease document "on behalf of Zap Pty Ltd, to be formed".Unknown to A at that time, the Australian Securities and Investments Commission (ASIC) had rejected the name "Zap" because it is already in use.

The company was registered on 30 April as "Sparky Pty Ltd".The information supplied to ASIC with the registration forms shows that the directors of the company are A, B and C.There are four shareholders: A, B, C and M (whose role is described below).

At the first directors' meeting, three weeks after registration, A, B and C decided (after much discussion) that Sparky Pty Ltd would approve the lease contract. Another item of discussion was a contract purportedly entered into on the company's behalf by C after the company was registered.The contract was for the purchase of heavy-duty welding machinery from X.A and B had no knowledge of C's actions regarding the contract, and it appears that C has forged B's signature on the company cheque for the first instalment of the purchase money.X is now pressing for further payment.

M, on hearing about the ratification of the lease contract is not pleased.

M became a member of the company because he was able to contribute large sums of capital. His share rights are the same as those for A, B and C, and all four hold an equal number of shares.When A, B and C learn of M's response to the ratification they fear that he may be an adverse influence on the company's progress. Accordingly they decide to call a general meeting at which they will propose that the company's constitution will be amended such that all shares in the company will have their dividend entitlements removed.A, B and C will, however, continue to be entitled to receive fees for their work as directors.

(i) A and B seek your advice on the legal position concerning the machinery contract. (10 marks)

(ii) M seeks your advice about the validity of the ratification and on who is liable on the lease. (5 marks)

(iii) M seeks your advice about the validity of the proposed amendment to the constitution and any remedies he has against the directors. (5 marks)