BLAW5016: Fundamentals of Business and Corporations Law

John and Vera operated a partnership that was in the business of manufacturing furniture. They decided to register a company named Urban Pty Ltd and sell their business to it.

In January 2021, John enters into a contract to supply office furniture to Curtin University for $75,000 and signs the contract as an agent of Urban Pty Ltd.

In July 2021, Urban Pty Ltd was formed. John becomes the managing director and Vera becomes the director and the sales manager of the company. The following clauses are contained in Urban Pty Ltd's constitution:

the company will only manufacture

any borrowing by the company exceeding $50,000 is to be approved by the members in general

Vera, the Sales Manager of Urban Pty Ltd, was so impressed by a machine used to produce colourful mobile phone cases that she purchased a machine for Urban Pty Ltd at a cost of $100,000 from Wow Ltd. As Urban Pty Ltd did not have the necessary funds, Vera arranged a loan from Distrustful Bank Ltd

Before the sale was entered into, however, Wow Ltd had telephoned Urban Pty Ltd and asked to speak to the managing director. As John was absent the phone call had been taken by a clerk who happened to be passing John's office when the phone rang. The clerk did not describe himself to the caller and told Wow Ltd that Vera was a senior executive of the company, and the purchase would no doubt be in order.

Urban Pty Ltd decides that the phone case machine will not be profitable. They advise Wow Ltd that 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 furniture manufacturing; that under the Corporations Act 2001 (Cth), Wow Ltd is assumed to know this from the company's constitution; and, as the company had no capacity to enter into such a contract, Vera could not have had the authority to act on its behalf.

Urban Pty Ltd advises Distrustful Bank Ltd that the loan agreement is terminated on the grounds that the company's constitution does not permit any borrowing over $50,000 without approval from the members in the general meeting; that Distrustful Bank Ltd should have been aware of this requirement and had the responsibility to check to ensure such approval had been first obtained; and, that Vera had no authority to enter into such an agreement.

REQUIRED:

With reference to the Corporations Act 2001 (Cth) and case law, you are required to answer the following questions:

1. Discuss three advantages and disadvantages of incorporating Urban Pty Ltd compared with the type of business they were operating before registering Urban Pty Ltd. You are NOT required to use the 4-step process in answering this question.
2. Discuss the procedure that John and Vera would have had to follow under the Corporations Act 2001 (Cth) to register Urban Pty Ltd, including the creation of the company's internal management rules.
3. Identify and discuss the sections of the Corporations Act 2001 (Cth) that will make John liable if Urban Pty Ltd does not want to supply office furniture to Curtin University. In answering this question, note that the contract was entered into in January 2022 and the company was registered in July 2022.
4. With reference to the purchase of the machine used to produce colourful mobile phone cases, discuss the following:
   • Whether the contract with Wow Ltd can be terminated as Urban Pty Ltd's constitution only permits the company to manufacture furniture and the company had no power to produce colourful mobile phone cases. 
   • Whether the contracts with Wow Ltd and Distrustful Bank can be terminated on the grounds that Vera had no authority to enter into such

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