Task: Robert, Clara, Johann and Teresa are extremely talented musicians. They decide to form acompany to run a music teaching business. They decide to call the company JRCT Musical PtyLtd and when they register the new company with ASIC, they list themselves as the onlydirectors and only shareholders. As the initial shareholders, they each receive one ordinaryshare, 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 thecompany 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 morethan $5,000 in any calendar year unless that transaction has been approved by ordinaryresolution in a general meeting of members. The constitution does not exclude the replaceable rules. The replaceable rules therefore apply tothe company, with the exception of any replaceable rule that conflicts with an article in thecompany’s constitution. At their first board meeting, the directors pass a resolution to appoint Teresa as Chief ExecutiveOfficer (CEO) of the company, ‘effective immediately’. They decide that they will prepare aformal written employment contract for Teresa at a later stage but in the meantime, theyencourage her to start working as CEO. Teresa asks whether the board would be happy for herto order business cards for them all and whether it would be okay if her own business cardindicates 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 tellsLudwig about her position at JRCT Musical Pty Ltd and mentions that she feels like a verypowerful business person even when she is not allowed to enter into any contracts over $5,000on the company’s behalf. Ludwig tells Teresa that he has been trying to sell a Baby GrandPiano and it would be a great acquisition for the music teaching company. Ludwig showsTeresa the Baby Grand Piano and lets her play all sorts of music for one hour. Teresa agreesthat the piano would be a great investment for the new company and the price of $10,000 is anonce-in-a-lifetime opportunity. She provides Ludwig with a copy of her newly printed businesscard indicating that she is the CEO of JRCT Musical Pty Ltd and Ludwig drafts a contract for thesale of the Baby Grand Piano. She mentions that she will need to get approval at a generalmeeting of members of JRCT Musical Pty Ltd. Teresa then goes home and sends Robert, Clara and Johann an email telling them that ageneral meeting of members of JRCT Musical Pty Ltd will take place at 8 am on the followingday at her home. Her email explains that the purpose of the meeting will be to vote on whetherthe company should sign the contract for the sale of the Baby Grand Piano. She attaches acopy of the contract to the email. Teresa then calls Robert, Clara and Johann to tell them to check their emails and to askwhether they can attend the general meeting. Only Robert is able to attend. Clara and Johannare not available at the proposed time and they both complain to Teresa about the short noticeand 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 sheand Robert meet at the scheduled time and place and they both vote in favour of the resolutionto sign the contract. After Robert leaves, Teresa drafts the minutes of the meeting, recording that the resolution hasbeen passed. She has heard that company contracts should be signed by two directors, so shesigns her own name and forges Robert’s signature. She indicates under the signatures that sheand Robert are directors of JRCT Musical Pty Ltd and that they are signing on behalf of thecompany. Teresa then visits Ludwig and gives him the signed contract. Ludwig expresses surprise thatTeresa was able to organise a shareholders’ meeting in such a short time period. Teresaexplains 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 guiltywhen 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 twoof the directors of JRCT Musical Pty Ltd, he should have no problem in holding JRCT MusicalPty Ltd to the contract. At the next board meeting of directors of the company, Clara and Johann express considerabledisappointment that Teresa went ahead with the contract for the acquisition of the Baby GrandPiano without properly consulting with them. They tell Teresa and Robert that they do not thinkthat the meeting at Teresa’s home was a valid general meeting of members. They propose aboard resolution stating that JRCT Musical Pty Ltd is not bound by the contract for the BabyGrand Piano and that the company will not make any payments under the contract. Robert, whois disappointed that Teresa forged his signature, votes with Clara and Johann and the boardresolution passes by three votes to one. Teresa then contacts Ludwig to let him know that JRCT Musical Pty Ltd wants to cancel thecontract. In the meantime, Ludwig turned down the possibility of selling the Baby Grand Piano toanother corporate customer who offered $15,000. Ludwig is convinced that he is bound by thecontract with JRCT Musical Pty Ltd. Ludwig tells Teresa that JRCT Musical Pty Ltd must honourthe 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 courtwould require JRCT Musical Pty Ltd to honour the contract with Ludwig.
Subject Name: Business Law
Level: Undergraduate
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