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.

HINTS:

In the process of working your way through answering this question, you should make sure you always state the source of the relevant legal rules (e.g. a section of legislation or a court case) and apply those legal rules to the facts. A possible structure for your assignment would be as follows:

-First - consider whether there were any procedural irregularities in relation to the purported general meeting of members and, if so, whether this means the court would find that the resolution passed by Teresa and Robert at that meeting wasinvalid.

-Second - consider whether a court would require JRCT Musical Pty Ltd to honour the contract with Ludwig on the basis of the common lawrules.

-Third - consider whether Ludwig would be able to rely on the statutory assumptions in order to persuade a court to require JRCT Musical Pty Ltd to honour thecontract.

In the course of writing your answer, you may find it useful to argue 'in the alternative'. For example, if you argue that the court would likely find that the resolution passed by Teresa and Robert at the purported general meeting wasvalid, then (in addition to exploring the legal implications of this) you may want to write something like:

While I have argued above that Teresa and Robert's resolution wasvalid, it is also worth considering the legal implications if the court determines that it wasinvalid. In that case ...

Conversely, if you argue that a court would likely find the resolutioninvalid, then you might like to discuss the legal implications if the court instead finds that it wasvalid.