25C. Constitutional limitations: transactions with directors or their associates

Question 1

25C. Constitutional limitations: transactions with directors or their associates
- is voidable by virtue of this section

Answer 1

General overview
[25C.01] Section 25C provides that a contract or transaction that falls within s 25B is voidable by the company. It provides for the remedies of the parties in such transactions as well as the loss of the company’s rights to rescission. However, the operation of any written law or any rule of law by virtue of which the transaction may be called in question or any liability to the company is not affected by this provision: s 25C(2). Furthermore, the rights of any party to the transaction who is not a director or a person connected to the directors is also not affected by this provision: s 25C(7).

Question 2

Application of this section

Answer 2

[25C.02] Section 25C only applies to contracts or transactions which fall under s 25B. In other words, where the transaction is void because it is ultra vires or unenforceable for any other reason under the operation of any written law or rule of law, ss 25B and 25C do not apply: ss 25C(2) and 25B(5).

Question 3

Voidable transaction under s 25B

Answer 3

[25C.03] Subsection (3) provides that a transaction entered into by a party which includes a director of the company or a person connected with any such director with the company or its holding company shall be voidable at the instance of the company.

Question 4

Remedies

Answer 4

[25C.04] Regardless of whether the transaction mentioned in s 25C(3) is avoided or not, such party to the transaction and any director of the company who authorised the transaction is liable to account to the company for any gain he has made and indemnify any loss or damage arising out of the transaction. However, any party who is not a director shall not be liable if he shows that he did not know the directors were exceeding their powers: s 25C(6).

Question 5

Intervention of third-party rights

• The right of the company to avoid the transaction is lost where
  (a) restitution of any money or the subject matter of the transaction is no longer possible;
  (b) the company is indemnified for any loss or damage resulting from the transaction;
  (c) a third party’s rights acquired bona fide and for value without notice of the directors exceeding their powers would be affected by the avoidance; or
  (d) the transaction is affirmed by the company. (ratification of directors’ breach of duty by the general meeting or affirmation of the transaction by the company at general meeting)

Answer 5

[25C.05] The right of the company to avoid the transaction is lost where (a) restitution of any money or the subject matter of the transaction is no longer possible; (b) the company is indemnified for any loss or damage resulting from the transaction; (c) a third party’s rights acquired bona fide and for value without notice of the directors exceeding their powers would be affected by the avoidance; or (d) the transaction is affirmed by the company. Further, see cases on the ratification of directors’ breach of duty by the general meeting or affirmation of the transaction by the company at general meeting. The general meeting may by ordinary resolution ratify an act of the directors who had voted on a contract in which they were interested: see Grant v United Kingdom Switchback Rlys Co (1888) 40 Ch D 135, CA . However, the general meeting cannot ratify the acts of the board which contravened the company’s articles: Boschoek Pty Ltd v Fuke [1906] 1 Ch 148, Ch D . The general meeting may ratify the acts of the directors who issued shares improperly for the purpose of forestalling a takeover: Bamford v Bamford [1970] Ch 212, CA . Sale of a steamer by a director to the company may be ratified by the majority of the shareholders: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589, PC . Where there is fraud or expropriation of the company’s assets, the general meeting cannot ratify such acts of the directors: Cook v Deeks [1916] 1 AC 554, PC ; Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350, CA. Where the directors personally benefited:

Question 6

Powers of the court to make order that is just

Answer 6

[25C.06] Subsection (7) empowers the court to make any order affirming, severing or setting aside the transaction on such terms as appear to be “just” and in favour of any party to the transaction who is not a director (see subsection (3)(b)(i)) or a person connected to a director (see subsection (3)(b)(ii)).