Question:
Discuss about the Commercial Law for Lexicon Pty Ltd.
Lexicon Pty Ltd is a huge proprietary company which manages a construction and a building business across Queenstown and Northern Territory in Australia. The said company had a board consisting of three directors. Grant “Big Boss” Jackson was the founder of the said company, his son Bob Jackson is in charge of the manufacturing and Gerard Stone who is a qualified accountant and a family friend act as the directors of the company. Additionally Gerard Stone was the company secretary for Lexicon Pty Ltd. In the 12 months, the business of the said company has been very great and with the Paris climate agreement in December 2015, the company’s board saw vast expansion opportunities in the remote areas of Australia especially in the South Australia and Western Australia. Olivia was the daughter of Grand and even though he was not formally appointed as a director of the company, she occasionally attended company board meetings and acted as a office manager and head of administration.
However, to expand their business operations to other parts in Australia, the company needed to increase its manufacturing capacity as well as the staff of the company. Thus, for the same the company would require to borrow approximately AUD 3-4 million. However, the board decided to not continue with the expansion plan and discuss the same mid next year. Bob and Olivia were very upset with the said decision.
Olivia took the business expansion plan to a bank and the bank manager looked very convinced with the plan and immediately agreed to fund and said plan by providing a loan. Olivia convinced Bob to join her in the said conduct and both Olivia and Bob signed a loan agreement and a mortgage contract on behalf of the Lexicon Pty Ltd. Without any intimation to the other two directors of Lexicon Pty Ltd, Olivia and Bob used the loan money to set up new offices in Australia and hired new staff. However, three months later, all the loan money was exhausted without any order for construction of a new home. The March and April repayment of the said loan was due and thus the bank sent a formal letter to Lexicon Pty Ltd seeking total payment of the loan which was yet unpaid. However the other two directors stated that the Lexicon Pty Ltd is not liable for the loan repayment and the mortgage contract as the said company never approved the said loan or any transaction with the bank.
Thus, the issue in the said case is whether Lexicon Pty Ltd is liable to pay the bank the default amount of the loan and whether the mortgage contract signed on behalf of Lexicon Pty Ltd can be considered void?
Every company which is operative and managed in Australia is governed by the rules and regulations made under the Corporation Act 2001. Thus, the Corporation Act 2001 is the primary statute which determines the duties, obligation and liabilities of a company operative in Australia under particular situations (Salthammer, Mentese and Marutzky 2010).
There are certain business law doctrines which are application in company or business laws of most of the countries. One such doctrine is the doctrine of indoor management (Ridley 2011). This doctrine states that when an individual is dealing with a company or a corporation, it is correct to assume that the said individual is acting in good faith and with the lack of any knowledge about any irregularities, needs to inquire about the formalities of the internal affairs of a company however can rightfully assume that the said company is complying with its bylaws and constitution (Goldberger 2014). Thus, doctrine is known as the doctrine of indoor management which protects an outside while dealing with a company to assume that the said company is complying with all its constitution and replaceable rules. Thus, if an individual dealing with a company suffers any harm or loss sue to company’s non-compliance in its intern affair; the individual can hold the company liable for the same (Pathak 2013). In a famous case law Royal British Bank v Turquand the director of a company granted a bond to a bank. However the Articles of Association of the said company stated that the same could be done only after it is bring approved at a board meeting in a general resolution (Cain 1989). Thus, when the liability of the bond arose, the company stated that no resolution passing the same was approved by the company, thus the company is not liable (Sheikh 2013). However, the judge in the said case applied the doctrine of indoor management and stated that the said doctrine protects innocent parties that deal with companies and who are totally unaware of the internal working of the company, such people have the right to assume that the company has complied with all the necessary laws in its internal management (De Lacy 2013).
The Corporation Act 2001 in Australia also has adopted the “Doctrine of Indoor Management” and makes similar provisions in section 128 and section 129 of the Corporation Act 2001. Section 128 of the Corporation Act 2001 permits to make certain assumption while he dealing with a company operative in Australia. Section 129 of the Corporation Act 2001 gives the list of the assumptions which can be made by an individual who deals with a company in Australia. The section 129(1) of the Corporation Act 2001 states that the any individual dealing with a company may assume that the company’s constitution and the rules and regulations of the Corporation Act 2001 that are applicable to a company in form of replaceable rules are complied with in the internal management of the company (Shepherd and Ridley 2015). Additionally, section 129(2) of the said act states that an individual dealing with a company may rightfully assume that anyone who appears, from information which is made open to public by a company to be a director of a company is duly appointed following all rules of such an appointment and has the authority and the power to exercise all the duties as a director of the said company (Hill 2012). Thus, the Corporation Act 2001 also recognizes the doctrine of indoor management by incorporating section 128 and 129 within its scope (Vasudev and Watson 2012).
In the present case, there were three directors of the Lexicon Pty Ltd who were Grand, Bob and Gerard. Olivia was the daughter of the founder of the company and though not formally appointed attended board meetings of the Lexicon Pty Ltd and worked as the office manager and head of administration.
When the expansion plan was disapproved by the board of Lexicon Pty Ltd, Olivia convinced Bob to enter into a loan agreement and mortgage contract to fund the expansion plan and without the knowledge of Grand and Gerard, the remaining two directors of Lexicon Pty Ltd, secured a loan and mortgage of AUD 3-4 million. However, soon when the expansion plan failed, the replayment of loan amount become impossible finally bank sending a letter to Lexicon Pty Ltd claiming for the same. Grand and Gerald stated that Lexicon Pty Ltd was not liable as the said loan was not approved, however the doctrine of indoor management applies to the present situation and bank in the said case is the outside party which is protected if the internal management of the company had any non-compliance or irregularity. Thus, the bank is allowed to presume that Olivia and Bob had the authority to enter into a loan agreement and a mortgage contract on behalf of Lexicon Pty Ltd. Thus under section 128 and section 129(2) of the Corporation Act along with the doctrine of indoor management, the Lexicon Pty Ltd would be liable for the loan repayment and the mortgage contract is also valid and Lexicon Pty Ltd is entitled to make the payment to the bank as the bank was right in assuming that the Olivia and Bob who signed the loan agreement on behalf of Lexicon Pty Ltd had full authority in doing the same.
Lexicon Pty Ltd is liable for both repayment of the loan amount which was in default. Additionally, the mortgage contract was also valid and Lexicon Pty Ltd was liable under the said contract.
Grant Jackson owns 60 %of Lexicon Pty Ltd shares and bob, Olivia and Gerard own 5 % each shares of Lexicon Pty Ltd. The remaining shares of the company are held by Jackson families past associated people. Samantha Jackson who is the first wife of Grand Jackson but not the children of Bob and Olivia on learning about the failed expansion plan and financial issues with the Lexicon Pty Ltd feared the value of her shares would drop drastically and was determined to get back some money from her ex-husband and his children.
The issue in the said case, after assuming Lexicon Pty Ltd had to pay the loan, can Samantha Jackson under the Corporation Act 2001 get some money from Jackson family and their family accountant.
Rule of Law
The rules and regulations established under Corporation Act 2001 are to be followed by all the companies operative in Australia (Fox 2013). Thus, any company not complying with the rules and regulation of the Corporation Act 2001 has to suffer the consequences of non-compliance. Every company has directors who are responsible for the internal management of the company. However, if the said directors fail to perform their duties as a director, they are personally liable to the company and the shareholders of the company (Brand, Fitzpatrick and Lombard 2013). There are many grounds on which a director of an Australian company becomes personally liable. One of these grounds includes debts incurred when a company becomes insolvent (Du Plessis, Hargovan and Bagaric 2010). A director may be liable to pay the debts of the company in case the company fails to pay its dent as and when they fall due. The primary reason for making a director liable for the same is because it is the director’s duty to make sure that a company does not trade when it’s insolvent. A company is Australia is considered to be insolvent when it fails to pay its debts as and when it falls due (Gitman, Juchau and Flanagan 2010). Thus, in such a case, a director is personally liable for the debts incurred and continuing the trading of a company when its insolvent is a violation of the section 588G of the Corporation Act 2001 which states that it is the duty of the director of a company to prevent insolvent trading by company (Omar 2013). Thus, the shareholders and the creditors of the company can ask the director to pay for their loss and damage which is incurred by the insolvent trading of the company as a debt which is mentioned in section 588M of the Corporation Act 2001 (Buchan 2013).
Application
In the said case, there were three directors of the Lexicon Pty Ltd who were Grand, Bob and Gerard. Bob along with Olivia entered into a loan agreement with a bank on behalf of Lexicon Pty Ltd without the knowledge of the other two directors. Soon, the company suffered financial losses and repayment of the loan amount got difficult, it is when the other two directors realized the said loan was taken on behalf of Lexicon Pty Ltd. However, in the said case, the directors of Lexicon Pty Ltd will be liable for the debts incurred as the directors failed in their duties as a director as set in section 181 of the Corporation Act. Additionally, the company also indulged in trading while it was insolvent, thus the directors of the company breached their duty under 588G of the Corporation Act 22001 and are liable to pay the creditors and the shareholders of the company any loss incurred by them. The said amount can be collected by the directors of the company similarly a debt is collected. Therefore, in the said case, Samantha being a shareholder of Lexicon Pty Ltd, can claim for compensation from the Jackson family for her losses suffered due to insolvent trading of the company under section 588G and 588M of the Corporation Act 2001.
Conclusion
Samantha is liable to get back money from the Jackson family under section 588G and 588M of the Corporation Act 2001.
Reference List
Brand, V., Fitzpatrick, J. and Lombard, S., 2013. Governance and Not-for-Profits: Regulatory Reform. Flinders LJ, 15, p.381.
Buchan, J., 2013. Franchising: A honey pot in a bear trap. Adel. L. Rev., 34, p.283.
Cain, T.E., 1989. Rule of British Bank v Turquand in 1989, The. Bond L. Rev., 1, p.i.
De Lacy, J. ed., 2013. Reform of UK Company Law. Routledge.
Du Plessis, J.J., Hargovan, A. and Bagaric, M., 2010. Principles of contemporary corporate governance. Cambridge University Press.
Fox, J., 2013. What are the obligations of directors and officers of a company limited by guarantee that is a charity?. Keeping Good Companies,65(4), p.221.
Gitman, L.J., Juchau, R. and Flanagan, J., 2010. Principles of managerial finance. Pearson Higher Education AU.
Goldberger, J., 2014. Contract law in the cases: 2013 in review. Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia,28(2), p.12.
Hill, J.G., 2012. Why Did Australia Fare So Well in the Global Financial Crisis?.
Omar, P. ed., 2013. International insolvency law: Themes and perspectives. Ashgate Publishing, Ltd..
Pathak, A., 2013. Legal Aspects of Business. Tata McGraw-Hill Education.
Ridley, A., 2011. Company Law. Routledge.
Salthammer, T., Mentese, S. and Marutzky, R., 2010. Formaldehyde in the indoor environment. Chemical Reviews, 110(4), pp.2536-2572.
Sheikh, S., 2013. A guide to the Companies Act 2006. Routledge.
Shepherd, C. and Ridley, A., 2015. Company Law. Routledge.
Vasudev, P.M. and Watson, S. eds., 2012. Corporate governance after the financial crisis. Edward Elgar Publishing.
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