Company Law: Section 125, 140, And Directorial Duties

Scenario 1: Authority of a Company Representative and Object Clauses

1.The solution deals with the application of section 125, section 140 and the authority of the representative of the company.

Miles and Patricia are operating farm and in 2014 they decided to involve their children. So Avocado Smash Pty Ltd (“AS”) is incorporated and the farm is transferred to AS. Miles and Patricia are the directors, Alicia (daughter and Chief Financial Officer) and Leighton (Managing Director from 1^st January 2015 for 3 years). Coral (solicitor) drafted the constitution.

An object clause was introduced which limited the activities to organic farming of avocadoes. Also, Coral is the solicitor and can only be removed for misconduct. He is given 6% shares and is thus the minority shareholder. Nuala was appointed as Company Secretary (CS).

The Corporation Act 2001 is the guiding force of the company incorporated in Australia. As per section 124, the legal status of a company is distinct and separate. It requires officers for its working. A director is the officer appointed at the said post and includes all person who are carrying the acts of a director. As per section 198C, a Managing Director is responsible for carrying day to day activities s of business.

Now, Leighton was acting as MD from 2018, thus, he is the de facto manager.

The first concern that was raised is whether AS is bound by the contract with Build Em Architects considering that Leighton has exceeded his authority?

In company law, directors are authored to represent the company. The power can be granted to the directors actually or impliedly or ostensibly. When the agents act outside their authority and enters into contractual relationship with outsider, then, if the outsider is acting with good faith then the acts are binding under Indoor Management Rule.

As per section 128(4), assumptions under section 129 can be raised by outsider if acting in good faith. As per section 127, if the document is signed by one director and CS, then, it can be assumed that the officer has the required authority as per section 129.

Now, Leighton is only allows to undertaken transactions up to $50,000. Beyond that board of approval is required. He appointed Nuala as CS and solicitor. In 1^st August, Leighton entered into contract with Build Em Architects (BEZ) @ $150,000. The contract is signed by Leighton and Nuala.

The contract with BEZ is valid as the document is signed by the MD (Leighton) and Nuala (CS) and thus BEA can rely on section 129 assumptions and IMR provided it is acting in good faith.

Scenario 2: Breaches of Directorial Duties in the Context of a Loan

Now, Whether the agreement by Leighton is considered to be in breach of the objects clause?

As per section 125, the company must act as per the provisions of the object clause. But, in order to avoid suffering to outsiders, as per section 131, the acts are not considered to be ultra virus even if they are outside the object clause.

So, the contract by Leighton with BEA is outside the object clause, but as per section 31 such acts are valid and enforceable.

Now, on 10th of August, Leighton notified Coral that her services are not required.

Now, whether Coral can enforce the clause appointing her as CS and what remedy is applicable.

As per section 140, a contract with the officers is enforceable by the company with members and vice versa. Thus, a member can sue the company provided his member’s rights are violated.

So, when Leighton terminated the service of Coral, then, her member’s rights are not violated. So, she cannot sue the company as per section 140. She can seek remedy for breach of contract.

2.The solution deals with the duties of the director.

Great Games Ltd (GG) manufactures/sells outdoor play equipment for adults. Zak, Taylor and Abdullah are directors. GG owns 60% of the shares in Great Adventures Ltd (GA) (

Market adventure packages). Zak, Taylor and Abdullah also sit on the board of GA along with two independent non-executive directors (Bethany and Chris). These two companies advertise their products together

The main issue that arose is whether Zak, Taylor and Abdullah have breached their directorial duties (section 181 o other equivalent duties) towards GA, if yes then what are the penalties?

A company is distinct and requires directors for its operations. The directors are imposed with several duties.

Section 181 submits that the directors/officers must act with good faith securing the company interest and for proper purpose. Non compliance of registration of share transfer is breach of section 181. The test is objective and consider from the point of the court.

As per section 191-195, the directors must avoid clash of concern and gave preference to the interest of the company over their own interest.

As per section 182-183, no company director must abuse his position and information for his own gain at the loss of the company.

As per section 180, the directors must act with care and diligence. If inadequate advice is furnished knowing that the shareholder is taking heed of the advice then it is violation of section 180.

Violation of the duties might result in disqualification of director (section 206B), fines and compensation. If the breach is reckless then jail of 5 years can be imposed.

Now,

GG is in financial difficulties and is not able to pay the Bank. on 20^th July 2018, board meeting of GA was carried out wherein it was decided that GA will gave loan to GG so that bank payments can be done. The loan is granted on the note that it is in best interest of GA as if there is failure of GG then it will hamper the reputation of GA.

It is submitted that Zak, Taylor and Abdullah are the directors of GG and GA both. it is submitted that Zak, Taylor and Abdullah acted without good faith and they thought of their own infest over the interest of GA. Bethany and Chris were right as the grant of loan was to protect their the reputations of GG and not to bring any reputational gain to GA. Thus, there is breach of section 1181 and section 191-915. Also, the acts of Zak, Taylor and Abdullah are not in good faith and they used their position and information for their own interest and thus there is breach of section 181,m182-183.

So, they must be imposed with penalties and can be disqualified

Reference List

Books/Articles/Journals

Cassidy, Julie, Concise Corporations Law, (Federation Press, 2006)

Judge, Stephen , Business Law, (Macmillan Education UK, 2009);

Tomasic, et. Al, Corporations Law in Australia, Federation Press.

Mäntysaari, Petri , Comparative Corporate Governance: Shareholders as a Rule-maker, (Springer Science & Business Media, 2005)

Case laws

ASIC v Adler [2002] NSWSC 171;

Australian Metropolitan Life Assurance Co Ltd v Ure (1923)

Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461.

Brunninghausen v Glavanics (1999) 17 ACLC 1247.