In this section of the assignment the powers of an agent in relation to binding a company to its acts would be discussed in the light of the Corporation Act 2001 (Cth) (CA). This part also deals what happens if a person gets into a contract in the name of the organization with a third party before the organization has been registered or incorporated. The first question is related to the issue that Sunshine Scooter Art Pty Ltd (SSA) has a binding contract with CS and PP as entered upon by Bob one of its directors or not.
In this case it has been provided that a company has been planned to be incorporated by Bob, Adrian and Jana for the purpose of making scooters. Bob has got into a contract with CS for the purpose of providing SSA computers worth $8000 before the company has been incorporated. Bob has also got into contract with PP worth $50000 for supply of goods for mass production of scooter after the company has been incorporated. The constitution of company provides that transition above $10000 are not valid unless the approval of board is taken.
Section 124 of the CA provides power to an organization to get into contract in the same way a natural person can do with a third party. In addition even if such contract is not in the interest of the company the capacity of the organization would not be disturbed.
Section 125 of the CA provides power to the directors of an organization to restrict the power which can be exercised by the organization with respect to dealings with a third party through its constitution or replaceable rules. However it has been further provided by the section that merely because the constitution restricts the power of the company to get into a transaction the dealing cannot be declared as void.
Section 126 of the CA provides powers to a person who is working on behalf of the company and has been provided by implied or express authority in relation to agency law to ratify, discharge, make or vary a contract between the company and a third party even if the common seal which the company has is not used by such person in relation to the dealing.
In order to execute a document with respect to dealing between a company and a third party it is necessary that such document is signed by one director and one company secretory of the company or two directors mandatorily according to section 127 of the CA. If the seal of the company is used in the document, also has to be witnessed by the same persons mentioned above.
Section 131 of the CA provides remedies to the third party who has got into a contract with a company before the company has been registered. As per the rule of the subsection (1) any person who gets into a dealing with a third party on behalf of the company before it has been registered has the right to the benefits of the dealing if after registration the contract has been ratified by the company within reasonable or agreed time. Subsection (2) states that a third party is entitled to damages in case the contract has not been ratified by the company according to the provisions of subsection (1) after registration or the company is not been able to get registered. The damages would be paid by the person who got into the contract on behalf of the company and the amount would be the same which the company had to pay to the third party. As per subsection (3) in case a third party commences legal action as the company is not ratifying the contract the court may allow any order it deems appropriate which may also include ordering the company to pay damages to the party totally or in part, give back the property received by the third party or pay damages to the third party.
Under section 128 a person has the power to make assumptions provided through section 129 and such assumption cannot be declared as incorrect by the company in legal proceedings. Section 128 (3) states even when the agent acted in a fraudulent manner the power of assumption exist. Section 128 (4) states that the rule of assumption is not applicable if during the assumptions there was knowledge or doubt of the assumption being incorrect.
As per section 129(1) a person has been given the power to assume that an act entered upon with the agent of the company is in compliance with the rules of the constitution and replaceable rules.
In the case of Lion Nathan Australia Pty Ltd v Coopers Brewery Limited it was provided by the court that only because the constitution of the company does not allow a dealing it cannot be declared invalid.
The powers in relation to right or an outsider to assume had also been discussed in the case of Royal British v Bank v Turquand which have now been incorporated in section 129 (1) of the CA.
In relation to the contract which had been entered by Bob with CS for the supply of computers even before the company had been incorporated the provisions of section 124-127 and section 131 would be applicable. As per the application of section 124 and 126 and it can be said that SSA had the power to get into a contract. Bob as the director of SSA had the power to get into a contract on behalf of SSA. According to section 131 Bob has the power to get into contract with CS before SSA is registered. SSA as per section 131 have not ratified the contract with CS. Thus as per section 131 CA has the right to claim compensation from SSA or Bob or them both or they have the right to get the computers back and receive compensation for the deal as the court deems fit.
In relation to the contract with PP , it can be said through the application of section 125 of the CA that the act is not invalid only because it has been restricted by the constitution. In addition as per the rules of section 128 of the CA, PP is entitled to make assumptions which cannot be stated as incorrect by SSA even if bob had been fraudulent. There was no knowledge on the part of PP that the constitution of SSA required the approval of the board for transaction over $10000. Thus they cannot be exempted under section 128 and have the right to make assumption as per section 129 of the CA that the constitution was complied with during the dealing. The provisions of the Turquand case also provides for such consideration
Conclusion
SSA and Bob are entitled to pay compensation to CS and return to computer or have to pay CS damages in relation to the contract.
SSA has a binding contract with PP which if violated would result in damages.
The directors have been provided with the job of regulating the affairs on the company lawfully. This section of the paper would discuss the duties of directors in relation to the company for the purpose of solving the issue which arises out of the question. The section would discuss the duties as provided by the CA and as applied by the courts. In this case it has to be determined that whether Jack, Alice and Francis have not complied with the duties imposed on them as the directors of the Superdry Stores Ltd. The paper also discusses the duties which have been imposed on the directors through common law.
Jack, Alice and Francis are the directors of Superdry Holdings Ltd (“Holdings”). They are also the directors of Superdry Retail Stores Ltd (“Stores”) and Superdry Manufacturing Ltd (“Manufacturing”). They have the maximum interest in Holdings and Manufacturing as it has been provided that 70% of the shares of Stores belong to “Mum and Dad” investors which is the general public. As Manufacturing and Holdings are not doing great business they require loan to avoid insolvency. They are already over the overdraft limit and the bank demands personal guarantee. As stores is doing good business they pass a resolution to make stores provide guarantee for holding and Manufacturing to the bank.
The CA imposed statutory duties on directors of a corporation via the rules provided in section 180-184.
Section 180 of the CA gives out a duty to the directors as per which they have to act in such a way as to provide proper skill and diligence towards dealing with the operations of the company. The section is divided into two parts. Section 180 (1) provides that due diligence and skill has to be imposed by the directors. Such actions have been undertaken or not is identified by imposing an objective test. As per the directions of the test under this section appointment of a reasonable director is done who is hypothetical in the position of the original director and then the actions of both the directors are compared to analyse any breach.
Section 180(2) of the CA states a rule which is famous as the business judgment rule. The rules is used as a defence against part (1) of the section. As per the principles of the rule the court would not consider an action by the director to be inappropriate if it is in relation to the risk taken in business. However some reasonable director have to take the same action for the defence to be applicable.
Section 181 of the CA gives out another duty for the directors of a company. According to this duty the directors have to target the best interest of the company while working in good faith and for an appropriate purpose dung the exercise of their powers provided to them by the company. The duty is also consistent with the common law, equitable and fiduciary duty of directors to act in good faith, proper purpose and best interest of the organization.
Section 182 and 183 of the CA gives a duty to prevent the directors from misusing their position and company’s information. As per section 182 the directors have to give utmost priority to the company’s interest in case a conflict of interest situation arises in relation to the needs of the company. They must not gain an unfair advantage for themselves using their position. In addition the directors of the company as per the provisions of section 183 of the CA must not use any information of the company to gain unfair advantage. They must report to the board about a conflict of interest position as per section 191 of the CA. these duties are consistent with the common law and fiduciary duties of not letting conflict of interest situation arise and choosing the interest of the company over personal interest.
Section 184 of the CA applies criminal sanctions for the breach of section 180-183 in a deliberate, intentionally, reckless or careless manner.
Section 588G of the Act states that the directors must not carry on the business activities of the company if they believe the company to be insolvent or the company may likely get insolvent because of the act.
In case the directors duties of section 180-183 are violated the directors can be prosecuted with pecuniary penalties under section 1317E of the Act as well as be suspended from managing a company for a period determined by the court under section 206C of the CA.
In case of violation of section 588G by the directors they can be held personally liable to the debts incurred by the company because of the insolvent dealing.
In the case of Asic v Adler and 4 Ors the duties of directors towards the company had been discussed by the court.
In ASIC v Lindberg the director was imposed with 2 years ban as well as $100000 pecuniary penalty for the breach of section 180(1)
In the given case the directors are clearly not using proper skill and diligence towards the administration of stores. This is because if the test under section 180(1) of the CA is applied it can be said that no reasonable director would give guarantee for companies which are not doing well. Thus section 180(1) of the CA has been violated by the directors.
Here they can take the defence of the business judgement rule as they think that the act would be in the best interest of stores and its parent company not doing well can hamper its own reputation.
In relation to section 182-183 of the CA it can be provided that the three directors as they have maximum interest in Holdings and manufacturing have used the position and information to pass a resolution to gain unfair advantage for themselves and subject stores to a disadvantage by passing the resolution for guarantee.
Section 588G has been violated as they have been trading even when the company has reached it’s over draft limit and not in then position to pay its creditors.
Thus the fiduciary duties as discussed above have also been violated in the same way. The directors are liable to be prosecuted under section 1317E and section 206C of the CA.
Conclusion
The directors have violated the both equitable and statutory duties. They can take defence of section 180(2). The will be liable for suspension and pecuniary penalties as per section 1317E and section 206C of the CA.
Asic v Adler and 4 Ors [2002] NSWSC 171
ASIC v Lindberg [2012] VSC 332
Corporation Act 2001 (Cth)
Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444
Royal British v Bank v Turquand (1856) 119 ER 886
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