Discuss about the Law of Business Organization for Indoor Management.
Issues
The main issues that arose in the given scenario are:
Whether there is a valid contract amid Executive Car Fleets Ltd (Car Fleet) and Speedy Auto Hire Ltd (Speedy) for the sale of cars?
Whether Speedy has right in law to avoid the contract if established amid the parties?
In the present given scenario, the law of Indoor Management Rule and section 128 and section 12 of the Corporation Act 2001 (Act) is applicable.
Whenever any company wants to make a contract then the same is valid provided it is undertaken by its authorized agents. The agents are authorized when they posse’s relevant authorities, such as: (Krawitz 2002)
Actual authority – when an authority is granted to an agent by his principle under a specific agreement/contract then such an agent has actual authority and is held in Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd (1964). The actual authority can be express (when granted by the principle purposely either orally or in writing) or implied (when the authority is granted by the conduct or actions of the parties) and is held in Hely-Hutchinson v Brayhead Ltd (1968).
Ostensible authority – when the authority is assumed by others to be possessed by a person then such is an ostensible authority. Normally, when a company holds out a person to an outsider and represents that such person does have certain authority then an outsider can rely on such representation and can make valid contract under the ostensible authority of such person.
Thus, any contract which is undertaken by an agent with an outsider within his authority will bind the company and the company has to honor the contract which is established by such an outsider.
However, many a times, an outsider undertakes a contract with a person on the belief that such person has the relevant authority but in reality such person does not possess any authority, then, such contracts are normally voidable by the company on the ground of lack of authority. But, this avoidance of contract is not just for those outsiders who deal with the company officers on the belief that such officers are authorized to deal on behalf of the company.
To protect such honest outsiders the law of Indoor Management Rule laws formed in Royal British Bank v Turquand (1856). As per the rule if any outsider is undertaking any contract with a company on a belief that the agent with whom he is dealing has requisite authority and has no knowledge of any irregularity, then, such an outsider is under no obligation to check the authenticity of the agent’s authority. Under the Indoor Management Rule he can assume that all the internal management procedure which are required to authorize such an agent are comply with and thus the contract is binding upon the company. However, there are few exceptions to the rule, such as: (Krawitz 2002)
When the outsider is aware of the irregularities of the lack of gent authority;
When he can put in mere enquiry and be aware of the irregularities and is discussed in Northside Developments Pty Ltd v Registrar-General (1990).
Further, under the Corporation Act 2001, there are two important provisions which are applicable in the given situation. The same are section 128 and section 12 of the Act.
As per section 128 (1) any person who is dealing with the company has an authority to make assumptions as provided in the section 12 of the Act (Gye v McIntyre (1991). However, as per section 128 (4) it the person who is making the assumptions under section 12 of the Act is aware that the same are irregular and incurrent then such person is not entitled to make the assumptions. The knowledge of the irregularity must be actual and is held in Tesco Supermarkets Ltd v Nattrass (1972). As per section 129, a person can assume that all the provision of the Constitution and the replaceable rules if applicable are comply with by the company and there is no irregularity in the same and is discussed in Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989). As per section 129 (3) an outsider can assume that any agent of the company is duly appointed and has authority to perform the actions. (Krawitz 2002)
Thus, these are the applicable laws that are applied to the given factual situation.
Dan is an employee (Vehicle Sales Manager) of Executive Car Fleets Ltd (Car Fleet) and sells on the companys behalf. Whereas Mark is an employee (Vehicle Purchasing Manager) of Speedy Auto Hire Ltd (Speedy) who make purchase on his companies behalf.
Various contracts are entered amid Dan and Mark. Thus, both the parties are dealing with each other from some time and are aware of each other’s respective authorities to bind their company by their respective actions.
Dan has often signed contracts with Mark for the sale of cars. On Thursday (9.00 am) Dan has send an email to Mark specifying that he has authority to sell cars @ $ 50 000 per car and he must come at 4 pm to sign the contract. At 4 pm, Mark visits Dan and signs the deal to buy the vehicles for a total price of $ 1 500 000.
Thus, at this stage it is submitted that since both mark and Dan has requisite authority to bind their company’s, thus the contract entree red by them are valid.
However, before signing the contract Dan has met Mary (CS at Speedy). She submits that there are chances that Mark will be fired from his job. Dan communicates the news to Johnson (CFO) who does not gave heed to the news and asks Dan to continue with the deal.
It is submitted that Dan and Johnson are aware of the irregularity that might take place. Even after getting aware of the same they continued with the contract with Mark. Thus, by applying the exceptions to the Indoor Management Rule, it is submitted that an outsider must act in good faith to rely on the rule and if he is aware of the irregularity then no protection can be granted.
Thus, Dan and Johnson are aware of the irregularity and are not dealing in good faith thus they are not protected under the Rule.
Also, they cannot rely upon the assumptions mentioned under section 129 of the Act as they are aware of the irregularities.
Conclusion
Thus, Speedy has full right to rescind the contract entered amid Dan and Mark as the same is not protected under the Rule and section 129 of the Act. Mark and Johnson are aware of the irregularities n thus they cannot take advantages of their own wrong.
Issues
What actions can be undertaken by Peter for the decisions taken by Sparkles Ltd? Are there any remedies that can be availed by him?
Whenever any company is formed then it is considered as a separate legal entity in the eyes of law. The company is considered to be distinct from its members and any actions which are undertaken by its officers and members are undertaken in the name of the company. It is the company alone which can sue and be sued ion its own name and this concept of separate legal entity is rightly established in the Salomon v Salomon & Co Ltd (1897). (Puig 2000)
In any registered company, the people who holds the share of the company its shareholders. The person who hold the major shareholdings of the company are major shareholders and the persons who hold fewer amounts of shareholdings are minor shareholders. It is the duty of the major shareholders to run the company in such a manner so that it is not against the interest of minor shareholders. (AICD 2013)
But, many a times the actions of the company officers are such that they are not in the interest of the minority shareholders. In such situations a minority shareholder can take against such officers.
A minority shareholder can take action under part 2F.1 of the Corporation Act 2001 for seeking remedies for oppression. Section 232-235 deals with the actions of oppression.
As per section 234 of the Act, any member, any former member or any applicant who was the member when the application for the oppression was filed are eligible to file the application for oppression and is rightly held in Re Spargos Mining NL (1990). In Gooze v Graphic World Group Holdings Pty Ltd (2002), a sole shareholder was also allowed to file remedy for oppression. The application must be made with clean hands unless the same will be rejected by the court and is held in Re Bellador Silk Ltd (1965). (Aherns 2013)
As per section 232, the court can allow the application for oppression provided the affairs of the company against which an application is made is not in the interest of the shareholders or is unfair, oppressive, discriminatory, etc. and is rightly held in (ASC v Lucas (1992). (Findlaw 2016))
In the leading case of Scottish Co-op Wholesale Society Ltd v Myer (1959), the court held that not availing business opportunities is a kind of oppression on the shareholders of the company. In Jenkins v Enterprise Gold Mines NL (1992), the court that if the directors of the company are not complying with their duties honestly and adequately then the same is considered to be oppressive in nature.
Once it is justified that the applicant fulfills the criteria’s mentioned under section 232 and section 233 of the Act, then the court has power to make an order under section 233 of the Act. normally, the court has discretionary power to make any order it may deem fit. However, there are few remedies that are mentioned under section 233 of the Act, the same are:
The court may wound up the company;
The court may order the repeal or modification of the constitution of the company;
The court may order that the affairs of the company must be regulated appropriately and is discussed in the leading case of Re Spargos Mining NL(1990).
The court may purchase the shares of the members of the company and is discussed in the leading case of Rankine v Rankine(1995).
The court may appoint a manager to the company in order to manage the affairs of the company appropriately and is discussed in Re Enterprise Gold Mines NL (1991).
The court may also any officer of the company to act as per the directions provided by the company.
Thus, this is the basic procedure which must be cater by a minority shareholder in order to protect his legitimate interest.
The law as discussed above is now applied to the facts of the case.
As per the facts, Sparkles Ltd (Sparkle) is a company which deals in custom jeweler. Peter Jones is a stationary businessman and also holds 5% shares in Sparkles. He was appointed by the company to supply stationary to the company for a term of three years.
Thus, Peter is the minority shareholder in Sparkles.
However, there are few decision which are taken by the company which are not found in favor of Peter:
The company decided to source all its stationary requirements from Office Pax Ltd.
The decision taken by the company was complained by peter, however, the board is reluctant to change the decision. The decision is totally against the contract that was signed amid Peter and the company and violates the terms of the constitution. Thus, an oppression is caused to the employee of the company.
Roger (Director and CEO of the company) who holds 65% of the shares sells a rare sapphire on companies behalf to his nephew @ $ 5 000 which is actually worth $ 100 000. He is also selling Ruby @ $ 40 000 to his (Rogerson’s) niece for $ 8 000.
Thus, Roger is the major shareholder of the company and is acting and managing the affairs of the company in such a manner which are not in the interest of the company. The stones are sold at an undervalued price and thus the conduct is not proper and is against the interest of its members.
It is thus advice to Peter that he must make an application under section 233 and seek remedies from the court. The court can grant remedy in the form of appointing a manger for managing the affairs of the company properly.
Conclusion
It is thus concluded, that peter must file an application under section233 and seek appropriate remedies from the court.
Reference List
Aherns (2013) Statutory Oppression Remedy Under the Corporations Act 2001 (cth) < https://www.ahernslawyers.com.au/latest-news/statutory-oppression-remedy-under-the-corporations-act-2001-cth/>. [viewed on 12th September 2016].
AICD (2013) Don’t forget minority shareholders < https://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/April/Opinion-Do-not-forget-minority-shareholders>. [viewed on 12th September 2016].
Findlaw (2013) oppression against shareholders < https://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/April/Opinion-Do-not-forget-minority-shareholders>. [viewed on 12th September 2016].
Krawitz A (2002) Protecting Outsiders to Corporate Contracts in Australia, Volume 9, Number 3 (September 2002) <https://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html>. [viewed on 12th September 2016].
Puig GV (2000) A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, Volume 7, Number 3 (September 2000) < https://www.austlii.edu.au/au/journals/MurUEJL/2000/32.html>. [viewed on 12th September 2016].
Case laws
ASC v Lucas (1992).
Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989).
British Bank v Turquand (1856).
Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd (1964).
Gooze v Graphic World Group Holdings Pty Ltd (2002).
Gye v McIntyre (1991).
Hely-Hutchinson v Brayhead Ltd (1968).
Jenkins v Enterprise Gold Mines NL (1992).
Northside Developments Pty Ltd v Registrar-General (1990).
Re Spargos Mining NL (1990).
Re Enterprise Gold Mines NL (1991).
Re Bellador Silk Ltd (1965).
Salomon v Salomon & Co Ltd (1897).
Scottish Co-op Wholesale Society Ltd v Myer (1959).
Tesco Supermarkets Ltd v Nattrass (1972).
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