This is the case study which discusses about a contract which is to enter by a company with a third party. After understanding this case study one can easily understand the different types of contract and how to deal in case of such contracts. To come to a conclusion for this case one needs to understand the provisions relating to contracts entered in Australia.
A contract can be anything, whether in a written or an oral form. It can also be made by just a handshake or even with the help of a written document. There are generally four types of contract which are discussed below:
There are various issues which can arise while entering into a contract. The issues which can arise in a contract are discussed below:
In the given case William was a director of a company but now he is a bankrupt. But the problem is that even after knowing this he was acting as a director of that company. Harry, who was a director of the company, gives a letter to William to enter into a contract with the other party. William signs the contract as the agent of the company. Whenever a director becomes bankrupt then it has no rights to become the director of the company and he should first pay all the debts of creditors. But instead of this he entered into a contract with another party as an agent of the company. This is a clear case of a fraud. Hence, the contract has to be considered as void since fraud was committed by the director of the company.
In this case whether Harry is acting as a Managing Director or he is really a managing director doesn’t make any difference. Harry wen to William to just negotiate the contract but instead William has signed the contract as an agent of the company. It was a complete fault of William; he should not enter a contract since he was bankrupt. Now from where he would pay money to the creditors of the company. He should not have signed the contract. Hence even in this case it is the fault of William and the contract has to be considered as void.
Issue: This is the case study which would help to understand the provisions of loan agreement which is entered into a contract. There is a company which is having two directors and shareholders. One of the directors is Maria and other director is David. Both of them are directors and shareholders of the company. In this case Maria who is a director and shareholder of the company wants to borrow $100,000 for professional and personal purpose from a bank. Bank granted loan to Maria but guarantee has to be given by the company. Maria knew that David would not agree with this loan agreement and hence she would not get any loan from the bank. To get loan from the bank she took the loan on her name and have also signed on David’s behalf as well. Now the question is if Maria fails to make the payment under the loan agreement then company would be held responsible or not. To answer the case study we need to understand the provisions of default made by any director of the company.
Rule: as per Australian Corporation Act 2001, if a director breaches any of its duties then he has to bear the consequences. Once the company is registered under ASIC, rights and liabilities of the director will continue unless ASIC deregisters the company. All the rights and liabilities would lie with the director itself. If company has become bankrupt and unable to pay off its liabilities, then directors would be held responsible to pay off all the liabilities of the company. Obligations of a director may continue even after the company ceased trading and has been deregistered. There would be certain circumstances where director would be held personally liable for the debts and losses of the company. If company is unable to pay off its debts and liabilities then directors has to personally pay all the debts. If a director has committed a default then action has to be taken against that director. But due to fault of one of the director, their party should not suffer. For instance if a contract is entered by a director with any third party, and the contract is not valid then action has to be taken against the director. But in no instance the third party should suffer because of the default committed by one of the directors of the company.
Application: in the current scenario above mentioned provisions would be applied. Maria was at default here since she had entered into a loan agreement with a third party on fraud basis. She had forged signatory of David. As per the laws and provisions of Australian Constitution Act 2001, the loan agreement should not be considered. Bank has the full right to take action against the company. Even the company was not at fault, only one of the directors of the company was at fault. This is the issue within the company, which has to solve within. Due to such issues the third party should not suffer at all. Bank has the right to take action against the company. After paying all the dues company can take action against Maria who was at fault. If Maria is unable to pay the dues then David has to pay off its liabilities. This is given as per the provisions of the Australian Corporations Act, 2001. Directors would be held personally liable in following situations:
Conclusion:
As per the provisions mentioned above and understanding the case study, bank can take legal action against the company. Then finally company can take legal action against one of the director named as Maria.
References
Consequences For Breaching Directors Duties – Legalvision (2017) LegalVision <https://legalvision.com.au/consequences-for-breaching-directors-duties
Crimes Amendment (Fraud, Identity And Forgery Offences) Act 2009 No 99 (2017) <https://www.austlii.edu.au/au/legis/nsw/num_act/caiafoa2009n99500.pdf>.
Directors’ Liabilities When Things Go Wrong | ASIC – Australian Securities And Investments Commission (2017) Asic.gov.au <https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong
Guide To Directors’ Duties And Responsibilities For Non-Listed Public Companies And Proprietary Companies In Australia (2017)
Paul T Vout, Unconscionable Conduct (Lawbook Co, 1st ed, 2006).
Struan Robertson, Remedies Where There Is A Breach Of Directors’ Duties (2017) Out-law.com <https://www.out-law.com/page-8207>.
Types Of Contracts (2017) Business.gov.au <https://www.business.gov.au/info/plan-and-start/start-your-business/independent-contractors/understanding-contracts/types-of-contracts>.
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