COMPANY LAW Question A Advice to Ivan The issue in this case is whether XPty Ltd is required to make the loan re-payments to the community credit union after Tatiana’s failure to make 3 home repayments to the community credit Union? The issue arose out of Boris arranging that X Pty Ltd to guarantee Tatiana’s loan. A company according to the decision in Salomon v Salomon & Co is a separate legal entity. The Corporations Act (CA) 2001 (Cth) clearly stipulates the obligations of corporations in terms of its management. The CA clearly stipulates the duties of a director. The duties of a director are to exercise and discharge their powers with the degree of care and diligence that a reasonable person would exercise, business judgment based on good faith, proper purpose, no conflict or material interest in the subject matter of the judgment and is in the best interest of the company. Business judgment according to CA is the decision taken by the director in respect to matters that are relevant to the operations of the business. The CA section 126 specifically states that a company is bound through its agent’s actions and the agent must have an express or implied authority to act on behalf of the company. AWA Ltd v Daniels enshrines the principle set out at section 198 A (1) of the CA 2001 that the business of a company is to be managed by or under the directors direction. In determination of the scope of the powers given by the director to the agent then one must comprehend the nature of the power conferred. In the decision made in the case of Re Haycraft Gold Reduction & Mining Co it was held that ordinarily a director does not have the requisite authority to bind a company by virtue of being a director. However, in the case of Entwells Pty Ltd v National and General Insurance Co Ltd it stated that the role of a managing director is to deal with the daily activities and supervise the running of the company, manage the directors and be in charge of the company. Apparent authority of agents dealing on behalf of the company as stated by Kirby J in the case of Bank of New Zealand v Fiberi Pty Ltd “that if an officer purports to bind a company but do so fraudulently and without authority, then the company will ordinarily bear the loss and not the innocent party”. There is an important factor in regards to agent’s dealings with the company. In the case of Story v Advance Bank Australia Ltd the definition of” dealings in a company” was discussed. The issue was whether dealings need to be based on the legitimate dealings arising from actual authority of the agent of the company. The decision of the court stated that the concept of dealings includes dealings of an agent with a third party who lacks authority, the dealings by way of forged documents or instruments however, it will not apply where there exists no real relationship between the company and the instruments and actions. The CA 2001 at section 129 (2) clearly states that if it appears that the information provided by a corporation to ASIC which is subsequently made public, then a third party can assume that the director or secretary is duly appointed and has the authority to exercise the powers and perform the duties customarily exercised to be performed by the director or the company’s secretary. In Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd a company secretary can make representations on behalf of a company, enter it contracts and administrate on the affairs of a company. Ivan is the managing director of X Pty Ltd and Boris is the company’s secretary despite the failure of X Pty Ltd to update its record which indicates that Anna is the company’s secretary. Ivan gave Boris specific authority that is to ‘keep contact via email but sell the adjoining land but fails to consult Ivan on running the confectionary business. Authority to act on behalf of the company was express in regards to the sale of land and any other business required consultation and approval, this was the extent of the delegated authority by Ivan to Boris. In consideration of the decision in Story v Advance Bank Australia Ltd since there existed no prior relationship between the company, the instruments and the action, then X Ltd will not be liable to pay the loan amounts. Question B Advice to Ivan The issue under consideration is whether X Pty Ltd is responsible for paying the importer the rest of the money for the factories equipment and limits the company’s liability for the purchase of the equipment? The issue arose out of the fact that Boris and Anna left for the Ukraine indefinitely and Z Pty Ltd invoiced X Pty Ltd for the amount owing for the equipment. The CA at section 79 states that a breach of the duty of a director is proved when the person acts improperly, the improper use of the position led to the loss and detriment of the corporation and criminal proceedings can be instituted against the directors. In the case of Chew v R the court stated that there needs to be proof of reckless conduct on the part of the director in causing a detriment to the company. This extends to the directors, company secretary and the agents of the corporation. The CA at section 182 clearly states that the director, secretary or an employee of a corporation should not use their positions improperly to gain an advantage for themselves or someone else or cause a detriment to the corporation. The CA makes it a criminal offence for directors or other corporation employees who recklessly, intentionally dishonest in failing to exercise their powers and discharge their duties in good faith and in the best interest of the company and for a proper purpose. The CA at section 129 (1) clearly creates an assumption that “a person having a dealing within company may assume that the acts within its constitution and powers have been properly and duly performed”. The indoor management rule as stated in the case of Royal British Bank v Turquand that persons dealing and dealing in good faith may assume that the acts are within its constitution and powers have been properly and duly performed and hence not bound to inquire whether the acts of internal management have been regular. In the case of Northside Developments Pty Ltd v Registrar-General the director and a secretary of the company executed a mortgage of the land on behalf of the company in favour of the Barclays Credit Corporation. The directors had affixed a seal of the company and signed by the director and the company secretary and in this breached the constitution of the company. The mortgage executed was not on behalf of Northside but another corporation owned by the director. In this case, the corporation had nothing to do with Northside nor did the loan benefit Northside. Due to default, Barclays exercised its power of sale under the mortgage and sold the land to a third party. The issue in the case was whether Barclays was entitled to act on reliance of the indoor management rule and whether it ought to have made a further inquiry about the authority of Northside’s agents. The High Court held that the mortgage execution was invalid because the loan conferred no benefit to Northside and the mortgage executed by Northside secured the in-debtness of a non-associated corporation. In consideration of the rule set out in Northside Development Pty Ltd v Registrar-General, the failure of Z Pty Ltd conducting and questioning the indoor management of both Y and X Ltd limits the liability of X Ltd to pay for the amount owing in regards to the business. The assumption by the supervisor as to the similarity of the confectionery business then it would be prudent to sign the agreement further negates liability of X Ltd since Y Ltd has never benefited X Ltd despite X being the major shareholder in the business. It would be prudent if Z Ltd had extensively investigated the internal proceedings to determine the authority of Boriss and Anna so as to rule out any fraud, unjustly favor and unscrupulous persons purporting to act on behalf of the companies. It is prudent to restate that a company is a separate legal entity, that is X Ltd and Y Ltd are separate entities and unless one was a subsidiary and another a parent company, the n liability would not lie on X Ltd to pay for the equipment as due diligence was not followed. What can Z Pty Ltd do? Since it cannot recover directly from X Ltd, it can institute proceedings against Boris and Anna in their individual capacity as directors of Y Ltd to recover monies owed under the contract. On the other hand, X Ltd can sue for accounting of profits from Anna and Boris on the profits made in the sale of second hand furniture. This is because Anna and Boris were constructive trustees for any profits earned while they acted on behalf of X Pty Ltd. Reference List Corporations Act 2001 (Cth) Tomasic, R., Stephen, S and McQueen, R Corporations Law in Australia. ( Federation Press, 2012). Seivers, S, ‘ Directors Duty of Cares’ (1997) 15Company and Securities Law Journal : 392