Posted: June 27th, 2015

Relations with Third Parties

Outline

1. Issue
2. Relevant law

• Application to facts

1. Conclusion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issues

Whether the company is bound by the contract made by the two directors?

Relevant laws

Bankruptcy Act of 1966

Corporations Act 2001

Case law

Application of the facts

A director of a company is a person employed to execute all duties related to management of a company. According to the case of Salomon vs. Solomon (1897) 31, a company is a corporate entity with perpetual succession. A company can own property and is capable of suing and being sued. The directors of a company execute all the duties of a company (Ciro& Symes, 2008).

According to the facts given in the case, Peter is a director and has been declared bankrupt. However, he enters into a contract related to the company with Bruce and a third party. According to the Australian corporation Act 2001, a bankrupt who is not discharged bankrupt is prohibited from affairs of the company. A bankrupt person cannot transact the affairs of a company in the capacity of a director. In addition, under Part X of the Australian Bankruptcy Act, a person is barred from managing any corporation, and if such a person was a director before the bankruptcy proceedings, the person ceases to hold such a post. The only exception created to accept such a disqualification is in circumstances whereby the party declared Bankrupt seeks leave of the court to manage the company. This includes those people who have earlier executed a deed, as provided under Part X of the Bankruptcy Act 1966 (Wishart, 2008).

In the present facts, Peter was the director of the company, but he has been adjudicated bankrupt. Hence, he lacks the legal capacity to enter into a contract on behalf of the company. The provisions of the Corporations Act 2001 outlaws a person adjudicated bankruptcy to trade or enter into a contract without the leave of the court. Peter has breached the provisions and the court should penalize him $5,500 or one year imprisonment. The court has a wide discretion to award either a fine or an imprisonment. It is prudent for the company to file a notice of cessation to the registrar of the company’s office, with the name of the replacement. This strategy will help to avoid bankrupt parties representing the company (Tomasic, Bottomley & McQueen, 2002).

The facts state that Bruce, who is the managing director, represents Peter like a director of the company. A third party subsequently enters in a contract with the company. The legal wording of the acts by Bruce is “indoor transactions principle”. However, the misrepresentation he has done to the unsuspecting third party is dealt with in favor of the third party. The company, through the misrepresentation of a Managing Director, is bound by the contract. Indoor management rule means a company officer with information, which is not accessible by the public about the company. The indoor management principle is to the effect that the genuine party, who contracts with the company, should not be put at a disadvantage. The common law position on indoor management is to the effect that, the company is bound because the third party cannot get more information than the accessible public information. In such a case, whenever it is proved that the third party entered into the contract in good faith or not, the company is bound by the contract (Tomasic, Bottomley & Mcqueen, 2002).

The transactions indicate that Bruce was aware of the bankruptcy status of Peter, but he went ahead to represent him as if he had the capacity to contract. The Australian Corporations Act 2001 prohibits any officer, who negligently or fraudulently breaches the fiduciary duty owed to a company. The common law fiduciary duty requires the officers of the company to act in good faith, and to the best interest of the company. From the facts given, Bruce, who is the managing director of the company, has breached his duties by engaging in fraudulent dealing. In the case S & Y Investments Pty Limited vs. Commercial Union Assurance Ltd 85 FLR 285, court held that a company can be held vicariously for the acts of the officers, employees or agents acting on behalf of the company (Ciro& Symes, 2008).

For a person to act as an agent of a company, the person should have either express authority or implied authority, as it was stated in the case of Freeman & Lockyer V Buckhurst Part Properties Ltd [1964] 2 QB 480. In this case the court held that the misrepresentation made by the company’s agent must have been relied on by the third party to his or her detriment. The issue of Peter representing to have agent powers to the reliance of the contracting third party will be taken as if Peter had the powers. If Bruce was in an acting capacity, the company would be vicariously liable for any fraudulent acts to the third parties (Cassidy, 2006).

Conclusion

The Australian Company law is to the effect that there are duties established; whereby officers of a company must follow. A director, once adjudged bankrupt, he/she ceases to be a director of the company. In case of a transaction between the bankrupt director and a third party, the company is held vicariously liable and the director is held personally liable. The indoor principle protects a party from being disadvantaged out of a misrepresentation.

 

 

 

 

Reference List

Cassidy, J 2006, concise corporations law, Federation Press, Annandale.

Ciro, A & Symes, C 2008, Corporations law: in principle. Thomson Reuters (Professional), Australia, Pyrmont.

Tomasic, R Bottomley, S & Mcqueen, R 2002, Corporations law in Australia, Federation Press, Sydney.

Wishart, D 2008, Corporations law guidebook, Oxford University Press, South Melbourne.