Lst5Ccl Company And Commercial Law Assessment Answers

The constitution/ replaceable rules of the business state that a director has power to manage the ordinary affairs of the company, however any contract for goods and services (including a loan) exceeding $100,000 must be signed by a director and another person authorised by the board for that purpose.

Chris did not discuss this with any of his colleagues before signing the contract.

b) Is the business bound by the loan contract under the Corporations Act 2001 (Cth)?

c) Has Chris breached any duties as director under the Corporations Act 2001 (Cth) by taking up the loan?

Answers:

a) What type of business should Mary, Fred and Chris operate now? Again, support your answer by citing relevant cases and statutes.

In the present case, it is clear that Mary, Fred and Chris had been managing their business as a partnership. But after the incident in which a customer suffered burn injuries and sued the business and negligence, they want to know if they can adopt any other business to get to operate their business. In this regard, it appears that the business structure of a private limited company will be most appropriate for them. This business structure proved to be successful business model. In this case, the owners of the business hold be shares of company privately. Similarly in this case, the shareholders can operate the business themselves or they can also hire directors for the purpose of managing the company on their behalf. However, when a private limited company has been formed, it provides protection to the personal assets of the owners and at the same time, the business section of a company also provides access to more resources and financial assistance (Clarke and Clarke, 2016). In the same way, in such a case greater tax benefits are available. In this regard, the most significant benefit that is available to the owners of the business in case of the evaporation of companies that of the limited liability off its owners. The reason is that according to the law, a duly registered company is considered as a separate legal entity. Therefore, in the eyes of the law, a company is a separate entity that is distinct from its owners or controllers. In this case, the owners of the company can give shareholders and similarly the controllers of the company are the directors (Khoury and Yamouni, 2010). The result is that the members of the company cannot be held personally liable for the debts and other obligations of the company. The doctrine of limited liability of the members of the company was provided by the court in Salomon v Salomon (1897). It was stated by the House of Lords in this case that under the law under the law, a company has to be treated as a separate entity. Therefore, the company can enter into a contract in its own name. Similarly, the company can also own property. But at the same time, as a result of this doctrine, the members of the company cannot be held personally liable regarding the debts of the company. Therefore, the personal assets of the members of the company cannot be held liable to pay the debts of the corporation. There are certain other benefits that are also available when it has been decided that the business will be operated as a corporation. One example that can be given in this regard is the continuity of the business of the company. Therefore a company enjoys permanent succession. The reason is that a company is a separate legal entity and it enjoys its own distinct personality in the eyes of law. As a result, even in case of the death, retirement or the resignation of the members of the company, the company continues to exist.

Another advantage that is present in case of the incorporation of a company is related with fundraising and investments. Therefore it is easier for a company to attract investors as it can offer its shares. In such a case the shareholders have ownership over part of the company. The shares can be issued directly by the company or it may also issue options over shares. This facility is not available to sole traders and partners. Therefore generally in order to raise funds they have to seek a loan. On the other hand, banks and other financial institutions have guidelines related with how much money they can give as loan. Therefore, it may be difficult for sole traders and partners to raise funds.

In the present case, Mary, Fred and Chris had been running their business as a partnership. But as mentioned above, the benefit of limited liability is not available in case of a partnership. They were in such a case, the owners of the company can be held personally liable for the debts and obligations of the business. As in the past, a customer had threatened to sue the business and in such a case, Mary, Fred and Chris would have been personally liable to pay compensation to the customer, it can be advised that now the three of them should consider adopting the business section of a limited liability company. After the incorporation of a company to operate their business, the liabilities of the company cannot be enforced against the three of them. As a result, Mary, Fred and Chris cannot be held personally liable for the obligations of business.

On these grounds, it can be recommended that Mary, Fred and Chris should adopt the business structure of a corporation in order to operate their business now.

b) Is the business bound by the loan contract under the Corporations Act 2001 (Cth)?

The issue in this case is that Chris had entered into a contract without informing the other members of the board. On the other hand, it has been provided in the Constitution of the company that was the purpose of entering into a contract exceeding $100,000, a director and another person who has been authorized by the board of the company for this purpose, should sign the document. But in the present case, Chris did not consult with his colleagues before signing the contract. Therefore the issue arises if the business will be bound by the contract according to the provisions of the Corporations Act, 2001. In this regard, it needs to be noted that in the eyes of law, a company in a separate legal entity. However companies can either executed contract directly, for example in its elevating or indirectly where an agent is authorized to enter the transaction on behalf of the company. According to section 128 of the Corporations Act, the persons who have taken the responsibility to deal with the company can make certain as engines that have been mentioned in section 129. In this regard, it was mentioned in Lyford v Media Portfolio Ltd (1989) that it is easier to rely on these assumptions instead of relying on evidence for this purpose. It also needs to be mentioned that directors, managing directors and the secretaries of the company are always considered as the agents of the company. But they are required to be expressly authorized by the internal rules of the company. At the same time, a third party is allowed to rely on the assumption that has been mentioned in s129 regarding the authority of the agent wide-ranging into a contract on behalf of the corporation. Therefore, s129 provides that it can be assumed by a person that the other person who has been held out by the company to be. The officer on the details of the company has been properly appointed and that person also has the authority to exercise all the power is on the up of the company. On the other hand, the contract created by such a person on behalf of the company will not be binding is the company gives her the contract has been entered by the person who did not have the authority to do so.

The provisions of s129 are based on the indoor management rule. This rule has been provided by the court in Royal British Bank v Turquand (1856). As a result of the decision given in this case, innocent parties are protected when they are transacting with a company and are not in a position to know if all the internal rules of the company have been complied with or not.

As mentioned above the rule provided in Turquand's case has been incorporated in s129 and as a result, the third parties are allowed to assume that there has been compliance with the Constitution of the company and replaceable rules when an agent of the company, having authority to do so, enters into a contract with such third-party. However, this protection will not be available to a third party when such party is aware of the fact regarding the lack of authority on part of the agent or the director. Similarly, it has also been mentioned in s128(3) that if there is a fraud on the part of the officer of the director, the transaction cannot be considered as binding on the company. As a result, if the agent of the company had acted fraudulently or if such agent had forged a document, the company can be held liable for such behavior only if the agent was acting within the scope of authority conferred on such an agent. In Ruben v Great Fingall Consolidated (1906) it was mentioned by the court that a company cannot be considered to be bound by forged certificates. In this regard, if damage or loss has been suffered by a third party, such party can seek remedies. Therefore, the agent who had translated with the company without a common seal by using forged documents, may be required to pay a fine or to compensate. In such cases, the agent may even have to face criminal penalty.

In the present case, a loan was obtained by Chris for $150,000 without informing the other directors. On the other hand, the Constitution of the company provides that in order to enter into a contract exceeding $100,000, the documentary designed by director and one more person who has been authorized by the board in this regard.. Under these circumstances, the issue arises if the business will be bound by such a contract. On the basis of the above-mentioned discussion, it can be said that the third-party may rely on the assumptions mentioned in s129, and therefore it can be assumed that all the internal rules of management of the business were fulfilled when Chris had entered into a contract for the loan of $150,000.

c) Has Chris breached any duties as director under the Corporations Act 2001 (Cth) by taking up the loan?

The issue that needs to be decided in the present case is if Chris has breached any of his duties as the director of company that have been prescribed for the directors by the Corporations Act, 2001 by taking this loan. In this regard, it can be stated that the number of duties have been described for the directors by the common law and also by the Corporations Act, 2001. Among these duties, there is a very significant duty of the directors, which is known as the duty to prevent insolvent trading. According to this duty when a company is facing financial problems, the directors and other officers of the corporation need to take special care while dealing with outsiders. In such a case, the director should always consider the ability of the company to pay all its debts as and when they fall due. This requirement becomes all the more important than the company is facing financial problems (CAC v Shapowloff, 1974). If it could be reduced by any reasonable competence director that. The company does not have the ability or may lack such ability after incurring the debt; the directors should not allow the company to take further loan.

This duty has been prescribed in s588G, Corporations Act that is related with insolvent trading. These provisions have been designed to replace the earlier insolvent trading regions that were present in sections 592-593, Corporations Law. In this way, s588G(1) describes a duty for the directors of the company according to which they should not allow the company to be involved in insolvent trading. The heading of Division 3, Corporations Act is related with this duty. Therefore this setting is considered as a part of the corporations act as a result of the operation of s109D.

The provisions of s588G will be applicable if the following conditions are fulfilled:-

(i) The director should be acting as the director of the corporation at the relevant time when a debt has been incurred by the company;

(ii) The company is insolvent when it has incurred the debt or it will be going to become insolvent after incurring that debt;

(iii) There are reasonable grounds present at the time due to which it can be suspected that either the company was insolvent or it is going to become insolvent due to the transaction;

In this way, it has been provided in s588G if a person had failed to stopped the corporation from entering such a debt, it can be stated that the provisions of this section have been contravened by such persons give the person was aware at the time that reasonable grounds are present to suspect or any other reasonable person would have been aware of these grounds under similar circumstances (3M Australia Pty Ltd v Watt, 1984). Moreover, it has also been mentioned in s588G(3) that an offense would be committed by a person if:-

The company has incurred a debt at that time;

That person was acting as a director of the corporation;

The corporation was insolvent at the time or it was going to become insolvent after incurring the debt or by incurring some debt, which included the debt in question;

It was suspected by the person that the corporation was insolvent or may become insolvent due to the reason of incurring such a debt;

The failure of the person to stop the company from incurring the debt can be described as dishonest.

In the present case, the business owned by Mary, Fred and Chris was already facing financial problems. This fact was known to Chris as a result of his position as the director of the business. Still, Chris decided to incur a loan of $150,000. But luckily in this case, taking the loan was a sound business decision. The reason was that after the business purchase the neighboring shop and extended the café, it was able to significantly increase its profit. As a result, the business could deal with its financial problems.

However, Chris can still be held liable for the breach of his duties as the director of the business, particularly the duty imposed by s588G, which requires the directors that they should not allow the corporation to be involved in insolvent trading. In the present case, Chris had reasons to believe that the business may not be in a position to give the loan that he was going to take. As a result, it can be set in the present case that Chris had breached his duty. It does not matter if the decision turned out to be profitable for the business later on. Chris can still be held liable for the breach of s588G.

References

Daniel Khoury, Yvonne Yamouni, 2010, Understanding Contract Law, 8^th Edition, LexisNexis Butterworths

P Clarke, J. Clarke, 2016, Contract Law, Commentaries, Cases and Perspectives, 3^rd Edition, Oxford University Press

3M Australia Pty Ltd v Watt (1984) 9 ACLR 503

CAC v Shapowloff (1974) CLC 27

Lyford v Media Portfolio Ltd (1989) 7 ACLC 271

Royal British Bank v Turquand [1856] ALL ER 435

Ruben v Great Fingall Consolidated (1906) AC 439

Salomon v Salomon [1897] AC 22