Directors’ Liability for Business Expansion
Directors Duties (Common law and statutory)
The issue identified in relation to the first question is to determine the liabilities of the directors of the company in relation to insolvent trading, conflict of interest and duty to disclose interest along with the defenses available for such violations.
Section 588G of the Corporation Act 2001 (Cth) prevents a director of an organization to indulge in an activity which they believe may make the organization insolvent or indulging in an activity knowing the fact that the organization is already insolvent.
In the case of Rema Industries and Services Pty Ltd v Coad & Ors it had been ruled by the court that the directors cannot claim a defense that they were not involved in the decision related to insolvent trading and they were a silent party.
It is a defense under section 588H of the CA that a person was not present in relation to the decision because of illness or a good reason. In addition it is a defense if it is objectively proved that the directors had reasonable grounds to carry on with the decision.
Section 181 of the CA provides a duty of best interest and proper purpose. Accordingly the directors have to act in good faith, best interest and appropriate purpose of the company. The breach of the duty relates to a civil liability provisions.
There is also an equitable duty imposed on the directors by common law similar to that of the duty under section 181 to act is best interest of the company and be loyal to the company.
The directors of an organization as mentioned in section 182 of the CA have been provided with the duty of maintain the dignity of their position in the company and not uses the powers provided through their position in the company to causes losses to the organization and make personal profit. They have an obligation to disclose any personal interest in the transaction which the company undertakes, to the other board of directors. in addition if by chance a situation is created where there is a conflict of interest between the benefit of the company and personal benefit of a director, the organizational interest should always be prioritized by the director.
The directors are also obligated under the provisions of section 183 of the CA not to utilize any information of the company to make personal gain. The directors have the duty of not misusing information and position in a manner which may cause an issue for the company in form of any financial or reputational interest.
Through the scenario it has been provided that Nolan, Andy, Erica, Jack and Helen are the directors of an organization dealing in wholesale business of jewelry named Gemsales Pty Ltd. It has been analyzed by the directors of GS that the market for jewelry is become competitive and they need an expansion. Their company does not have the capital and assets to finance the expansion and they indulge in an act of obtaining a loan.
Agency Law and Pet Traveling
There was a chance in this case that company may become insolvent because of actions related to the loan taken by the company. The company obtained a loan of $4 million where $3 million had been used purchase more stock and $1 million to purchase a warehouse. Thus the director of GP have prima faice violated the provisions of section 588G of the CA related to insolvent training.
Erica although had not attended the meeting would be liable for the breach of section 588G as per the application of the Rema Industries case. This is because the case provides that directors who are not involved in a meeting cannot claim the absence as a defense
Andy in the given situation was also not present at the time the decision had been taken because of being in hospital as a result of serious injury. Here Andy can be exempted from the breach of section 558G under section 588H as he might is entitled to claim the defense of illness discussed above.
Helen in the same way as Erica would be liable for the violation of section 588G even though she did not vote in relation to the decision according to the principles provided in the Rema Industries case.
Jack and Nolan as they both voted in relation to the loan would be clearly liable for the breach of section 588G and would be personal liable for all loss incused by the company through the act in the same way as for Eric and Helen.
Nolan in addition did not disclose that he was a major shareholder in the company Trader Pty Ltd from which GS purchased the warehouse. Thus in this situation Nolan has violated the statutory provisions of CA under S191 and common law provisions related to disclosing interest.
Nolan has opened his own business which deals with similar operations that of GS. In this situation he has created a conflict of interest in relation to his personal interest and the interest of the company and chooses personal interest. Here he has not only violated section 181 of the CA to act in best interest of the company and in good faith but also common law position of not creating a conflict of interest position.
Nolan has also approached established clients of GS for the purpose of gaining orders for his personal business. Such information about the clients has been gained by him from GS using his position. Therefore it can be evidently provided that he has violated the common law duty as well as s182 and s183 of the CA related to the using of information and position to detriment of the company.
Conclusion
Therefore from the above discussion it can be concluded that Andy is not liable for breach of section 588G of the CA (Insolvent trading). Helen, Eric, Jack and Nolan have violated section 588G. Nolan has violated section 191. Nolan has further violated section 181,182 and 183 of the CA. In addition Nolan has violated the equitable and fiduciary directors duties under common law.
Formation of a New Company and a Time-Sensitive Contract
The issue in this case is to determine the legal position of —- through the application of provisions related to agency in Australia.
An agency is created through the relationship between two person or corporations known as the agent and the principal. The purpose of an agent is to create a contractual relationship between the principle and a third party. The agent is provided authority to act on behalf of the principle and represent him in relation to dealing with a third party.
The relationship with respect to an agency gives rise to two contracts firstly, the contract which is created between the principal and the agent and secondly the contract which is created between the third party and the agent.
Agency can be created in three ways, namely expressed, implied and apparent agency. An expressed authority is provided when the agent is expressly given authority by the principle to act on his behalf.
An implied authority is created when the principle act in such a way so as to make the third party believe that there is a relationship between the agent and the principal. The concept had been discussed by the court in the famous case of International Harvester Co of Australia Pty Ltd v. Carrigan’s Hazeldene Pastoral Company
Ostensible or apparent authority is a kind of agency which is created between the agent and the principle even in case where the principle has not provided any authority to the agent. There are two specific situations in which an agency through ostensible authority may be created. Firstly, through his actions or words the third party is made by believe by the principle that he has a relationship of agency with the agent. Secondly, when there was a relationship between the principle and agent before but as the relationship had been terminated the third party had not been notified in relation to such termination.
Agency is also created through the process of ratification done by the principle. The situation may arise when a duly appointed agent exceeds the authority provided to him by the principle, any person who had not been provided any authority acted in such a way that he had authority. In case such a situation takes place it is the right of the principal to ratify or reject the contract. In case the contacts is ratified by the principal than the terms of the contract become binding on him.
The principal is bound by all the acts done by the agent during the course of employment even if the agent had exceeded the authority and the third party did not have knowledge that the authority had been exceeded by the agent. The third party can claim compensation from the principal in case their contractual rights have been violated.
In the given situation it has been provided that Ben had gone into the contract with Slick through which he had been provided the right to act as an exclusive agent of Slick in Australia. The new contract related to agency has been notified to the people of Australia through advertisements. Thus the fans of slick have the knowledge that Ben is the agent of slick in Australia.
Rusty has entered into a contractor with Ben for the purpose of taking care of Slick’s dogs as Ben is not comfortable with dogs. The contract stated that rusty was to handle all the matters in relation to the dogs. It was also clear through the contract that Ben was to take care of all other matters of the dogs such as custom registration and not only day to day activities.
In this case it can been seen that there are two relationships of agency which have been created. Firstly where Ben is the agent and slick parsley is the principle and the fans are the third party. Second where Ben is the principle, Rusty is the agent and Slick is the third party.
In this case rusty had been notified by Slick that instead of two dogs there were three dogs she would want to carry with her to Australia. It has been discussed above that the contract which rusty had with Ben that he has to take care of all dog related matter except custom registration. However such facts were not known to Slick and thus Rusty had apparent authority. Ben therefore in his authority says Slick that he would take care of the matter and takes tree dogs on board.
The registration of the third dog in relation to the custom had not been done as prior information had not been provided. Here Ben would be liable for the loss which has been faced by Slick because she had to be deported back as a result of bringing in a dog into Australia illegally. This is because Rusty was the agent of Ben and had been appointed to take care of the dogs. He also ensures Slick that he has taken care of everything in relation to the dogs.
Ben can however claim compensation from Rusty as he did not carry on his activities in relation to contract and exceeded his authority without notice. This is because it has been it was the ACL provides remedies to the person who has been provided with bad quality services by a service supplier.
However, the fans will have any against Slick with respect to the Fresh spices tour as Ben is the agent of Slick as notified to the public by him and any loss caused to the fans as the concert had been cancelled will be liable to be compensated by Slick.
Conclusion
Therefore from the above discussion it can be provided through the application of law of agency that Ben is liable to Slick for the loss incurred by her through the actions of Rusty as he was Ben’s agent.
- Contractual capacity of the company pre and post registration period under the CA
- Remedies available to a liquidator under the CA
The issue which have been identified in relation to the scenario is that whether the different circumstances as provided in the scenario result in a binding contract
According to Section 131 of the CA a person entering into a contract or purporting to enter into a contract on behalf of the organization or for the interest of the organization before it has been lawfully registered, the contract would be binding on the company or any other company which is reasonably associated to it and such company would be entitled to its benefits incase when the company gets registered the contract is ratified by the company. The ratification of the contract has to be done within the time it has been agreed by the parties or a reasonable period where no prior agreement in relation to the time has been made.
According to Section 131 (2) of the CA the person mentioned in subsection (1) would have the obligation of paying compensation to every party involved in the pre-registration in case the company is not registered, or in case upon registration the company does not ratify the contract according to the provisions of subsection (1). The person would be liable in relation to the amount which the company would have paid in case the contract was ratified by the company and then violated.
According to section 131 (3) of the CA, where an aggrieved party initiates proceedings in accordance to the situation under subsection (2) an order may be made by the court which may consist if anything the court finds appropriate with respect to the circumstances and may also include the following. An order for the payment of part or all of the debt the person is liable to pay, transfer all property received by the company in relation to the contract or pay an amount which the court thinks fit.
In the case of Kelner v Baxter the person who entered into a contract on behalf of an unregistered company was held liable personally as the company had not been registered.
According to section 132 of the CA a person under section 131 of the CA may be released from all liabilities which may be imposed on him under section 131 through signing of a release with such party. However irrespective of equity or rule of law, no right has been provided to such person with respect to indemnity against the organization towards his liability provided in this part even if he was acting or purporting to act as a trustee if the company.
According to section 477 of the CA the liquidator who has been appointed to appropriately wind up an insolvent company have various powers in relation to the company. One of such powers provides that the liquidator can sue any party on behalf of the proceeding.
Section 567 of the CA provides power to the liquidator a right to recover in relation to specific transactions. The recovery may be made from the promoter of the company or any person acting as the director of the company during the time of the specific transaction or even their relatives and spouse.
In the given situation it has been provided that Company A and B have initiated a joint project in the name of company C. company C was to be initially managed by one of each directors of company A and B who are Shirley and Laverne. Both the directors entered into contract before the company C had been registered. One of such contract was with entered by company C with company Y in relation to a computer training project. The contract had the clause that in case company C does not ratify the contract upon its registration then company Y would have the right to rescind the contract.
In case Company C has been registered within a month in order to make the contract with company Y the provisions of section 131(1) has to be complied with according to the section as discussed above a company has to ratify the contract upon registration within the prescribed time or a reasonable time were the time is not prescribed, in the given situation a time of two months after incorporation has been provided to company C to ratify the contract. Thus the company can do so in accordance to section 127 of the CA to give effect to the contract.
In order to not be libel personally with respect to the contract entered upon with company Y before company C had been incorporated both Shirley and Laverne have to sign a release with company Y after the ratification of the contract according to section 132 of the CA.
In case company C has not been registered within a period of two months as provided in the contract company Y would be entitled to remedies according to section 131 of the CA. in the given situation company Would have the right to claim damages from Shirley and Laverne as they were the person who entered into a contract on behalf of company C which was not registered. In addition according to the provisions of subsection 131(2) the amount of damages which can be claimed by company Y if company C is not registered can be equal to the amount which company C would have to pay if it ratified the contract and then breach it.
In relation to the third assumption where Shirley and Laverne have misused their position in company C and sold assents to the company from their personal company at an inflated value and company C has become insolvent, the liquidator in accordance with section 477 of the CA can bring proceedings against Shirley and Laverne. The liquidator can recover the amount from their spouses and relatives as well as per section 567.
Conclusion
Therefore in relation to the first assumption Company C has to ratify the contract as per section 131. In relation to the second assumption Shirley and Laverne can be personally liable to company Y under section 131(2). In relation to the final assumption the liquidator can initiate proceedings against Shirley and Laverne under section 477.
Corporation Act 2001 (Cth)
International Harvester Co of Australia Pty Ltd v. Carrigan’s Hazeldene Pastoral Company (1968) 100 CLR 644
Johnson, Olatunde, et al. “Agency Practice & Inequality: Views from the Inside.” (2017).
Kelner v Baxter (1866) LR 2 CP 174
Kubasek, Nancy K., Bartley A. Brennan, and M. Neil Browne. The legal environment of business: A critical thinking approach. Pearson, 2016.
Rema Industries and Services Pty Ltd v Coad & Ors (1992) 10 ACLC 530
Zhou, Qi. “Limits of mandatory rules in contract law: An example in agency law.” N. Ir. Legal Q. 65 (2014): 357.
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