Marketing report on: Commonwealth of Australia

1. Executive SummaryThis report has been structured in order to discuss the various principles which constitute the working of the organization. The report mainly takes into consideration the various principles of Corporations Law in vogue in the Commonwealth of Australia. The report has been framed from the number of academic and scholarly resources which have been relied upon in course of the present discussion in order to understand the issues involved in a better manner have been duly and properly acknowledged as such.

The various issues from the case study have been highlighted in the report. The facts of the instant case point towards breach of statutory duties by one of the directors of the company. The various other issues discussed within the case study refer to of issues both within as well as outside the purview of the Corporations Act, 2001. However, in the present discussion, owing to paucity of time and space, the scope of the present discussion has been kept limited to the principles of Corporations Law itself apart from a few relevant principles of the Common Law as in vogue in the Commonwealth of Australia.

IntroductionThe present exercise brings forth an exciting opportunity to revisit the principles pertaining to the constitution of a company as well as the manner in which the company can be bound by a transaction which is not authorised by the company’s constitution as such. It is submitted that various principles of Corporations Law in vogue in the Commonwealth of Australia.It is pertinent to note here that there are a number of academic and scholarly resources which have been relied upon in course of the present discussion in order to understand the issues involved in a better manner have been duly and properly acknowledged as such. It is submitted that it is very important to analyse the facts of the instant case in order to understand the issues involved in a better and at the same time in order to understand the available remedies with the Ferrari dealer as well as the bank which had lent a loan of $ 1.3 million to the company. It is submitted that after analysis of the facts of the instant case, the important and suitable law provisions have been discussed in course of the present discussion followed by application of the relevant legal principles to the facts of the case. Finally, a logically cohesive and sound conclusion has been submitted in course of the present discussion as such wherein the correct and substantiated legal advice to the Ferrari dealer as well the bank has been provided.

1. Analysis of the facts of the case

The facts of the instant case point towards breach of statutory duties by one of the directors of the company. However, this is not the only issue involved in the present case as there are a number of issues both within as well as outside the purview of the Corporations Act, 2001 (Cth), however, in the present discussion, owing to paucity of time and space, the scope of the present discussion has been kept limited to the principles of Corporations Law itself apart from a few relevant principles of the Common Law as in vogue in the Commonwealth of Australia.

A perusal of the first part of the statement of facts of the case discloses that there are two officers and shareholders of the company in question, i.e. Freehills Antiques Pty Ltd, namely Freddy and Fiona Freehill and the company’s area of specialization is expensive estate jewellery. It is pertinent to note that the facts of the company state that the company is governed by its constitution as such and not by replaceable rules as provided by the provisions of section 204 of the Corporations Act, 2001 (Cth). The facts also disclose that the bank with which the company has a credit facility is the Prudent Bank Ltd. as the bank deals company regularly. It is pertinent to note that this fact is a very important aspect of the present case and the same would be taken into consideration in the later part of the present discussion. It is pertinent to note here that the company had a restriction vide its constitution whereby the in case of any loan transaction exceeding the limit of $ 500,000 with its bank, i.e. Prudent Bank Ltd, the same needs to be authorised vide a resolution of the company and the common seal of the company must be affixed for executing any loan documents as such.

This part of the facts of the case disclose that the bank had all the requisite information regarding the procedure that had to be adopted with reference to loan transactions were also known by the bank.The facts further reveal that Fiona Freehill was the one who used to make all the business decisions in the company even though Freddy was the managing director of the company. It is pertinent to note here that the concepts of apparent and ostensible authority are very important in the context of the present discussion and the concepts have been discussed in greater detail in the later part of the present discussion. It is pertinent to note that removal from the post of director as well as inductionof new director/ secretary in a proprietary company as well requires certain compulsory documentation and this again would form a necessary part of the present discussion. It is pertinent to note here that there are a number of issues in the present case which range from duties of directors as required by the provisions of Corporations Act, 2001 as well as in the realms of Common Law. Apart from this, it is submitted that there are certain issues such as the duties of a banker as well under the Common Law and they also need to be discussed in course of the present discussion in order to ascertain whether or not the bank as well as the Ferrari dealercan enforce the contract against the company or not. A discussion of the various principles of law in this regard has been made hereunder and the same has been followed by application of the legal principles to facts of the case which has been followed by a conclusion.

1. Duties of Directors and officers of the company

The touchstone on which the validity of directors’ decisions is tested has been stated as follows in the form of:

– Whether the judgement is made in good faith or not;

– Whether the director does or does not have a material interest in the subject matter of the judgement;

– Whether the director makes an informed decision; and

– Whether the director truly and logically believes that the decision taken by him is in the best interests of the corporation and its stakeholders.

• Directors of a corporation must manage and undertake the task of conducting the business of a corporation in the best interests[1] of the corporation they are directors of.[2] This requirement is to be governed by all the surrounding circumstances including the type of corporation, its size and the nature of the composition of its board to a certain extent;
• The director must not abuse the information – directors must not use information gained through their position to gain an advantage for themselves or others and/or cause detriment to the corporation.

It is stated here that the statute imposes an overriding duty to act in good faith[3] upon the directors of a corporation and this requirement cannot be waived under any circumstance. In this regard, it is pertinent to mention here that section 184 of the Corporations Act, 2001 imposes strict liability upon a director who fails to act in good faith and the section prohibits the directors of company from acting dishonestly[4]:

                     (a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

                     (b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.”^[5]

It is submitted that there apart from this, the concept of apparent and ostensible authority are also extremely important in this regard because in case a person has real or even ostensible authority, the company can be bound by the same even if the company’s constitution does not allow the same.[6] It is pertinent to note in this context that the landmark case of Northside Developments Pty Ltd v Registrar General[7] wherein one of the directors of the company along with his son who represented to be the company’s director as well as the secretary of the company in order to secure debt from Barclays Bank after affixing the company’s seal. It was held in this case that the mortgage was invalid and this case is also known as an exception to the indoor management rule. It is submitted in this regard that as per section 129 of the aforementioned statute[8] indoor management rule has been made a statutory rule, however, in case the facts and circumstances of the case point towards anything suspicious, then the person or party dealing with the agent must make such enquiries as deemed fit and in such a circumstance the person or party dealing with the company cannot take advantage of the indoor management rule[9] as such and the party must have made legitimate enquiries in regard to the subject matter of the contract.[10]

1. Application of the legal provisions to facts of the case

It is submitted that in the instant case, Freddy, being a director of the company abused his position as a director of the corporation, misrepresented and made false statements to the bank in order to secure a loan which the constitution of the company expressly prohibited. It is pertinent to note that the bank was well aware of the fact that there was a constitutional limitation regarding high value financing. It is submitted that the misrepresentation of Freddy must have created some suspicion in the banker’s and they should have made further enquiries.[11] There was explicit failure on part of the bank in question as they failed to make enquiries not only regarding the change in composition of the company, but they also failed to evaluate the viability of the financing as well. Accordingly, it is submitted that the bank in question cannot take advantage of indoor management rule.[12]

Regarding Felicity’s transaction pertaining to Ferrari, it is submitted that the facts do not disclose that Felicity had affixed the company’s seal while taking the car on lease. In absence of the same, the benefit of indoor management rule[13] cannot be had.[14] The reason behind this statement is because neither did Felicity have real nor apparent or ostensible authority to act in a binding capacity towards the company with respect to the rental agreement for the Ferrari car and in absence of either real or ostensible authority, the company cannot be held liable or bound by the agreement entered into by Felicity as an agent of the company

Conclusion

It is submitted that a perusal of the facts of the instant case along with a discussion of the relevant legal principles as well as the landmark cases cited hereinabove, it is pertinent to note that Freddy has been in violation of his statutory as well as common law duties in the capacity of a director of the company and as such he likely to attract the penal provisions of the Corporations Law in vogue in the Commonwealth of Australia. It is further submitted that as the bank should have inquired further into the false statements made by Freddy, the mortgage would not be held to be executed validly and as such Prudent Bank cannot enforce the contract against the company and the case regarding the Ferrari dealer is even more clear because in the instant case[15] there was no real or ostensible authority to bind the company and accordingly, it is submitted that the Ferrari dealer can also not hold the company liable for the Ferrari deal as such and Felicity would be held personally liable for the contractual liability apart from being criminally liable as well for being fraudulent and making fraudulent misrepresentation