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Law Of Business Association: Legal Nature

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Law Of Business Association: Legal Nature

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In the present case it is shown that William is a bankrupt individual who is incapacitated from acting as a director of the company. However in the present case he is still acting as one. There is a letter between Harry, the managing director of the company and a third party wherein he mentions that William possesses the authority to enter into a contract. Harry privately mentions to William that he is only entitled to negotiate the contract and not enter into it. However William enters into the contract in capacity of an agent.
Issue- From the instant case scenario certain issues arise which are of legal nature. The first issue is whether the present company is bound by the terms and conditions of the contract[1]. Another circumstance arises when the same position is to be determined if Harry only acted as a managing director.
Rules- From the instant case scenario it can be discerned that the fact there is a managing director and insolvent director in the company suggests that the company is a joint stock company. The governing law which will be applicable in this case is the Corporations Act 2001 (Cth). Under this legislation, the company can enter into a contract and execute it in various ways. Under section 126 of this Act, the company can appoint an agent who provides own name to represent for and on behalf of the company[2]. Under section 127(1) of the Act, a company can make contracts by other ways. This includes when the contract is entered by two directors of the company. The contract can also be entered upon by one director and one secretary. In case of a sole proprietorship, the contract can be entered by the only director. Sub section 2 of the same section suggests that the most formal way of entering into a contract is affixing the common seal of the company and getting the contract verified by the above mentioned members[3]. In the present case scenario contract entered is without express authority. The contract becomes binding in this case as there is application of the law of agency. In the case of agency there are broadly two kinds of authority[4]. One is express authority where the company directly appoints a person to act as an agent. Here the person exercises all the rights and obligations of an agent. The other is implied authority where the authority generates from the situation of the case. In the present case William possesses ostensible authority. Here the company is making a representation that William possesses the authority of entering into the contract. On the basis of the representation, the third party relies on the company and judges their credibility. This has been seen in the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480. Ostensible authority is also created when the representation is made by the specific company. This is seen in the case of Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Ltd (1975) 133 CLR 72. However in the present case there is clarity that the person entering into the contract was insolvent. Directors have various duties. As per section 588 G of Corporations Act 2001 (Cth) the director is duty bound to ensure that insolvent trading does not take place[5].
Application- In the present case the managing director is liable for allowing insolvent trading. As per section 180 (2) of this Act, no protection is given to directors for breach of such statutory duties. The company is liable to be sued for breach of the duties[6]. The director can claim defences on the basis of the grounds provided under Section 588 H[7]. The same rules are applicable if Harry acted as de facto director as per the provisions of Section 9 of the Act.
Conclusion- The Company is liable for encouraging insolvent trading.
From the instant case it is clear that there are two directors of a company i.e. Maria and David. They are also the shareholders to the company. Herein Maria applies for a loan of $ 100,000 for official as well as for private purpose from a bank. The bank asks for a guarantee. Maria is aware that David will not approve of the loan. She mentions her name as the guarantee and signs the agreement in the name of David.
Issue- The issue that arises here is that in case there is loan default, can the bank impose the guarantee against the company.
Rules- From the instant case it is clear that Maria acted in a manner which is beyond her statutory duties. The circumstances clearly suggest that Maria had committed forgery. She had breached the general duties of a director. Forgery is a serious criminal action in Australia. The relevant legal provision for forgery is mentioned in section 144(1) of the Criminal Code 1995. The elements of forgery include making a third person believe that the relevant person is authorised to do the act[8]. In this way the wrong doer acts dishonestly to make a gain and cause loss to others. There are provisions under the Corporations Act 2001 (Cth) where directors are penalised heavily for committing acts of fraud and offences with respect to management of the company. These are mentioned in the sections 210B and 206B of the Act.
Application- The bank can hold the company vicariously liable for the acts of Maria. However the company can disqualify Maria from her position and sue her. Her term of conviction can be 5 to 10 years of jail. She is liable to pay fines and penalties for her act.
Conclusion- The bank can hold the company liable for the breach of guarantee as Maria was acting during her course of employment. 
Corporations Act 2001 – SECT 126 (2017) Austlii.edu.au
Corporations Act 2001 – SECT 127 (2017) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s127.html
Corporations Act 2001 – SECT 180 (2017) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html
Corporations Act 2001 – SECT 588G (2017) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html
Corporations Act 2001 – SECT 588H (2017) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588h.html
McQueen, Rob, A Social History Of Company Law (Routledge, 1st ed, 2016)
Ong, Denis S. K, Trusts Law In Australia (Federation Press, 1st ed, 2007)
Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law In Australia (Federation Press, 1st ed, 2002)

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