Australian-business-law-case-study

1、School of BusinessLAW2480Business and Corporation LawStudent name: Tianyi CHENStudent number: s3510993Tutorial Class: Tuesday 17:30 20:30Tutor Name: Belinda Clarence 推荐精选Contents Introduction21. Issue 1: Is Warthog legally bound to repay Cheatem the loan?2A Implied authority2B Apparent (Ostensible)

2、authority3C Indoor management rule and the statutory assumption4Remedies52. Issue 2: has Scar breached his duties as a director5A Duty of care and diligence5B Duty to act in good faith in interest of company6C Duty of position and use of information6D Directors duty to disclose7Remedies73. Issue 3:

3、has Simba breached his duty as a director?8A Duty to act with reasonable care and diligence8B Duty to prevent insolvent trading8C Negligence9Remedies9Conclusion10Reference11推荐精选Introduction This legal report aims to analyse and judge three disputes in a small proprietary company. In this case, the t

4、hree managing directors breached their duties to different degrees. As a consequence, their acts place the company in a dilemma. The analysis will begin with discussing the relationship between the director and company by measuring Nulas director authority. In order to prove that Warthog is legally

5、bound to repay Cheatem loan, implied authority, apparent authority, the indoor management rule and statutory assumption will be considered. Secondly, the next part will focus on Scars director duties. By analysing the duty of care and diligence, duty of loyalty and good faith, it can be seen that Sc

6、ar has breached the duties of a director. Finally, Sumbas director duties will be considered. Two main issues will be looked at in this part: acting with reasonable care and diligence; and duty to prevent insolvent trading.In order to strengthen the arguments, every statement will be supported by le

7、gislation and cases. Moreover, some remedies are provided for each issue. 1. Issue 1: Is Warthog legally bound to repay Cheatem the loan?A. Implied authorityThere is an important issue in this case regarding the relationship between Nala and Warthog Pty Ltd. According to case Hely-Hutchinson v Brayh

8、ead Ltd Hely-Hutchinson v Brayhead Ltd 1967 1 QB 549, they emphasized that actual authority has two forms: expressed and implied. These could be inferred from the conduct and the circumstances. In the case of Warthog, Warthog is defined as a small proprietary company Corporations Act s 45A

9、, because its annual return is less $25 million and it employs推荐精选 less 50 full-time employees. Nala is one of board members and was appointed as managing director. Therefore, the company authorized her to do all the general company activities, which is within the usual scope of a managing directors

10、 role (Crabtree-Vickers v Australian Direct Mail Advertising) Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd 1975 HCA 49;. An individual could act with the implied authority to make a contract on behalf of the company4 Corporations Act s 126 (1). The relati

11、onship between the company and Nala is binding. Therefore the company should be liable for Nalas conduct on behalf of Warthog. B. Apparent (Ostensible) authority Apparent authority is based on estoppel doctrine. It occurs when individual or agent represents the principal to make a contract with a th

12、ird-party. According to Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964 2 QB 480, if the board without a formal appointment confers the actual authority and the agent has authority to enter into a contract on behalf

13、of the principal, the principal is still liable for any obligations imposed upon it. The facts are similar to those of Freeman & Lockyer v Buckhurst Properties; the board appointed Nala as managing director and the board has actual authority. Nala played an apparent or ostensible authority role

14、in the company, although Nalas working contract had been expired and Nala had not been formally reappointed. As Cheatem had been Warthogs banker for a number of years, Cheatem relied on the holding out to make the loan. Nala acted on behalf of Warthog to borrow $300 000 in a different but similar wa

15、y. Cheatem took for grants Nala had authority to enter the agreement as a representative and the company had the capacity to act. All those conditions were fulfilled on the facts, because:(1) Warthog knew about Nalas general activities and permitted her to deal with 推荐精选activities such as make repre

16、sentations to borrow money from the bank;(2) That representation was made by Nala who had “actual” authority to take charge of the company s business;(3) Cheatem was introduced to contract by these representations.(4) Warthog had capacity to repay this loan. Nala told Cheatem that the money was for

17、purpose of a very profitable project and Warthog had a lucrative contract. This conduct made Cheatem believe that Warthog was able to repay the loan. Given the above analysis, Nala did have apparent authority as managing director. C. Indoor management rule and the statutory assumption Corporations A

18、ct s128 & s129 According to the case Royal British Bank v Turquant Royal British Bank v Turquand (1856) 6 E&B 327 , the companys indoor affairs are the companys problem. The outsiders are not required into the regularity of the companys internal affairs. That is the indoor manageme

19、nt rule. Outsiders could be able to assume that the companys acts complied with its constitution. Its representation is properly and duly performed. It is not necessary for outsiders to inquire whether acts are validly executed.Indoor management rule is designed to protect those who are entitled to

20、make assumptions. Given the several years cooperative relationship between Warthog and Cheatem, Cheatem could be able to assume that Nala act is appropriate and duly performed with the boards permission. In addition, Cheatem was not aware of Warthogs irregularities.S 128 and 129 are the statuto

21、ry equivalent with the indoor management rule. Pursuant to s 128(1) and s129, a person is entitled to make the assumption in 129 in relation to dealing with a company and a person may assume that the companys constitution has been complied with. As several years cooperative relationship existed betw

22、een Warthog and Cheatem, Cheatem is entitled to assume that Nala could acts on behalf of the company to borrow money.推荐精选 RemediesAfter analysis and comparison of the actual authority, the apparent authority, the indoor management rule and statutory assumption, it can be concluded that the loan cont

23、ract is valid and Warthog is legally bound to repay the Cheatem loan. Nala entered into this loan contract in the name of Warthog. This act is the act of the company itself. Although Nala placed this amount into his account and fled Australia, Warthog is still liable to repay this amount. At the sam

24、e time, Warthog should make the best effort to recover the money with the help of police and investigate Nalas criminal responsibility. 2. Issue 2: has Scar breached his duties as a directorA Duty of care and diligence Corporations Act s180 Section 180 (1) of the Corporations Act requires a director

25、 to perform their duty with care and diligence when making business decisions. The rules in Sect 180 require that director and other officers must exercise their power and discharge their duties with the degree of care and diligence that a reasonable person would exercise. The company officers need

26、to ensure the completeness and accuracy of any information to shareholders. ASIC v Vines 2003 NSWSC 1116 Scar is a director and takes charge of supplying fuel. He lobbied the other directors to sign a contract with a new supplier, which is more expensive than current fuel for the sake of getting a v

27、ery large commission. However, the other directors do not know his intention. Moreover, he bought a first class cruise and sta推荐精选yed in un-countable status for 6 months. He did not comply with his duty. Obviously, Scar has breached his duty of care and diligence.B Duty to act in good faith in inter

28、est of companyUnder the section 181 (1) of Corporation Act Corporations Act s181 (1), a director or other officer must exercise their power and discharge their duties:a) in good faith in the best interest of the corporation; andb) for a proper purposeDirectors are under a fiduciary duty to act in lo

29、yalty and good faith. Scar exercised his powers for personal profits, which is against honesty and loyalty. As a director, Scar did not act for the benefit for company. According to the case Furs Ltd v Tomkies, the directors have a duty not to make secret profits from company business. Therefore, Sc

30、ar has breached the duty of good faith. According to Permanent Building Society (in liq) v Wheeler Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 (1994), although well-intentioned decision-making may not preclude the court from deciding that the directors have exercised their power

31、improperly. Scar decided to use a new fuel that was more environmental fuel, his intention is correct. However, he got the kickback from the contract, and he used this amount to pay for a 6-month cruise in a first class cabin. For this reason, Scars action may be improper.C Duty of position and use

32、of information Under Section 182 of Corporation Act, directors must not improperly use their position to advantage themselves personally or cause detriment to the company Corporations Act s182 (1). And according to s183, the director must not use the information to gain personal advantage推荐精选 Corpor

33、ations Act s183 (1). In the case Regal (Hastings) Ltd v Gulliver Regal (Hastings) Ltd v Gulliver 1942 UKHL 1, the director may be in breach of their fiduciary obligation to the company if there was sufficient connection between their obligation and the profit-making opportunity they had ma

34、de. The case of ASIC v Somerville & Ors ASIC v Somerville & Ors 2009 NSWSC 934 highlights the importance of use of information. As Scar is in charge of supplying fuel, he has all information about supply of fuel. He lobbied the other directors to sign a contract with a new fuel supplier and

35、got a large commission from this. This act has breached s182. Scar gained the commission and paid for a 6-month cruise. There is sufficient connection between the contract and profits. Consequently, Scar has breached the duty not to use his position of director improperly. D Directors duty to disclo

36、seUnder s 191 of Corporate Act, a director has duty to notify other directors when a material personal interest conflict arises Corporations Act s191. the material interest means “some real substance” McGellin v Mount King Mining NL (1998) 144 FLR 228. The director must disclose the detail of t

37、heir interest in the matter, Scar gained a commission in return for signing the contract of fuel supply. The exchange of material interest has breached the duty. RemediesTo sum up, Scar is one of the directors and has obligation to exercise his power properly and discharge the duties. However, he in

38、tended to gain personal interest via signing the new contract and he did achieve his intention. However, his acts have breached the duties of care and diligence, duty of loyalty and good faith, duty not to use the position of director improperly. According to common law for breach of directors dutie

39、s, Warthog c推荐精选ould claim compensation or rescission of the contract. Warthog could claim declaration of contravention, pecuniary penalty order and disqualification order in accordance with statutory penalties. 3. Issue 3: has Simba breached his duty as a director?A Duty to act with reasonable care

40、 and diligenceAccording to the common law duty, directors play a core role in a companys management structure. A responsible director should have an active interest in the corporate business affaires. Duty of care infers a responsibility in the performance of the director.Simba is enthusiastic about

41、 aviation and does not have any interest in the financial affairs of the company. In some way, he does breach the duty of care. A director has the obligation to take reasonable steps to monitor the company management AWA Ltd v Daniels (1992) 7 ACSR 759. Simba did not notice that Nala infringed

42、the companys rule and Scar gained personal interest by entering the contract. Under section 180 (1) of the Corporate Act Corporations Act s180 (1), directors are required to exercise their powers and discharge their duty when making business judgment. When Warthog was in a dilemma due to huge amount

43、 of compensation, Simba just made a little effort to participate in the companys business affairs. B Duty to prevent insolvent tradingSection 588G of the corporations Act Corporations Act s588 G requires that the directors have the duty to prevent insolvent trading in their company. When the company

44、 meets debt difficulties, the directors duty arises. Directors should take reasonable steps to prevent the company from推荐精选 insolvency. Under section 588H Corporations Act s588 H, the director can avail themselves of the Statutory Defences, however, Simba cannot absolve the liability because:1) He d

45、oes not have reasonable grounds to expect the company would remain solvent;2) There is no information or reliable person that would lead to an expectation insolvency of Warthog;3) Simba always worked during the period when the company was insolvency;4) He did not take reasonable steps to prevent the

46、 company from the debt.In the case of Commonwealth Bank of Australia v Friedrich Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, a director who failed to prevent the company from insolvency trading, is personally liable for debts incurred by the company. Simba made little effort t

47、o change the actual situation of the company. He did not enquire the fate of Nala and Scar or participate in the running of Warthog. As a consequence of his negative act, Warthog breached its contract with the other company. Warthog became insolvent because it must pay compensation. Simba had been a

48、ware that the company had been in difficulty because of his fellow directors. However, he did not take the reasonable steps to prevent the company from insolvency. C NegligenceAs a managing director, Simba commits the tort of negligence for Warthog Company(1). Simba owed the company a duty of care;

49、and (2). Simba breached the standard of care. He did not have active interest in companys affair and did not take reasonable steps when company was insolvent; and (3). The company became insolvent and suffered the damage because of Simbas negative acts; and推荐精选(4). The insolvency incured actually an

50、d is not remote. Remedies Simba, as one of the main directors, should have the obligations to exercise the power and discharge the duty to take part in companys general management and protect the companys interest. However, he only focused on his technique affaire and ignored the financial affair. I

51、n addition, he did not take the effective actions to prevent the company from insolvency. Hence, he did breach some duties of director. If Simbas default cause serious damage to the company, it may order the director to pay he company compensation equal to the amount of loss in relation to debt because the companys insolvency. Conclusion It can be seen that the three managing directors breached the duties of directors with