The current case needs to determine the position of Michael and his role and duties in Foragers R Us in order to define the action that Suzy could take. According to the Corporations Act 2001, s9, an officer of a corporation means: i) a person who “makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation”; or ii) “who has the capacity to affect significantly the corporation’s financial standing”. The application of s8(i) and (ii) was found in ASIC v Adler, where Adler was held to be an officer of another company in HIH group, even though he not registered as a director in that company. Definition provided under Section 9 includes directors who are de facto directors. Therefore, the definition includes those persons who act in the position of director, but are not formally appointed as directors.
From the facts of the case, it is understood that for several years, Suzy and Michael, as her de facto partner, operated the business under Foragers R Us. This indicates Michael occupies the position of an officer, as per the definition of officer under the Corporation Act 2001. Another determination could also be made of whether Michael could be treated as a promoter as well. A promoter is a person “who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.” As such, seeing the operation of the business and their roles in the company, both Michael and Suzy could be treated as promoters. Now that Michael is treated as an officer as well as a promoter of the company, there are various duties and liabilities that are associated with these positions as defined in the relevant legislation. The next paragraphs will deal with those duties and liabilities and the legal position of the company in relevance to the issue in hand.
Directors and officers of a company are imposed certain statutory duties. Corporations Act 2001, Division 1, Section 180 to Section 184 provides relevant duties to the current case.
Section 180 provides for civil duty to care. These duties apply to officers and directors. Section 180 provides for duty to care.duty of good faith where an officer or director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were in that position. Any officer making a business judgment must meet this requirement and equivalent duties at equity and common law. The judgment has to be made in good faith for a proper purpose, and must not have material personal interest in the subject matter of that judgment. The judgment must be in the best interest of the company. In this section a “Business Judgment Rule” is applicable to the duty of the officer or the director. The best interest of the company is rationale and the test of reasonableness applies to determine this. In ASIC v Rich, Greaves case, John Greaves was held to be in breach of his statutory duties of care and diligence with respect to his role of the company, One.Tel going to liquidation. It was also held in Allen v
Gold Reefs of West Africa, that shareholders have duty to exercise voting rights in the best interest of the company. In ASIC v Healy, the Federal Court observed that a director is expected to take diligent and intelligent interest in the information he obtained or available to him, and apply his mind to his responsibilities. In the current case, Michael being an officer of the company has the statutory duty to care in good faith where he must exercise his powers and discharge his duties as an officer with the reasonable degree of care and diligence. Any business judgment he makes must meet this requirement and it must be for a proper purpose. He must not have material personal interest in the subject matter of that judgment. The judgment must be in the best interest of the company. This may not be the case in the current case. It is proof that Michael is behind customers of Foragers were being approached by Florist Supplies and that Michael had copied Foragers’ price list and product offers, he would be liable for breach of his duty to care as discussed earlier. In the current case, he is found to be a manager of Florist Supplies, which will enable proving all the above and further show that he has personal material interest.
Section 182 prohibits an officer or director from improper use of his position to gain advantage for himself or for someone else; or to cause detriment to the company. This is found in the Adler v ASIC. Permanent Building Society (in liq) v Wheeler, identified a few principles for determining improper purpose. Directors’ fiduciary powers and duties may not be exercised for any collateral or improper purpose. The court has to objectively determine whether acts were performed in good faith and in the best interest of the company. The court must apply the “but” test and determine whether, but for the improper or collateral purpose a director he would have performed the impugned act. In the current case, Michael holds a position in Florist Supplies Pty Ltd and had it not been improper purpose of advancing his personal material interest, he would not have had exercised his fiduciary powers and duties arising out of he being an officer of Foragers. He is prohibited from improper use of his position which itself prohibits him from the alleged solicitation of customers and products offering similar with Foragers.
Section 183(1) prohibits an officer to use information obtained by him as being the officer of the company to gain an advantage for himself or someone else; or causing detriment to the company. This duty applies even after his employment in the company. The violation of this duty will lead to civil penalty as provided under Section 1317E. Section 184 provides that an officer or director is criminally liable if he is reckless or intentionally dishonest and he fails to use his power and perform his duties in good faith in the best interest of the company and for proper purpose. This section presents a proper purpose doctrine. In Re Smith and Fawcett Limited, it was observed that a director must not exercise his for purpose collateral to that for which the power was conferred. Section 184 holds the officer or director criminally liable if he uses his position or information he obtained being an officer or
director, dishonestly with the intention of directly or indirectly gaining an advantage for himself or for someone else, or to cause detriment to the company. He is liable in this regard for his reckless conduct which may give him or someone else advantage or cause detriment to the company. In the present case, as establish earlier, Michael will be liable for civil penalty as he has improperly use information obtained by him because of his position in Foragers. This will make him gain an advantage for himself or for Florist Supplies and this would also cause detriment to Foragers. He would also be criminally liable if it shown that he was intentionally dishonest, failed to use his power and perform his duties in good faith in the best interest of the company and for proper purpose. Further, according to
Division 2, Section 191, he must have disclosed any material personal interest in a matter relating to the affairs of the company. He must have notified Suzy in this regard when conflict arises. This duty to disclose aims to protect the interests of companies and investors. Promoters also have a duty of disclosure. Thus, a promoter may not be able to make a profit from any transaction with another company without disclosing it the company. In this current case, Michael would not have any rights to any profit from his dealing with the other companies or with Florist Supplies. In case of breach of duty, Section 185 applies and it provides that sections 180-184 are applicable with other rule of law regarding duty or liability of person because of their office or employment. It allows commencement of civil proceedings for a breach of duty or in respect of liability.
In order to identify liability of breach of duty as provided earlier, application of the separate entity doctrine will help in this regard. A company is a separate legal entity and is distinct from its members or incorporators. A company is not a mere machinery of the shareholder to give effect to their purposes. The doctrine that the company is a separate legal entity was as established in Salomon v Salomon & Co Ltd. This is the separate entity doctrine, which has effect of property relations. Property of the company belongs to the company. Officer, directors or members of the company do not have any interest in the company’s property. A separate legal entity is created as soon the company is formed. It is the company that owns the assets put into it by the original investors. It possesses the residual income and control rights over the assets, output from production, and any further assets purchased by the company. No participants in the enterprise own these assets. In the current case, Michael does not have any right to enforce an alleged proprietary interest in Suzy's house. As a matter of fact, he does not have any claim over the assets of the company. The asset belongs to the company, which holds a separate legal entity status. All residual income and control rights over the asset belong to the company.
In certain situations, the court will look at those behind the company. Young J, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd, while stating that a company has a separate legal personality, but courts will look behind the company’s legal personality to the real controllers in certain situations. In Littlewood Mail Order Stores Ltd v McGregor, it was observed that the courts can pull off the mask to check what is really behind. The corporate veil can be lifted and the separate legal entity doctrine can be ignored if the court could see that the company’s role is playing a mere sham or that the company was formed or designed to evade a legal or fiduciary obligation. It all depends on the facts of the case. But the judicial approach in Australia is towards respecting the separate entity doctrine and the Australian courts will not readily lift the corporate veil. But instance of lifting the corporate veil can be seen in Gilford Motor Co Ltd V Horne where Lord Handworth MR described the company incorporated by Horne was a “mere cloak or sham” and a mere device to enable him commit breaches of restrictive covenant he signed. In the current case, the sole director of Florist Supplies is the florist, who had nothing to the management of Florist Supplies, which was conducted in virtually all aspects by Michael, who had the title of manager. In this case, lifting the corporate veil, it is Michael who is really behind the veil controlling Florist Supplies.
As remedies for breach of directors’ duties, Suzy can seek injunction under Corporations Act 2001, s1324 to prevent him from soliciting customers of Foragers.
Blair, Margaret M. and Lynn A. Stout, ‘A team production theory of corporate law’ in Lawrence E. Mitchell (ed.) Corporate Governance (Routledge, 1st ed, 2018)
Gerner-Beuerle, Carsten and Michael Schillig, Comparative Company Law (Oxford University Press, 1st ed, 2019)
CCH Australia Limited, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related Regulations (McPherson’s Printing Group, Vol. 1, 2011)
Langford, Rosemary Teele, ‘Directors’ Duties and Whistleblowing’ in Sulette Lombard, Vivienne Brand and Janet Austrin (eds.) Corporate Whistleblowing
Regulation: Theory, Practice, and Design (Springer 2020)
Levrau, Abigail and Lutgart Van den Berghe, ‘Identifying Key Determinants of Effective Boards of Directors’ in Andrew Kakabadse and Nada Kakbadse (eds.) Global
Boards: One Desire, Many Realities (palgrave macmillan 2009)
Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (The Federation Press, 2nd ed, 2002)
Allen v Gold Reefs of West Africa [1900] 1 Ch 656.
Adler v ASIC (2003) 46 ACSR 504
ASIC v Adler (No 3) (2002) 41 ACSR 72; 20 ACLC 576.
ASIC v Rich (2003) 44 ACSR 341.
Dennis Wilcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
Erlanger v New Sombrero Phosphate Co (1878) 3 AC 1218.
Gas Lighting Improvement Co Ltd v inland Revenue Commissioners [1923] AC 723 at 740-1.Gilford Motor Co Ltd V Horne [1933] Ch 935.
Industrial Equity Limited v Blackburn (1977) 137 CLR 567.Littlewood Mail Order Stores Ltd v McGregor [1969] 3 All ER 855.
Macaura v Northern Assurance Co Ltd [1925] AC 619.
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; 14 ACSR 109; 12 ACLC.
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) AC ACLC.
Re Smith And Fawcett Limited [1942] 1 Ch 306.
Salomon v A Salomon and Co Ltd [1897] AC 22.
Twycross v Grant (1877) 2 C P D 469 at 541.
The Corporations Act 2001
The issue in the current case is whether the third party can enforce the contract entered into by Tom and the director when in fact they did not conform to the contractual rule of the Constitution requiring approval of the board before signing a deal.
All matter for a company’s operations is governed by its Constitution, which the company may adopt. The Corporations Act 2001, s198A provides authority to the directors to manage the affairs of the company. In case the Constitution does not govern the company’s operations, the matters will be bound by Replaceable Rules. Replaceable Rules are provided under the Corporations Act 2001, s141. Also, the Constitution may also become a combination of terms from its own rules and what is left is to be determined by the replaceable rules. The Constitution may set or limit power and object of the company. This is provided in Section 125. Further, it must also be noted that the Constitution of a company and any replaceable rules has the effect of a statutory contract between the various parties, including any member, director, company secretary. This is provided under the Corporations Act 2001, s 140(1). New members, directors, or secretaries are bound by them and express consent or awareness is not necessary. This Section 140 confers rights as well as duties on each party and not right to enforce each and every provision of the Constitution. For example, a director can enforce the rights relevant to him as a director. It also does not create any strictly enforceable contractual rights for such outsiders. The Australian courts have been applying the ordinary contract principles of interpreting and enforcing contracts while examining the meaning of provisions of the Constitution and replaceable rules. This is found in the leading case of Lion Nathan Asutralia Pvt. Ltd v Coopers Brewery Ltd., it was held that the nature of the Constitution is that of a commercial contract and it must be read as a whole. Its interpretation must be done in broader commercial context to which it was formed, and extrinsic evidence may be used to that effect. In respect to the current case, the limitation and requirement around the terms of signing a contract as provided in the Constitution is perfectly valid. However, problem arises when the company deals with external parties. The next paragraphs will analysis the application of specific principles to the statutory and common law position of the Constitution with the assistance of the Corporations Act 2001.
The company is a separate legal entity. A company is a separate legal entity and is distinct from its members or incorporators. A company is not a mere machinery of the shareholder to give effect to their purposes. The doctrine that the company is a separate legal entity was as established in Salomon v Salomon & Co Ltd. Drawing authority from this principle, an individual may exercise the power of the company to make, ratify, of discharge a contract
on behalf of the company through implied or express authority, as provided under the Corporations Act 2001, s126. The Corporations Act 2001, s 127 provides for assumption by a third party in case a company executes a document signed by a director and a company secretary while dealing with the company. Section 128 entitles a person to make assumption such as provided under Section 129 that terms of the Constitution and the replaceable rules are complied with and further that a director or company secretary has authority to customarily exercise powers and duties. The company cannot, thus, avoid an obligation to a third party by imposing its non-compliance to the third party as a defence. In the current case, Midas Ltd. occupies the status of a legal entity separate from the identity of its directors, officers or members. Hence, it has full authority to enter into a contract on its own. However, the current situation presents an issue whether the contract entered into by its officer can bind the contract. The Corporations Act 2001, s126 stated here presents an agency principle where an officer or director may exercise the power of the company to make or discharge a contract. The rule of assumption as provided in Section 127 to Section 129 also extend this principle and in applying these provisions, Tom and the director are assumed to have the authority to enter into the contract as a customarily exercise of their powers and duties, provided in the Constitution.
The rules of assumption is also found in common law doctrine of indoor management rule that entitles an outsider to assume that all the necessary internal steps and processes for the management of the company are complied with the exception that where the outsider knew or ought to have known about a lack of authority. The indoor management rule was formulated in the case of Royal British Bank v Turquand. The rationale of this rule is relevant with the principles of agency in context of corporate dealings. The landmark case of Northside Developments Pty Ltd v Registrar-General deals with this rational in detail. There is a competing stake in place between presence of authority and lack of authority to sign a commercial deal. Thus, the concerned issue is whether the third party with whom Tom and the director signed the contract is eligible to involve the indoor management rule. Applying the rules here, it could be found that there is a competing stake in the current case. Midas Ltd. may argue that the contract is not valid as the contract needed prior approval of the board before they are signed by Tom and the director. Whereas, the third party may argue that, based on the rule of assumption, they can assume that Tom and the director had taken all the necessary internal steps and processes before and while signing the contract. But the rule of assumption can be justifiably applied here and Midas Ltd. cannot avoid obligation arising out of the contract signed to the third party with the justifiable argument that Tom and the director did not comply with its Constitution term requiring prior approval from the board before their signing.
There are few exceptions to rule of indoor management, as was held in Northside Developments Pty Ltd v Registrar-General that if the third party lacks knowledge, but suspects some irregularity, the third party cannot invoke the rule. Certain considerations to
be given are the nature of the company’s business, representation by authorised person, and relationship of the business to the concerned transaction. The rule applies in case the representing person has actual or ostensible authority to sign the transaction. This rule depends on normal agency principle and the act must be within the scope of actual or ostensible authority. The rule, therefore, confers authority of that person to enter in the transaction only when he has authority. Thus, few exceptions are evident in the Turquand rule, which opposes principal liability. The first is when the outsider suspects an irregularity. So, if the third party puts on enquiry, including whether the director signing the contract has authority to do so, as was seen in Howard v Patent Ivory Manufacturing Co, the company cannot be bound. Similar event was found in the case of Northside Developments, mentioned above. Another case is that of AL Underwood v Bank of Liverpool. or E B M Co Ltd v Dominion Bank, which requires that before an enquiry being put up by the outsider, some factor must be there indicating some other motives other that what was purported. The outsider will be considered to have a constructive notice if he would notice a particular fact had he put up a reasonable enquiry. However, not advancing the reasonable enquiry will deprive him of his right to invoke the rule. Thus, the outsider is generally precluded from relying on agency principles if he ought to have known when dealing with the company that the person who purported to act on behalf of the company has no actual authority to do so. Section 129(4) of the Corporations Act 2001 provides that outsider can assume a director has exercised his power for a proper purpose and not for some ulterior purpose. Section 129 also reflects the common law doctrine of apparent authority. The third party does not need to prove that it has made the assumption of apparent authority. The section requires proof that the company made the representation of the apparent authority and the action of the purported agent conforms to the “standard of an officer or an agent of that kind in a similar company”. Apparent authority derives from estoppel and in this regard, the company is estopped from arguing such apparent authority. This ostensible authority is different from actual authority where the authority is derived from an agreement. Therefore, a company will be liable where it hold out, expressly or impliedly, an individual as its representative. This was reflected in the case of In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd. Thus, an outsider is entitled to assume that the company cannot be affected by limitations of its constitution. At the same time, as seen above, the company cannot rely on non-compliance to the constitution or its rules to cause detriment to the outsider. These principle and rules discuss apparent or ostensible authority, which arises by virtue of the person holding a particular position within the
company. The person is held out as possessing the concerned authority attached to position that he holds. This rule applies as long as the third party does not know or suspect otherwise and the company is bound by the purported exercise of the power and authorities by the person.
In the current case, the facts of the case do not reveal any situation falling under the exception to the indoor management rules. The third party is entitled to assume that Tom and the director have has exercised his power for a proper purpose and not for some ulterior purpose. Considering the nature of the company’s business, representation by authorised person, and relationship of the business to the concerned transaction, the fact that Tom did not want to lose the opportunity of signing up the appropriate site for the company’s business, it is for a proper purpose and Tom did not have any ulterior purpose. Moreover, the rule of indoor management applies to this situation where Tom and the director have actual authority as per the Constitution and even in situation if they had ostensible authority deriving authority from agency principle and the doctrine of separate entity status of a company, as mentioned above. So, it really does not matter whether Tom and the director have actual or ostensible authority, which in this case they actually have. Further, it is not evident from the facts of the case that the third party lacks knowledge or suspects some irregularity in regard to the internal rule of requirement of prior board’s approval. In the current case, Tom and the director have actual authority to act on behalf of the company and signed the contract. So, the rule of apparent authority does not matter in this case and the third party does not need to show assumption of apparent authority. Based on these rules, the third party can invoke indoor management rules and can enforce the contract. Further, Midas Ltd. cannot rely on the fact that the contract was entered without complying the term of constitution of prior board approval before signing. This would cause detriment to the third party.
There is still an important concern here given that the other directors in the current case did not have knowledge about the contract. Can Mary and Benson, the other directors ratify the contract? The rule of ratification requires that authority by ratification applies in situation where Tom and the director did not have actual or ostensible authority. They have authority and therefore, this rule does not apply in the current case and the contract is enforceable.
Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University Press, 1st ed, 2017)
Graham, John R. et al, Introduction to Corporate Finance (Cengage Learning, 2nd ed, 2017)
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T.E., Cain ‘The Rule in British Bank v Turquand in 1989’ [1989] Bond Law Review 1989 1(2)
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Dig deeper into https://www.dissertationhomework.com/samples/assignment-essay-samples/essay/detainee-rights-protection with our selection of articles.
AL Underwood v Bank of Liverpool (1924) 1 KB 775.
E B M Co Ltd v Dominion Bank [1937] 3 All E.R. 666
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 498; [1964] 1 All ER 630; [1964] 2 WLR 618.
Gas Lighting Improvement Co Ltd v inland Revenue Commissioners [1923] AC 723 at 740-1.
Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156.
Lion Nathan Asutralia Pvt. Ltd v Coopers Brewery Ltd. (2006) 156 FCR I.
Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611.
Royal British Bank v Turquand (1856) 6 E & B 327; 119 ER 886.
Salomon v A Salomon and Co Ltd [1897] AC 22.
Smolarek v Liwszyc (2006) 32 WAR 101.
Corporations Act 2001
Richard Bowen, ‘Agency Authority in Australia’ (January 2014)
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