Freddy and Fiona Freehill are officers and shareholders of Freehills Antiques Pty Ltd. The company specialises in expensive estate jewellery. The company has a credit facility with Prudent Bank Ltd, which the company uses regularly in its business.
The company has a constitution that provides that any borrowing beyond the credit facility limit with the company’s bank (in this case Prudent Bank Ltd where the limit is $500,000.00) must be approved by a resolution of the company. Further, the constitution provides any loan documents must be executed by affixing the common seal, irrespective of the law.
Freddy is the managing director. Fiona, however, makes all the essential business decisions and has been doing so for some years. After an argument between Freddy and Fiona, Fiona storms off and leaves for the annual London Antiques Fair. She tells Freddy that she won’t be back for two months.
Some weeks later Freddy is at the Bendigo Antique Fair and learns of an old colonial settler’s estate coming on the market. The estate consists of a large homestead and outbuildings on 20 hectares of land. It contains antique furnishings, paintings and jewellery.
Freddy is very excited and he approaches Prudent Bank Ltd for a loan $1.25 Million to purchase the property. Paul the manager of Prudent Bank Ltd prepared the loan documents. Freddy and his daughter Felicity attend his office to sign them. Freddy explains that as Fiona was overseas for a while they had temporarily removed her from her position and that Felicity was the new director/secretary and was authorised to sign the documents. Freddy and Felicity signed the loan documents and affixed the company seal.
Felicity revelling in her new position at Freehills Antiques Pty Ltd decides to lease a new Ferrari for a month and she signed the lease as secretary of Freehills Antiques Pty Ltd. Needless to say Felicity was never appointed the company secretary.
When Fiona returns from London she discovers what has happened. The estate bought by Freddy turns out to be worth about half of what the company paid for it. When Freehills Antiques Pty Ltd defaults on its loan Prudent Bank Ltd threatens to bring legal proceedings.
a) Fiona informs Prudent Bank Ltd that the loan is not enforceable against the company because the loan documents were not executed by persons authorised by the company and was contrary to the provisions of the company constitution.
b) Fiona also tells the Ferrari dealer that Felicity was not the company secretary and had no authority to enter into the contract.
Advise Prudent Bank Ltd and the Ferrari Dealer whether they can enforce the contracts.
Students are expected to discuss the relevant common law and statutory provisions applicable to this problem in their answer.