Directors' Duties, Breach Of Section 180 (1), Legal Binding Of Contract - Essay.

1.Write an explanation in preparation for this meeting, setting out what the duties of directors are under s.180(1)of the Corporations Act, explaining the effect of s.180(2) and assessing whether any of the directors may have breached their duties under this section.

2.Explain to Lana, Rik and Patel whether Fruut can be forced to keep leasing the new premises for the three year term.

Duties of Directors under Section 180(1) of the Corporation Act

Whether the director of Fruut Pty. Ltd  (Fruut) have violated section 180 (1) of the Corporation Act 2001.

Whether section 180 (2) have any effect in the given situation?

The Corporation Act 2001 is the legislation that deals with the working of a company, its officers and employees. The House of Lords has established in (Salomon v A Salomon & Co Ltd, 1896), that once a company is formed then it has a distinct personality of its own and has a separate legal existence, that is, a company is an artificial person and have its own identity separate that from its officer, shareholders and employees. (Gerbic & Miller, 2010)

However, a company is not a natural person and thus its working is carried out by its officers and directors. Section 9 of the Act submits that any person who is employed as a director is a company director and also comprises of shadow and de facto directors. When a person is not appointed as director but is conducting all the acts that a director is required to do of such a company then the person is also a de facto director and holds the position of a director under section 9 of the Act (Chameleon Mining NL v Murchison Metals Ltd [, 2010). Section 198A of the Act empowers a company director to carry the acts on behalf of the corporation. 

But, the Corporation Act 2001 has imposed with few statutory obligations or duties that every director must carry out.

Section 180 (1) of the Act

Section 180 (1) of the Act is an obligation that is imposed on company director and officers to act with care and diligence. The acts must be carried out like a normal prudent man must have acted in the similar situation if such a person is the director or officer of the company or they are holding the post which is imposed with directorial duties. (Austin & Ramsay, 2013)

Every director and officer when undertaking acts on company behalf must consider the solvency of the company, its financial status, the impact of the act on the company and thus act with care and diligence and is analyzed in (Statewide Tobacco Services Ltd v Morley (, 1990).

A director is accountable for the compliance of section 180 (1) even when the duty is delegated by him. When any director is taking financial decisions then he must use his own mind and knowledge prior relying on any financial report. If the director rely on the judgment of any other person without due reasons and the company suffers loss then the director has not acted within the preview of section 180 (1) of the Act.

The Effect of Section 180(2) and Assessment of Breach of Duties

The duty under section 180 (1) is extended to non executive directors and is also declared in AWA Ltd v Daniels (1992). The duty must be comply with every person who is acting as the company director and is held in (Daniels v Anderson , 1995).

But, section 180 (1) is not rigid in nature and there is an escape route that is given to the company directors under section 180 2) of the Act.

Section 180 (2) of the Act is the business judgment rule which emphasis that when any director or officer (a) acts with good faith and honesty (b) and is of honest belief that the decision is in the interest of the company (c) and that the reasons are correct to the best of his knowledge (d) and have informed all director before taking the decision; then, it is held that the director must have comply with his duties under section 180 (1) of the Act.   

Section 181

 Every company officer must act in good faith for the company’s interest and with proper purpose

Section 182 and 183

No misuse must be done by the officer regarding the company information and position and is held in (R v Byrnes , 1995).

Section 588G

 No insolvent trading must be carried out.

Fruut grows/sells fruit trees. The director and shareholders of the company are Rik (manages day today financial affairs) and Patel (in-charge).

Thus, as per section 9 they must comply with their directorial responsibilities.

Lana is an accountant and attends meetings of the board and help in decision making. She also took bank guarantee on behalf of Fruut. Thus, as per section 9 and (Chameleon Mining NL v Murchison Metals Ltd [, 2010), Lana is the de factor director and must comply with all directorial duties.

Because of failing business, Rik decided to move. He decided a new premise owned by Watel Pty Ltd. however, Rik is found to be in violation of section 180 (1). He did not act with due care and diligence and he decided to take lease if the place without others consents, that is, Patel and Lana. However, Section 180 (2) can be availed because before finalizing the decision of moving Rik acted in good faith. He believes that since the shop is located at the front of a large block of land with excellent soil, thus, it can be profitable for the business considering the fact that there was no other company selling nearby. So, the decision of Rik was based with honesty, good faith and with belief that the decisions will be profitable for the company. 

Legal Binding of Contract and the Situation in Fruut

Patel and Lana are also in violation of section 180 (1) because they did not question the lease that is taken by Rik without informing them. They did not acted with due cared and diligence in the interest of the company.

Conclusion 

It is thus concluded that all the company directors that is Patel, Rani and Rik are found to be in violation of section 180 (1) of the Act as the decision of moving to the new premises is taken without die consideration, care and diligence and the acts are carried out not concerning the interest of the company.

However, Rik can avail the befit of business judgment rule under section 180 (2) of the Act.

Whether the lease amid Watel Pty Ltd and Rik is binding upon Fruut?

Any business which is incorporated as per the provisions of the Corporation Act 2001 is called a company. Every company is not a natural persona and thus requires officers to act on its behalf. A company director is authored to act for the company under section 9 of the act.  this atrocity is granted by the law itself upon the director and thus a director is considered to be the agent and is held in (Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd , 1964).

But, normally a person is considered to be an agent of the company if he is designated with authority to bind the company by his acts. An authority can be granted to the person: (Krawitz, 2002)

1. Actually -  The authority that is possessed by any person which is delegated to him either:
2. Expressly  - the authority that is granted to an agent expressly either by some written document or by deed or by words, etc but there is an express undertaking that is taken by the company to delegate power upon the officers and is held in
3. Impliedly – when the authority that is given to an agent without any expression and is required to comply with the authored tasks of the agent are implied authority;
4. Apparently – It is also called ostensible authority. It is the authority which is possessed by an agent nit by any actual authority but the company has made some kind of representation in front of the outsiders which make the outsider belief that the person with whom he is dealing is the authorized representative of the company provided the outsider is acting in good faith and is held in (Hely-Hutchinson v Brayhead Ltd , 1968).

Now, when any agent acts with his actual or apparent authority and with the scope of the authority makes any contract with the outsider, then, such contracts are binding both upon the company and the outsider. But, many times the agent of the company supersedes his authority and makes a contract with the outsider. In such situation the company may not enforce the contract on the pretext that the contract is made by the agent without authority. In such situation the outsider is at receiving end which has made the contract with the agent in good faith. 

To protect the interest of the outsider, the rule of indoor management is established in Royal British bank v turquand (1856). The rule submits that when a representation is made by the company which depicts that the agent does have the authority and the outsider enters into contract with the agent based on such representation then the contract is binding provided the outsider himself is acting in good faith. This assumption is also authenticated under section 128 and section 129 of the Corporation Act 2001 and the outsider is under no obligation to make any kind of inquiries. (Krawitz, 2002)

It is assumed that all the directors decide that they must move back to the old premises.

Lana contended that the lease which is taken by Rik with Watel Pty Ltd is not valid because he signed the lease not in the name of the company but in his own name.

It is submitted that Rik is the director of the company. In order to promote and make his business profitable he had entered into a lease contract with Watel Pty Ltd for three years.

But, there is no authority that is granted to Rik that he can enter into contract with the third parties individually. Thus, the act of Rik is not within his actual authority and has superseded his authority.

However, Rik is involved in the day to day financial transactions of the business. Rik must have entered into financial dealing on behalf of the company before entering into the lease as well. Thus, Watel Pty Ltd was also under the impression that Rik is the person who represents the company in financial matters. There is nothing on the part of Fruut that was made clear that Rik is not authored to enter into contract with outsiders. Thus, a representation is made by Fruut that Rik is authorized to enter into financial transaction and on this representation Watel Pty Ltd has entered into a contract with Fruut. It is however, impersonate that Watel Pty Ltd must have acted in good faith.

Conclusion

It is thus submitted that the lease that is entered by Rik on behalf of Fruut is binding amid Watel Pty Ltd and Fruut and Fruut cannot consider the lease invalid on account that Rik does not have the authority. The lease is binding under ostensible authority provided Watel Pty Ltd itself is acting in good faith. 

Austin, R., & Ramsay, I. (2013). Ford's Principles of Corporations Law. LexisNexis Butterworths.

Chameleon Mining NL v Murchison Metals Ltd [ (2010).

Daniels v Anderson (1995).

Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd (1964).

Gerbic, P., & Miller, L. (2010). Understanding Commercial Law. LexisNexis NZ.

Hely-Hutchinson v Brayhead Ltd (1968).

Krawitz, A. (2002). Protecting Outsiders to Corporate Contracts in Australia, Student, Murdoch University School of Law. volume 9, Number 3 .

R v Byrnes (1995).

Salomon v A Salomon & Co Ltd (1896).

Statewide Tobacco Services Ltd v Morley ( (1990)