Exercise In The Superlative Interest Of Principal - Legal Analysis

Discuss about the Exercise In The Superlative Interest Of Principal.

• Jack runs a waterfront bakery-cafe as a sole proprietorship, in Melbourne Docklands.
• He had employed a chief manager, named Michelle to monitor each and everything which goes out of the kitchen.
• Further, it was agreed that Jack would sign the orders internally and Michelle will send out them to the suppliers. One day Glitzy Touch, he sends an invoice to Jack, provides an offer for one day that is to procure a supply of edible gold leaf sheets at less than half of real value. Michelle thoughts that it will attract consumers and since she is not able of contacting jack because he has not provided his hotel details, she places the order for the amount of $5000 and Jack refuses to pay the same.

In order to conclude appropriate decision present case has been related with the case law of Hewson v Sydney Stock Exchange (1967) 87 WN INSW 422 in which court made a decision that manager should exercise in the superlative interest of Principal. Further, in the case of Dargusch v Sherley Investments Pty Ltd [1970] Qd R 338  and Lunghi v Sinclair  [1966] WAR 172,  it was concluded that agent is required to act in principal best interest. The provision concerning alleged authority was concluded that in the case law of Freeman &Lockyer v Buckhurst Properties. Under this case, BP properties had obtained and developed the land.  The agent has not been hired as a general manager,but he performs like a manager,and BP has knowledge about the same. Moreover, Agent employs F&L architects to make plans, etc. for BP properties. He has no authority to hire the architect as he was not a manager,but he acts like a manager. Further, F&L sends off an invoice to BP. In the present case, the problem is that since A is not a manger due to which BP refuses to give payment. Hence, it was held that BP suspected Agent out to be a manager at the firm allows his performance.

In addition, BP has to pay for the invoice which is sent to him by Agent.

In current case principal and agent relation exist among Michelle and Jack. Michelle has taken a decision keeping in mind the best for the bakery. Moreover, she had taken this decision becauseshe thoughts that it will be the best opportunity for them to attract consumers and to go ahead of competitors. In addition, she has fulfilled his fiduciary duties related to an agent that is performing in good devotion required and account honestly. Hence, jack has to pay for the invoice sent by Glitzy Touch.

Further, in this study the conclusion can be made in two ways; the first one is to agree with the decision of Jack through denying the payment. As Jack is able to claim violation on the basis, that the buyer is obliged to rely on the depiction

Since Michele was not allowed to sign the orders and Glitzy Touch is a regular trader. Hence, it is common to presume that the authority of signing order is only with Jack. Therefore, due to the same jack refuse to accept the order as it was not signed by him and he is legally empowered to do so.

Regulation

The second conclusion can be against the decision made by Jack that he should make the payment as the order made by Michelle was for the benefit of the bakery and not for her. The same will be applied in the current case as the situation of both the cases is similar. In the currentcase, Glitzy Touch is a regular merchant, and he knows that Michelle has the power of giving orders. Thus, he has adequate power to take a decision. Hence, Jack has to give payment to Glitzy Touch as he knows that Michelle is having a significant position at the bakery.

Conclusion

Aauthority of an agent

At the same time, if the entire situation is evaluated in a proper way that it could be evaluated that the decision taken by Michelle was not for his personal interest, she had taken it only for the profit of the company. The same could be considered as the functioning of the law of urgency as in case of Great Northern Railway Co. V Swaffield. Under this case,the horse was dispatched by train,but no one was there to meet up at the station. Due to the same, station master has taken the horse to stable till the holder proclaimed about it. Moreover, it was concluded that agency subsisted and the holder is accountable for the cost of the stable.

Duties, rights and liabilities resulting from agency

 Michelle in the present case  had taken a decision as Jack was not there and he was not provided with any details of the hotel due to which Michelle was not able of contacting him as well as the order is available for one day only, and she can’t wait for jack to come back. The decision was taken keeping in mind that the same opportunity will not come again and it will be profitable for the company only. She had completed all responsibilities which are to be completed by a manager. In addition, she had exercised a fiduciary duty of a manager that she performed in a preeminent interest in the absence of Jack. Hence Jack is accountable to pay for the order. The intention of Michelle should be considered before taking any final decision by the Jack as he intended to make the position of the bakery higher in comparison to their rivals. Even discussion was made between them relating to challenges to present their products in a more attractive manner,and when Michelle saw a chance to do the same at lower rates, she grabbed the opportunity. However, the decision made by him was out of the power,but Jack will require paying for the same as his intention was only to provide profit to the organization.

Applicability

The issue is about the ratification provision can be taken by the principals for avoiding problems when the agent takes the decision.

Agency is believed to be a kind of contract in which contractual rights can be conferred,and contractual liabilities can be provided on a stranger. Representation is an essential element of the agency as agent represents principal to outside world and can be held liable for the actions or decision of agent.

Appointment as agent

The contract of the agency has specified variants,i.e. proposal, promise, acceptance, consideration and agreement. The express authority will provide details relating to the actual authority of the agent and will affect the legal relations of the principal. In case express authority has been provided thenthe agent is bound to act according to the same,or in other words, it can be said that agencyis required to act in accordance with the express agreement.

It was held by Court that in case an agent act without permission of principal than principal had right to ratify the decision in the case law of ANZ Bank Ltd v Ateliers de Constructions Electriques and explained the concept of business efficacy.

In the presentcase, as Michelle has taken the decision out of the authority or power, Jack can develop an express contract with his agent (Michelle) in oral or written form. In other words,the same will result inthe creation of the contract between them.

Conclusion

Authority of an agent

In order to avoid similar circumstances for future Jack can develop an express contract or deed of power with Michelle. The specified deed will comprise the authority provided to Jack in detail and appropriate manner. Thus, the same will provide a clarification to Michelle too relating to his powers. Jack can also specify the terms in the deed that in case Michelle takes any decision out of the power than she will be responsible for same and will be required to pay the liability if any.

Duties and right of an agent

Through the development of deed, Jack will be able to control the decision of Michelle as well as make him understand about the authorities available to him. Jack is required to make a habit of providing communication details in caseshe is on a work tour or out of the station. Further, she should also take feedback from the manager in case she is out of station so that if any important decision is to be taken or an opportunity is available than the organization  is able to take advantage of same.

Conclusion

In the present study, Michelle placed the order for purchasing the ten deliver vehicle without identifying the financial conditions of the company. The company has already so m,uch debt, and it would very difficult to repay the loan. Moreover Michelle took the loan for buying the vehicle on behalf of the company. The issue is whether the Michelle breaks the duty of the director.

Definition of Director

Directors of the company mean any person who is appointed as director, who conducts activity as a board of director or the proxy director of the company. An individual which is appointed as director or is appointed as alternate director can be referred as director. In present case as Michelle is appropriately appointed as director, she is eligible for acting as a director.

Role of a director

The directors of the company have the power to conduct the activities and operations of the company. Therefore it is the duty of the board of directors of the company to set the policies and make the strategies of the company which maximize the main objective of the company. Further, the activities of the company are controlled and managed through the board of directors of the company. However in exceptional cases court are empowered to reveal the corporate veil of incorporation and same was concluded in case of Green v. Bestobell Industries Pty Ltd [1982]. In accordance with the specified case study court can lift the veil of incorporation in situation of evading fiduciary duties, fraud or neglecting existing duties. Thus, in present case as Michelle has not fulfilled his fiduciary duty, thus veil of incorporation can be lifted up.

• It is the responsibility of the director to possess the duty of care at the time of performance. The duty of care refers to a, adopt all reasonable step so that the activities of the board of directors does not make any adverse impact on other persons.
• All the decisions taken by the directors must be for the specific objective and in a reliable manner. The board of directors of the company must exercise due to sills and diligence and perform their functions in a reliable manner.
• The directors have the responsibility towards the company.

Business judgement rule, which has been described under the section 180(1) of the corporation act, directors activity is for the specific purpose, in good faith, not having any personal interest, and carried out in the best interest of the shareholders then it is considered as that the directors implied all the due care at the time of performance of the activity.

As per the case of South Australia V Clark, in this case, Clark was a member of the board of director of the state bank of South Australia. Clark has knowledge about that the company was acquiring all the shares of the life assurance company at a very significant price, which is more than the true value of the company. Even though the Clark did not obtain the valuation report form the independent valuation. Along with this, the Clark also know that the realization from the sale would apply for the repayment of the loan of Equitycorp Holding Ltd, in which he is the member of the board and his family also holds the significant interest in that company. In this case, the court held that the Clark breaches the duty of care and he was personally responsible for all the damages to the company due to his conduct.

Provisions

From the above analysis, it has been seen that the directors are responsible for their activities and they should exercise due care and diligence at the time of performance.

In the present study, Michelle holds the position as a member of the board of directors of the ‘Le Petit Plat Pty Ltd’. Michelle did not attend any meeting of the board of directors of the company and also did not aware with the financial condition of the company. Michelle was entered into the contract of buying ten delivery vehicles for the company and for this Michelle takes the loan of $600000 from the bank on behalf of the company. Thus he breached the duty of care, skill and diligence along with loyalty and good faith

Since, before taking the decision regarding the purchase of delivery vehicle and loan from the bank, Michelle did not exercise due care, skills and diligence. As before exercising any activity, it is the duty of the directorto analyse the situation properly. In this case, if the Michelle without going through the financial condition of the company take the loan even though the company already has manydebts which are very difficult to repay.

Conclusion

Therefore from the above analysis, it has been concluded that Michelle breaches the statutory duty of the director. On the basis of the decision given by the court in the case of South Australia v Clark, the Michelle will be personally liable for the company for the amount to which the company suffered by the decision of the Michelle. As a director, Michelle has also breached duty as per section 588G (1) of Company Act as she traded even though company was already having debts which it was not able to pay off.  Michelle was required to act in accordance with section 588 H (2) i.e. to assess reasonable grounds that company would be solvent with new debts and 588(h) i.e. taking reasonable debts from preventing company from taking debts. Moreover, Michelle might be compelled by the court for breach of duties up to $200000(in case of civil consequences) and also prohibited from managing companies in futures and compensated for the breach of duty.

In accordance with business judgement rule provided in section 180(2) of companies act, defence is available to director from payment of liabilities only in case they have acted in good faith and inform themselves for the subject matter. In present case as Michelle took the decision in best interest of company but did not assessed the financial position of the company. In this case she might apply the defence available through informing herself about the issue to the company.

Duties, Rights and Liabilities resulting from agency

The issue is providing the recommendation to the Jack, so that in future further problem not arise.

In case of breach of duty by the directors of the company, they will be personally liable for the damaged towards the company. The personal risk of the directors consists of the loss from the job, bad reputation, and disqualification for reappointment of the director in any company, the financial problem to the family, criminal charges, and so on. It was concluded in case of Kinsela v Russell Kinsela that in case company is not in a condition to pay of existing liabilities, director require owe the duty to take new credits with prior detail assessment of need of same. Thus, Michelle has breach the duty of director specified under common law and fiduciary duties. Therefore it is essential for the company to make rules regarding ascertain whether the directors will personally liable and also make the strategies in such a way by which the liability from the directors get reduced.

In this study, Michelle will be personally liable for the company as Michelle did not exercise due care and take the decision of purchasing the vehicle and taking the loan. Due to the breach of statutory duty by the Michelle, the personal liability will arise. For mitigating the personal risk of the director company should make the policies.

Conclusion

It is recommended that the company should make the insurance policy regarding the risk of the personal liability of the directors and also make the proper rules and regulation of the terms and conditions to obtain the insurance policy by the directors of the company such as all the criminal liability will not covered by the insurance policy however other personal liability which is not imposed due to the criminal offence can be covered under the policy. Along with this, the company can also make the indemnity bond which is signed by the directors of the company as well as by the company itself. Indemnity bond contained that the company can indemnify the loss occurred due to the action of the directors; in this bond, the company can cover all the matter which are not covered under the insurance policy. Apart from this, company can also make the policies regarding the all the material transaction cannot be taken by the one single member of the board of directors and can be taken only through majority of the vote by the members.

For instance, in the present study if the company Le Petit Plat has an  insurance policy with a member of the director of the company, then in such case the liability on the Michelle which was raised due to the breach of duty, can be mitigated. By this, the damage which was imposed by the court can be paid through the insurance policy.

A company by considering all the above recommendation can mitigate the personal liability or risk of the member of the board of director.