William is bankrupt and therefore cannot act as a director of a company. Nevertheless, he does so. Harry is the managing director of the same company. Harry gives William a letter addressed to the other party to the contract saying that that William has authority to enter into a contract. Harry, however, privately tells William that he is only to negotiate the contract, but is not to enter into it. Nevertheless, William signs the contract as agent of the company.
a.Is the company bound by the Contract? Provide reasons for your answer.
b.Would it make any difference to your answer if Harry were only acting as managing director, never having been appointed to the position?
Maria is one of two directors and shareholders of a company. David is the other director and shareholder. Maria wants to borrow $100,000 for both the company and for private purposes from a bank. She borrows the money in her own name, but the bank wants a guarantee from the company. She knows David will refuse to do so, so she signs the guarantee ‘Maria, director’ and writes ‘David, director’ in writing that is dissimilar to her own. If Maria fails to meet payments under the loan agreement, can the bank enforce the guarantee against the company?
First, revise your understanding of how to answer problems. This has been addressed in Tutorials and resources are available on the LMS to support you.
Then, from your lecture notes, tutorial answers and textbook reading:
1.Make a list of the ways by which companies can make contracts.
2.Make a second list of the techniques the law uses to deal with issues arising in the making of contracts (e.g, fraud, forgery, acting outside authority, failures to appoint)
3.On your first list, indicate which techniques in the second list are used in what circumstances.
4.For each such circumstance, work out what procedure the law uses to resolve the issue. Some books provide suggested procedures.
5.Check what you have found out by looking what some different textbooks say. Check that you have correctly understood sections in the Act and whatever cases might be relevant.
6.Read one of the questions and work out the story (what happens).
7.Choose which way of making a contract is involved.
8.Determine what issues in that way of making a contract are raised in the question.
9.Use the procedure you have worked out for that issue to indicate how a Court might resolve the problem.
10.Write a response to the question using your procedure.
11.Go back over the answer and check you have all the elements of a good answer: a defined issue, a statement of the relevant law, an application of the law to the facts and a conclusion assessing what a Court might do.
12.Repeat steps 5-10 for the next question.
13.Check expression, citation etc. Ensure there is nothing in your answer that would be considered plagiarism.
14.Proof read your response, comply with all formalities (Cover Page has required details, Statement of Authorship is attached, Extension form is attached if necessary) and hand in the assignment according to the Instructions.
This is the case study which discusses about a contract which is to enter by a company with a third party. After understanding this case study one can easily understand the different types of contract and how to deal in case of such contracts. To come to a conclusion for this case one needs to understand the provisions relating to contracts entered in Australia.
A contract can be anything, whether in a written or an oral form. It can also be made by just a handshake or even with the help of a written document. There are generally four types of contract which are discussed below:
- Written Contract: a written contract is a contract where an agreement is entered between both the parties in writing. All the details are clearly set out in the agreement. It generally minimizes risks as it is much safer than a word given by someone.
- Verbal Contract: a verbal contract is a contract where agreement is agreed between both the parties orally. High risk is involved in such contracts since everything is in oral. A person, who has promised to agree with a point, can even deny the point later whenever he wishes to do so.
- Standard Form Contract: it is a pre-paid contract where most of the terms are set in advance and either there is a little or no conversation between the parties involved. These are generally filled with few blank spaces with information such as dates, signatures and names.
- Period Contract: it is a contract template which sets out the terms for a business relationship where the contractor is mainly engaged to perform from time to time.
There are various issues which can arise while entering into a contract. The issues which can arise in a contract are discussed below:
- Fraud: if a contract is entered between two parties then there are chances that one party can commit fraud in a contract. If a party commits any fraud then a contract entered would be considered as void. Hence contract would not exist anymore. This is mentioned Part 4AA of Crimes Amendment Act 2009.
- Forgery: there are chances that anyone of the party forges any point of the contract. Even in such cases the contract entered between two parties would be considered as void.
- Acting Outside Authority: if anyone of the party entered in the contract is acting outside his authority then contract can be considered as voidable at the option of the concerned affected party.
- Failures to appoint: if a party fails to appoint as per the terms of the contract, even in such cases contract has to be void. Hence contract would not exist.
In the given case William was a director of a company but now he is a bankrupt. But the problem is that even after knowing this he was acting as a director of that company. Harry, who was a director of the company, gives a letter to William to enter into a contract with the other party. William signs the contract as the agent of the company. Whenever a director becomes bankrupt then it has no rights to become the director of the company and he should first pay all the debts of creditors. But instead of this he entered into a contract with another party as an agent of the company. This is a clear case of a fraud. Hence, the contract has to be considered as void since fraud was committed by the director of the company.
In this case whether Harry is acting as a Managing Director or he is really a managing director doesn’t make any difference. Harry wen to William to just negotiate the contract but instead William has signed the contract as an agent of the company. It was a complete fault of William; he should not enter a contract since he was bankrupt. Now from where he would pay money to the creditors of the company. He should not have signed the contract. Hence even in this case it is the fault of William and the contract has to be considered as void.
Issue: This is the case study which would help to understand the provisions of loan agreement which is entered into a contract. There is a company which is having two directors and shareholders. One of the directors is Maria and other director is David. Both of them are directors and shareholders of the company. In this case Maria who is a director and shareholder of the company wants to borrow $100,000 for professional and personal purpose from a bank. Bank granted loan to Maria but guarantee has to be given by the company. Maria knew that David would not agree with this loan agreement and hence she would not get any loan from the bank. To get loan from the bank she took the loan on her name and have also signed on David’s behalf as well. Now the question is if Maria fails to make the payment under the loan agreement then company would be held responsible or not. To answer the case study we need to understand the provisions of default made by any director of the company.
Rule: as per Australian Corporation Act 2001, if a director breaches any of its duties then he has to bear the consequences. Once the company is registered under ASIC, rights and liabilities of the director will continue unless ASIC deregisters the company. All the rights and liabilities would lie with the director itself. If company has become bankrupt and unable to pay off its liabilities, then directors would be held responsible to pay off all the liabilities of the company. Obligations of a director may continue even after the company ceased trading and has been deregistered. There would be certain circumstances where director would be held personally liable for the debts and losses of the company. If company is unable to pay off its debts and liabilities then directors has to personally pay all the debts. If a director has committed a default then action has to be taken against that director. But due to fault of one of the director, their party should not suffer. For instance if a contract is entered by a director with any third party, and the contract is not valid then action has to be taken against the director. But in no instance the third party should suffer because of the default committed by one of the directors of the company.
Application: in the current scenario above mentioned provisions would be applied. Maria was at default here since she had entered into a loan agreement with a third party on fraud basis. She had forged signatory of David. As per the laws and provisions of Australian Constitution Act 2001, the loan agreement should not be considered. Bank has the full right to take action against the company. Even the company was not at fault, only one of the directors of the company was at fault. This is the issue within the company, which has to solve within. Due to such issues the third party should not suffer at all. Bank has the right to take action against the company. After paying all the dues company can take action against Maria who was at fault. If Maria is unable to pay the dues then David has to pay off its liabilities. This is given as per the provisions of the Australian Corporations Act, 2001. Directors would be held personally liable in following situations:
- If the company has become insolvent then all the debts has to be paid by the directors of the company.
- Company has to suffer losses due to the breach of the duties by the director.
- If the director has given any personal guarantee or have provided any personal security.
- Debts were incurred by the company by acting as a trustee.
- If there is any illegal phoenix activity.
- If any action taken against the director of the company.
As per the provisions mentioned above and understanding the case study, bank can take legal action against the company. Then finally company can take legal action against one of the director named as Maria.
Consequences For Breaching Directors Duties - Legalvision (2017) LegalVision <https://legalvision.com.au/consequences-for-breaching-directors-duties
Crimes Amendment (Fraud, Identity And Forgery Offences) Act 2009 No 99 (2017) <https://www.austlii.edu.au/au/legis/nsw/num_act/caiafoa2009n99500.pdf>.
Directors' Liabilities When Things Go Wrong | ASIC - Australian Securities And Investments Commission (2017) Asic.gov.au <https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong
Guide To Directors’ Duties And Responsibilities For Non-Listed Public Companies And Proprietary Companies In Australia (2017)
Paul T Vout, Unconscionable Conduct (Lawbook Co, 1st ed, 2006).
Struan Robertson, Remedies Where There Is A Breach Of Directors' Duties (2017) Out-law.com <https://www.out-law.com/page-8207>.
Types Of Contracts (2017) Business.gov.au <https://www.business.gov.au/info/plan-and-start/start-your-business/independent-contractors/understanding-contracts/types-of-contracts>.