Commercial and Corporation Law: Contract Execution by Company and Liability

This article discusses the execution of contracts by companies and the liability of the company in case of breach of contract. It also covers the doctrine of indoor management and pre-registration contracts. Case laws and relevant sections of the Corporations Act, 2001 are cited.

Running head: Questions 0
commercial and corporation law
JUNE 9, 2018
student details:

QUESTIONS 1
Answer to question 1-
Issue
Whether the Motorbikes Pty Ltd was bound by the contract made on its behalf?
Rule
As per Section 126 of the Corporations Act, 20011, the company has a power to make
a valid contract. The contract may be exercised by the any person who has direct authority or
implied authority to execute a contract on the behalf of the entity2. An individual may act and
contract on the company’s behalf in the same manner in which natural person made contract.
The agent may execute the contract on the behalf of the company3.
Section 127 and the section 126 of the Corporations Act, 2001 draw the difference
between the contract executed by the company itself and the contract executed by the agent
on the behalf of the company. As per section 127, the documents can be executed with or
without the common seal of an entity4. In case where the common seal of the company is not
used and there are minimum two directors of the company, then it is required by the section
127 that the document or contract should be signed by minimum two directors or by the one
company secretary and one director of the company to make a valid contract.
The doctrine of indoor management (Turquand’s rule) secures the outsiders against
the company’s actions. As per this doctrine of indoor management, an individual should
make sure that proposed transaction is consistent with the articles and the memorandum of
1 Corporations Act, 2001 (Cth)
2 Corporations Act 2001, s126
3 Wolters Kluwer, Agent exercising a company’s power to make contracts (2012)
<https://iknow.cch.com.au/document/atagUio485822sl14503794/corporations-act-2001-section-126-agent-
exercising-a-company-s-power-to-make-contracts>
4 Corporations Act 2001, s127

QUESTIONS 2
the company. It is not required by an individual to check the inside irregularities of the
organisation5.
In Ruben v Great Fingal Consolidated6, the company secretary of the company did
bogus sign of the two directors and certificate was issued by him without the authority. It was
required by the article of the company to sign by the two directors but still the certificate
holder cannot take the benefit of doctrine because it was bogus transaction.
In Varkey Souriar v Leraleeya Banking Co. Ltd. 19567, it was held by the Kerala high
court that the doctrine of indoor management would be applicable in respect of the existence
of agency. It cannot be applied in respect of the powers exercised by the agents.
Application
In the given question, Michelle who was the director of the company and Tim who
was the company secretory of Motorbikes Pty Ltd acquired the motorbike. Tim and Michelle
both signed the purchase contract to acquire the motorbike on behalf of the Motorbikes Pty
Ltd. Later, the director of the company decided to breach the contract. Section 126 and
section 127 will be applicable here. The Section 126 of the Corporations Act, 2001 permits
the agent to execute the document or contract with implied authority or express authority.
The contract may made by an individual or an agent on the behalf of an entity. So the
contract made by director of company and the company secretary is valid contract. They had
authority to make contract.
The section 127 of the Corporations Act, 2001 permits the execution of contract
without the company seal. It is required that contract should be signed by minimum two
directors of an entity or one director and one company secretary in case of one director in an
5 Australian Government, Federal Register of Legislation (2015)
<https://www.legislation.gov.au/Details/C2018C00131>
6 [1906] 1 AC 439
7 1956 (12) TMI 15

QUESTIONS 3
entity. Here, the contract was signed by the Michelle and Tim on the behalf of the Motorbikes
Pty Ltd. It was the valid contract and the liability was of the company.
As per the doctrine of indoor management, John who was the seller of motorbike was
not required to see the inside irregularities because it is not the duty of outsider to check
internal authorities and the activities. Here, the Motorbike Pty Ltd will be bound by the
purchase contract. The company cannot breach the contract.
Conclusion
On the basis of the above analysis, it can be concluded that in case of breach of the
contract, the company will be bound by the contract which made on its behalf.
Answer to the Question 2-
Issue
Whether George was bound by the contract?
Rule
As per section 123 of the Corporations Act 2001, the company may have the common
seal to execute the document or contract8. A company may execute the documents and may
make the contract without having common seal as per the section 126 and section 127 of the
Corporations Act, 2001. The contract is required to be signed by the two directors or by the
one director or one company secretary of the company.
As per the section 131 of the Corporations Act 2001, the company cannot be the party
to any contract if a company is not registered9. It means if company or any individual or a
mediator on the company’s behalf enters in the contract for company’s benefit before the
registration of the company, then it would be bound by the deal. The Corporations Act 2001
8 Corporations Act 2001, s123
9 Corporations Act 2001, s131

QUESTIONS 4
allows the company to ratify the pre- registration contract after the registration of the
company. The liability is imposed on the individual to compensate the third party for the
damages because the contract is not ratified by the registered company or the incorporated
company fails to perform its duty under a ratified contract. When the contract is not ratified
subsequently by the registered company, then the court may give any order in this regard in
any circumstances10. The court may order the company to take some actions in the respective
matter11.
As per the section 132 of the Corporations Act 2001, in case of the pre-registration
contract, a party may be released from the obligations but it would not be allowed to
indemnity12. In respect of the pre-registration contract, the party of the contract may release
the person from the complete obligation or liabilities on the part. With no respect of the law
or principals or the rules or regulation or equity, no right of indemnity against the entity is
provided to an individual in respect of the liability of person. It happens when an individual
acts as the trustee for the company13.
The company has also an option of post registration contract. In case of the post
registration contract when the company once registered, the company’s members have the
options14. The pre-registration contract can be ratified by the members of the company. Other
option is that the members of the company do not ratify the contract15. They can file the
proceedings against the person who makes the contract on the behalf of an entity. For
10 Brew Harris, Third Party Suspicion of Lack of Authority on the Part of the Company Agents-A Comparative
Study and a Suggested Rule (Cambridge University Press, 2018)
11 Andrew Pugliese, George Nicholson, and John Bezemer, An observational analysis of the impact of board
dynamics and directors' participation on perceived board effectiveness (Oxford university press, 2018)
12 Corporations Act 2001, s132
13 Cooper grace ward lawyers, Has the company correctly signed the contract (2016)
<https://www.cgw.com.au/publication/company-incorrectly-signed-contract/>
14 Lea Sealy, and Sandy Worthington, Sealy & Worthington's Cases and Materials in Corporations Law
(Oxford University Press, 10th edition, 2013)
15 Sand Bottomley, Peter Spender, and Biel Nosworthy, Contemporary Australian Corporate Law (Cambridge
University Press, 2017)

QUESTIONS 5
example breach of the duty of promoter. The members of the company may form a new
contract in the similar manner and as per the same terms and conditions16.
In Kelner v Baxter (1866)17, the advocate had agreed to sign the contract on the behalf
of an entity which was not registered. The company was not created the advocate to make the
contract. It means the advocate was not considered as an agent. In this case it was held by the
court that the advocate was not liable personally. The company was not informed about this.
Application-
In the given question, Gerard and Sylvia made a deal with George to acquire the cake
shop. Sylvia and Gerard register the cake shop in the name Cakes Pty Ltd. In Cake Pty Ltd,
Gerard was listed as the director of the company and Sylvia was listed as the company’s
company secretary. Later the contract was made between them and it was signed by the
Gerard and Sylvia with the common seal. So it was the valid contract because as per the
requirement of section 126 and 127 of the Corporations Act, 2001, the contract was signed by
the George who was director of this entity as the witness and other witness was Sylvia. As
per section 123 of the Corporations Act, 2001 Geared also stamped a company seal on the
contract.
Later George thought to not to sell the cake shop. Here, George would be bound by
the contract. It means if the entity or any individual like agent on the behalf of the company
forms a contract for the advantage of the company before the incorporation the company,
then the company would be bound by the contract. In respect of the pre-registration contract,
a party of the contract may be released from the liabilities but indemnity would not be
allowed to that party of the contract. In the given situation, company is registered before the
16 Ray Barker, The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-
Profit Board Members (John Wiley & Sons Inc., 2016)
17 LR 2 CP 174

QUESTIONS 6
contract. The Cake Pty Ltd would not be liable in case of the post registration contract. All
the liabilities will be imposed on the George.
Conclusion
On the basis of the above analysis, it can be concluded that in the given situation,
George will be bound by the contract.
Bibliography
A. Articles/ Books/ Reports

QUESTIONS 7
Pugliese, A, Nicholson, G, and Bezemer, PJ, An observational analysis of the impact of
board dynamics and directors' participation on perceived board effectiveness (Oxford
university press, 2018)
Harris, B, Third Party Suspicion of Lack of Authority on the Part of the Company Agents-A
Comparative Study and a Suggested Rule (Cambridge University Press, 2018)
Bottomley, S, Spender, P, and Nosworthy, B, Contemporary Australian Corporate Law
(Cambridge University Press, 2017)
Sealy, L, and Worthington, S, Sealy & Worthington's Cases and Materials in Corporations
Law (Oxford University Press, 10th edition, 2013)
Barker, R, The Handbook of Board Governance: A Comprehensive Guide for Public,
Private, and Not-for-Profit Board Members (John Wiley & Sons Inc., 2016)
B. Cases
Kelner v Baxter (1866) LR 2 CP 174
Varkey Souriar v Leraleeya Banking Co. Ltd. 1956 (12) TMI 15
Ruben v Great Fingal Consolidated [1906] 1 AC 439
C. Legislations
The Corporations Act, 2001 (Cth)
D. Other
Australian Government, Federal Register of Legislation (2015)
<https://www.legislation.gov.au/Details/C2018C00131>
Wolters Kluwer, Agent exercising a company’s power to make contracts (2012)
<https://iknow.cch.com.au/document/atagUio485822sl14503794/corporations-act-2001-
section-126-agent-exercising-a-company-s-power-to-make-contracts>
Cooper grace ward lawyers, Has the company correctly signed the contract (2016)
<https://www.cgw.com.au/publication/company-incorrectly-signed-contract/>

QUESTIONS 8