Commercial and Corporation Law: Contract Execution by Company and Liability

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

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