Corporate Law: Structure, Contracts, and Indoor Management Rule

This report explores the meaning and working of corporate law in Australia, covering topics such as business structure options, contract formation, and the rule of indoor management. Case laws and legal provisions are discussed to provide a comprehensive understanding of corporate law.

Corporate Law

Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
Question- 1.............................................................................................................................4
Question 2...............................................................................................................................5
Question 3...............................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Corporate law is the body of law which regulates the matters of business activities. These
are applicable from the time of formation and continued to implement in the operations. Also,
the dissolution is being done according to the legal provisions which are provided by the law.
Furthermore, it provides rights and obligations which should be followed by the directors and
other individuals who are involved in the business and manage the business operations (Mitchell,
(2019)). This report, covers three questions which are capable of reflecting the meaning and
working of corporate law in Australia. It also consists of case laws that have occurred in the past
so that they can be used in future.
MAIN BODY
Question- 1
Business structure is the base on which a business is started for carrying the activities in
order to fulfil the objectives. It should be legally recognised by the law before opting for the
same for conducting the business affairs. The given case is about two individuals named DJ PP
and Khan Chan who are considering to start their own night club from the savings made by them.
However, on the consultation with one former nightclub owner, they came to know about the
huge risks involved in the business of nightclub if starting on own. Also, there has been a
situation wherein the advisor became personally liable for the losses suffered when the club was
burnt down.
By taking each and every fact as mentioned by the advisor, it becomes imperative to
make a decision about which business structure should be used for starting the business of night
club so that risks can be reduced to a major extent. When it comes to choosing a business
structure, there are many options available depending on their own features, merits and demerits.
Some of these are company which may be limited by share, guarantee or even an unlimited
company, partnership, limited liability partnership, sole proprietorship and many more (Goshen,
& Hannes, (2019)). Each one of these have their characteristics which should be taken into
account before making the final decision. According to the main aim which is to reduce the high
risks, company is a suitable option that can be selected by the parties mentioned in this case.
A company is an artificial judicial personality having separate legal identity from its
members together with a common seal perpetual succession. Furthermore, a company is in a
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principal and agent relationship with its directors who carry the operations on its behalf, make
decisions, enter into contracts and what not, as authorised by the constitution. It can be of three
different types viz. limited by share which means that liability of the members is restricted to the
amount unpaid on the shares held by them. The other kind being company limited by guarantee
which states that every member is required to contribute the decided amount at the time of
company being wound up.
Company is the appropriate choice for starting a business because of the features such as
there is principle of separate legal entity. According to this principle, a company is treated
different person from its members which limits the liabilities of the members (Bratton, & Sepe,
(2019)). According to the Company Act, 2001, it is provided that no member can be held
personally liable for the expenses and losses incurred by the members as agent of the company.
It is known as corporate personality which can be understood with the landmark case of Salomon
v. Salomon.
In the case of Salomon vs. A Salomon and Co. Ltd. [1897] AA 22, the judgement passed
in the case reflected that the company formed by Salomon was against the intent of the
Companies Act, 1868. Together with this, he carried the business in the capacity of mere agent
of Salomon, who should be responsible for the debts incurred during the period of agency. A
company is an independent person with its own rights and liabilities and this can be proved with
lifting of corporate veil, if needed.
Therefore, DJ PP and Khan Chan can choose limited company which can reduce number
of risks so that profit can be increased.
Question 2
Every company enter into contract which are in the best interest of the company and all the
parties that are connected with its management or affected with the activities. Directors are the
agents of the company who form contracts on behalf of organisation by putting the common seal
as mentioned in s 126(1) of the Corporate Act, 2001. Furthermore, a principal is liable only when
the contracts are made by an authorised agent and within the scope of objectives mentioned in
the constitution. If a person acts outside the objects of the constitution, then it becomes a case of
ultra vires. However, this cannot be considered as the only reason for invalidating the contract
just because of it is beyond the objectives mentioned in the constitution.
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According to s 126 of Corporate Act, 2001, a company can form contracts by appointing
an agent who is duly authorised to act on behalf of the company. It is done by executing a
contract between the company as principal and directors as the agents. Any activity carried by an
agent is to be treated as the action done by the principal itself. In case of any issue or debt, the
company is to be held liable for the acts of the agent provided the actions are within the scope of
objects of the company. There are statutory rules which provide that the actions of an agent can
bind the principal as well as the outsiders only in specified circumstances. Furthermore, the
agency can be created in two types such as actual and apparent authority.
Actual authority refers to the situation when an agent enters into a contract on the
principal’s behalf. This binds the principal along with an outsider only when the contracts are
within the scope of the objectives as provided in the constitution. If the outsider and the principal
forms a contractual relationship, then their agent is not supposed to play any role in that (Bratton,
(2019). Such type of authority is given expressly by the principal. Power of attorney is one of the
examples of the same.
The other authority being apparent or ostensible authority which is defined as the
authority that is given by the principal because of the impression held by the outsider. In simple
terms, when the outsider is under an impression that a person is the agent of the principal and
make decision by relying on the contract. There is no requirement of an agreement between the
principal and agent under such an authority. There can be number of situations in which the
ostensible agency can be proved which gives rise to agency by estoppel.
In the case of National Australia Bank Ltd. v Sparrow Green Pty. Ltd., the judgement
given by the court rest of the directors in the company did not have actual authority to bind the
company. According to Corporate Law Act, 2001 it is provided that a person can act as an agent
only when such authority has been given to such individual. And it can be passed by either
through the constitution or by resolution of the board.
In the case of DJ PP and Khan Chan, the contract formed is invalid because there are
mainly two reasons for that, first being that the agency is not properly assigned to the
receptionist. The individual was working as a receptionist and placing the order is not a
responsibility of the receptionist unless and until authority to act as an agent is provided by the
directors. The second reason being that a contract is required to have common seal for its
execution. In this case, there is no such thing done. However, a contract can be formed without a
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common seal but the conditions of should be fulfilled which provides that two directors or a
director and a company secretary should sign the document.
Hence, it is a not a valid contract and the company is responsible for the any losses or
damages. There is no role or contribution of the receptionist to this (Pargendler, (2019)).
However, it can be ratified by passing the required resolution as given in the Corporate Law Act,
2001.
Question 3
The rule of indoor management provides that it is obvious for the outsiders to rely on the
appearance of the regularity which is related with the business of the company. There is no hard
and fast responsibility of the outsider to look into the internal matters of the company before
acting on any activity. According to s129, there is this right of the outsider to enforce the
contract regardless of the conduct of the people working in the company or for that matter
irrespective of the outsiders own conduct.
In the case of Royal Bank v Turquand [1856] 119 ER 886, the judgment passed in the case
mentioned that there is no such provision by which a contract can be avoided solely on the
grounds that directors have acted beyond the scope of constitution (Lin, & Goo, (2019)). This
case is about two directors who borrowed money on behalf of the company by using the common
seal of the company. however, no such authority was granted in the general meeting by passing a
resolution.
When the company received notice from the bank for the repayment of the amount so
obtained by the directors, the company denied to pay the amount of loan. The company
contended that bank should have acted on the basis of constructive notice of the constitution
which clearly present the lack of authority. On considering all the facts and issues, the court
provided that there is no such responsibility of the bank to ascertain whether the company has
passed any resolution for the same or not. Also, the bank can have all its contracts enforceable
with the company because of the indoor management rule. The passing of resolution is an
internal matter and bank does not have any responsibility to check whether such a resolution has
been passed or not.
In addition to this, if the individuals are carrying the activities in a way that appears to be
entirely consistent with the constitution, then those dealing with them are not affected by any
irregularities in the internal management of the company (Sjåfjell, & Taylor, (2019)). According
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to the Corporate Act, 2001, this rule is for the protection of the third parties which deal with the
companies.
In this case, it is provided that the contract for loan is absolutely binding on the company
because of the rule of indoor management. The company is liable to pay the amount of borrowed
loan because the contract is enforceable (Monaghan, (2019). Hence, there is liability of the
company to pay the amount as bank relied on the facts provided by the receptionist by being as
an agent.
CONCLUSION
From the above repot, it has been concluded that corporate law is useful in governing the
matters of the business. There are different legal provisions which provide lawful support to the
commercial transactions of the company. Furthermore, it is useful in protecting the company
from any sort of damages. Therefore, it can be used for the benefit of the company.
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REFERENCES
Books & Journals:
Mitchell, L. E. (2019). Progressive corporate law. Routledge.
Goshen, Z., & Hannes, S. (2019). The death of corporate law. NYUL Rev., 94, 263.
Bratton, W. W., & Sepe, S. M. (2019). Corporate Law and the Myth of Efficient Market
Control. Cornell Law Review, Forthcoming, 19-21.
Bratton, W. W. (2019). Game Theory and the Restoration of Honor to Corporate Law’s Duty of
Loyalty. In Progressive Corporate Law (pp. 139-183). Routledge.
Pargendler, M. (2019). The Grip of Nationalism on Corporate Law. European Corporate
Governance Institute (ECGI)-Law Working Paper, (437).
Lin, Y. H., & Goo, S. H. (2019). Corporate Governance in Hong Kong. Corporate Governance
in Asia: A Comparative Approach (United Kingdom: Cambridge University Press,
2019), 150-181.
Sjåfjell, B., & Taylor, M. B. (2019). Clash of Norms: Shareholder Primacy vs. Sustainable
Corporate Purpose. International and Comparative Corporate Law Journal, 13(3).
Monaghan, J. (2019). Corporate law: The Murray-Darling basin Royal Commission report: A
governance perspective. Governance Directions, 71(3), 166.
Jiang, Q., Fu, S., & Zuo, W. (2019, March). Religious environment and corporate social
responsibility and in China: does law exerts any effect?. In International Academic
Conference on Frontiers in Social Sciences and Management Innovation (IAFSM
2018). Atlantis Press.
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