Directors: Authority, Breach of Contract, and Duty to Shareholders

Running Head: Directors 1
Directors
Name of Student:
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Directors 2
Question 1
Part A
Issue
Priya’s Board’s appointment as Managing Director has expired and the Board has not
made a fresh appointment. However, Priya has continued to act as the company’s managing
director. Priya has entered a contract beyond the scope of her previous appointment and the
objects of the company. Is the failure by the Board to formally reappoint Priya has affected
her Authority as a Managing Director and to bind the company?
Law
Provisions of Corporations Act 2001
S 128
S 129
Cases to apply:
Hely-Hutchinson v Brayhead Ltd1
Equiticorp Finance Ltd v Bank of New Zealand2
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd3
Sunburst Pty Ltd v Agwater Pty Ltd4
Application
1 [1968] 1 QB 549
2 (1993) 11 ACLC 952
3 [1964] 2 QB 480
4 [2005] SASC 335

Directors 3
The courts have found existence of authority where a company has failed to formally
reappoint its officer and the officer has continued to exercise his/her under the previous
appointment as if the contract has not expired5. In Hely-Hutchinson v Brayhead Ltd6 the court
found existence of authority where the company failed to formally reappoint a Managing
Director whose contract had run out but continued to exercise the powers of a Managing
director. The managing director was found to have both express and implied authority to bind
the company. Equiticorp Finance Ltd v Bank of New Zealand7 had a similar holding. In that
case, a corporation’s officer was found to have authority despite contract of appointment
having expired. Priya, therefore, had both implied and express authority to bind the company
provided she acted within the terms of her previous appointment and the corporation’s
constitution.
Even where the officer has exceeded the authority of his/her appointment the
company may still be bound provided apparent authority can be imputed8. Freeman and
Lockyer v Buckhurst Park Properties (Mangal) Ltd9 discussed circumstances under which
apparent authority may be imputed into a relationship. The principal must have made a
representation to a third party to the effect that the officer has the kind of authority exercised,
it must be shown that reliance was placed on the representation of the principal by the third
party to the third party’s detriment. The officers need not to know about the representation. In
this case no representation had been made to Vineyard’s Pty Ltd and as such Priya lacked
apparent authority to bind the company. However, Vineyard can rely on the assumption
under ss 129 (1), (3) and (4)10 to assert Priya’s appointment and authority. This will depend
on whether they are entitled to the assumptions based on s 12811. A person is not entitled to
5 Roman Tomasic, Stephen Bottomley and Rob, Corporations Law in Australia (Federation Press, 2002) 215
6 [1968] 1 QB 549
7 (1993) 11 ACLC 952
8 Keith Owens, Law for Non-Law Students (Cavendish Publishing, 2001) 467
9 [1964] 2 QB 480
10 Corporations Act 2001
11 Corporations Act 2001

Directors 4
assumptions under s 129 where they knew or suspected defects in the assumptions, s 128 (4).
In Sunburst Pty Ltd v Agwater Pty Ltd12 it was stated that the knowledge or suspicion must be
actual and not constructive and the test for determining such knowledge or suspicion is
subjective. Seedy Vineyard believed that Priya exceeded her authority and acted beyond the
company’s objects. They actually knew the defects and cannot, therefore, rely on the
assumptions under s 129 of the Act.
Conclusion
OW is not bound by the contract based on the grounds that Priya lacked authority to
enter such a contract and Seedy Vineyards knew of the lack of authority.
Part B
Issue
Can the claim by Ted against the Company succeed where it is based on the articles of
the company constitution and not independent contract?
Law
Provisions of the Corporations Act 2001
S 140
Relevant cases
Eley v Positive Government Security Life Assurance Co Ltd13
Hickman v Kent or Romney Marsh Sheep-Breeders Association14
12 [2005] SASC 335
13 (1876) 1 Ex D 88
14 [1915] 1 Ch 881