Law Case Study: Agency, Director's Duties, and Financial Obligations

This case study analyzes a scenario involving Jack, the owner of a bakery, and Michelle, his chef manager. The first issue examines Jack's liability for an invoice based on the principle of agency, focusing on ostensible authority. The analysis explores the legal concept of agency, distinguishing between actual and ostensible authority and applying it to the situation where Michelle, acting as Jack's agent, orders supplies from Glitzy Touch. The second issue addresses Michelle's potential breach of director's duties and personal liability, referencing the Corporations Act 2001 and focusing on Section 180 and 588G regarding care, skill, and insolvent trading. The case study provides a detailed legal analysis, applying relevant case law to determine liabilities and offering suggestions for Jack to mitigate future risks, particularly through the use of disclaimers and clarifying Michelle's authority.

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Contents
Solution 1....................................................................................................................................................2
Issue 1(a).....................................................................................................................................................2
Relevant Law...........................................................................................................................................2
Application of Law..................................................................................................................................3
Conclusion...............................................................................................................................................4
Issue 1(b).....................................................................................................................................................5
Solution 2....................................................................................................................................................5
Issue 2(a).....................................................................................................................................................5
Relevant Law...........................................................................................................................................5
Application of Law..................................................................................................................................7
Conclusion...............................................................................................................................................8
Issue 2(b).....................................................................................................................................................8
Reference List...........................................................................................................................................10

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Solution 1
Issue 1(a)
Is Jack liable for the payment of the invoice?
Relevant Law
When any two parties share the relationship of a principal and an agent, then, they are governed
with the laws of agency. An agency is established amid the parties when any person (as an agent)
is hired by the principal in order to carry out functions on behalf of the principal with the third
parties. Any contractual relationship which is carried out by the agent with the third parties has a
binding effect on the principal. When any agent acts for the principal, then, an indirect
association is established amid the third party and the principal, wherein, the third party can hold
the principal liable for the acts that are carried on but the agent within his authorities. No
principal can deny the existence of such acts/omissions which are carried on by an agent within
the authority. (Turner 1999)
In the leading case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964],
the courts have established that the authority that is presumed by the agent from the principal are
normally of two kinds, that is, actual and ostensible authority. (Gibson and Fraser 2013)
An actual authority is said to be possessed by the agent when the principal directly confers or
delegates authority to him. This can be done either expressly or impliedly. An actual express
authority is granted to an agent when the principal directly himself confers or delegate power to
the agent to represent him in front of the third parties. The grant of the authority is very direct,
that is, either by words, or by acts, or in written form. The only requirement is that the delegation
is direct and expressed and is held in the leading case of Construction Engineering (Aust) Pty Ltd
v Hexyl Pty Ltd (1985). But, an actual implied authority is an authority that is assumed by the
agent impliedly, that is, these are the authority that are assumed by the agent in order to comply
with the express authorities, that is, they are derived from the express authority itself and is held
in the leading case of Hely-Hutchinson v Brayhead [1968]). Both, these authorities are actual
authorities that are delegated to an agent by the principal thereby making the principal personally
liable for the acts or omissions undertaken by the agent within such authority.

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Now, there is yet another authority that can be possessed by an agent and is called apparent
authority or the ostensible authority. An ostensible authority is present and is possessed by an
agent when the principal makes any kind of representation which portrays or gives a feeling to
the third party that the agent is the delegator or the authorized representor of the principal. In
such authority if any act or omission is carried out by an agent with the third party then such act
or omission is binding on the principal and the third party has all the authority to sue the
principal for the compliance of such act or omission and is held in the leading case of Panorama
Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971]. In the leading case of
Goldberg v Jenkins (1889), the apparent or the ostensible authority is established and it was held
that in order to make an agent authorised and to assume powers to bind the principal by his acts
or omissions, it is necessary that there should be some representation made by the principal in
front of the third party which makes the third party believe that the agent is the authorized
representor of the principal and any act under such authority will grant power to the third party to
sue the principal. (Collins 2003)
Application of Law
Le Petit Gâteau’ is owned by Jack. He runs the bakert café as a sole proprietor. The bakery sells
freshly baked artisan bread and a range of pastries to patrons. Michelle is appointed as a chef
manager at the bakery.
Now, there are several responsibilities that are allocated by Jack to Michelle expressly. Thus, the
express authority that is allocated to Michelle includes:
i. He is mainly authorized to supervise everything that moves out of the kitchen.
ii. He is in full control of all the culinary assistants and the chefs.
iii. He discussed the purchase of the supplies, mixers and bake wares with Jack.
Now,
Michelle discuses regarding the purchase of the supplies, mixers and bake wares with Jack and it
is after the discussion, Jack suing off the orders internally and then it is Michelle who then
dispatches the orders to the suppliers. Thus, it is Michelle who is dealing with the suppliers
directly on behalf of Jack.

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Now, Glitzy Touch is one of the suppliers of Jack. It is in regular dealing with Michelle on
behalf of Jack. After securing orders from Michelle it sends invoices to Jack.
Now, it is submitted that there is ostensible authority that can be possessed by Michelle on behalf
of Jack. It is submitted that Jack has made a representation in front of Glitzy Touch that Michelle
is the authorized representative of Jack and is thus permitted to secure orders on behalf of Le
Petit Gâteau’. Jack by sending the orders through Michelle has made the outsider believe that
Michelle is authored to seek orders. This representation is made by Jack on his own. The
delegation of authority on Michelle is direct. Glitzy Touch is giving orders to Michelle on the
basis of the said authorization only. There are no reasons to make Glitzy Touch believe that
Micelle is not permitted to seek orders on behalf of Jack.
It is thus submitted that in the month of November when Jack was on a work trip to Montreal, an
offer is received by Michelle from Glitzy Touch to purchase a supply of edible gold leaf sheets at
less than half of the usual cost. The offer was found to be very attractive by Michelle and the
application of the gold leaves on the cakes and chocolates might be very beneficial in the festive
season. Michelle is also aware that Jack was discussing him with the challenges that they might
face in the season. Michelle was not able to reach Jack and thus confirms the order to Glitzy
Touch.
Now, it is submitted that Glitzy Touch’ is in regular tough with Michelle and seek order from
him on behalf of Jack. This authority is granted to Michelle by Jack himself and Glitzy Touch’ is
aware of the same. Thus, there is clear presence of ostensible authority on the part of Michelle
and the order of $5,000 worth of supplies that is taken by Michelle with Glitzy Touch’ on behalf
of Jack is valid in nature.
The order is considered to be valid as Glitzy Touch’ is not aware of any defect in the authority of
Michelle, that is, Jack has not expressly allowed Michelle to confirm the order to the gold leaves
with Glitzy Touch.
Conclusion
Thus, the order of $5,000 worth of supplies by Michelle with Glitzy Touch’ is valid as the same
is carried under the ostensible authority that is assumed by Michelle on behalf of Jack. Thus,
Jack cannot refuse to pay the invoice that is raised by Glitzy Touch’.

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Issue 1(b)
What are Jack’s options regarding Michelle’s behavior and to avoid this problem in the future?
Provide ONE possible suggestion and give reasons for your answer?
As Michelle is the agent of Jack and he has possessed ostensible authority to bind Jack by his
acts and omissions. But, it is submitted that Michelle has possessed this authority and because of
such authority has made a contractual relationship with Glitzy Touch. But, Jack has faced
setbacks as he has not signed the order form to secure purchases from Glitzy Touch’. But, the
contractual relationship is held to be binding as Glitzy Touch’ is under the impression that
Michelle is authored to bind Jack by his actions.
Now, in order to recover from the behaviors of Michelle and to avoid any kind of future
problems it is necessary that Jack must make an express declaration in front of Glitzy Touch’ and
specifies that Michelle is only authored to bind Jack by his actions provided the order forms must
be signed by Jack.
Also, Jack can provide a disclaimer wherein he can specify that Michele is only authored to do
certain acts and beyond such acts Jack is not liable to make good any loss that is suffered by any
third party inclusive Glitzy Touch. Thus, it is suggested to Jack that he must use declaimers and
restrict the authority of Michelle and prevent him to undertake tasks which are only authorized
him to do.
Solution 2
Issue 2(a)
Whether Michelle has breached any statutory director’s duties and is personally liable for the
debt?
Relevant Law
The Corporation Act 2001 is the governing force that guides the acts and working of any
company. As per Salmon v Salomon & Co Ltd (1897) once a company is formulated then it is a
separate legal entity in law and the acts of the company are only carried out in the name of the
company. But, since a company is not a natural being and does not have mind of its own, thus, it
requires directors for its working. Section 9 of the Corporation Act 2001 submits that a person is

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said to be the director of the company provided he is complying with the acts and duties that
exists with the position of a director. Thus, it is not the position of a director that makes him a
director, rather, it is the acts and duties comply with by a person which makes him a director. So,
a de-facto director and a shadow director are also called the director of a company and he must
also comply with the duties of a director.
The various duties that are imposed upon a company director include: (PWS, 2013)
i. Section 180 of the 2001 Act – Section 180 (1) submits that when a director is
complying with his directorial duties then he must take all adequate care and skill
before complying with such duties. As per section 180, the care and skill of a director
must be judged as what a reasonable prudent man would have acted in the similar
situation. As per ASIC v Adler and Ors (2002) a director can protect him provided he
can prove that his acts are based on sound decision making, expert advice, etc.
ii. Section 588G of the 2001 Act – Section 588G of the Act submits that no company
director must indulge in any act which results in making the company insolvent and is
held in the leading case of Woodgate v Davis (2002). It is the duty of the director that
he must make sure that the company must not indulge in any acts which raises the
debt of the company which the company is not able to pay and is held in the leading
case of Walker v Wimborne (1976). Any company director is held to be liable for
incurring insolvent trading provided there are few essential requirements are comply
with which includes:
a. As per Hall v Poolman (2007), when the debt is raised by the company, then, the
same is raised by the director of the company;
b. As per Morley v. Statewide Tobacco Services Ltd [1993], it is necessary to prove
that there are possibilities that because of the incurrence of the debt the company
will be insolvent or the company was already insolvent when the debt is raised by
the director of the company;
c. As per Power v Traveller (2005), it is necessary that the company is not able to
set off its debts.
When all the element are comply with then the director is held to be liable for incurring debt and
trading insolvent and so there is breach of section 588G of the Act. However, as per
Commonwealth Bank of Australia v Friedrich (1991), if the director can prove that he made all

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the resemble efforts to make sure that the company does not become insolvent and that his acts
are based on expert advice then the director is not held to be liable for insolvent trading and this
defense is held in section 588H of the Act. Also, as per Metropolitan Fire Systems Pty Limited v
Miller (1997) if the director is of the view that the debt raised by him will not result in the
insolvency of the company then there is no violation.
But, if any director is found to be in violation of his duties under section 588G of the Act then he
can be impose with civil penalties of $220,000, he can be disqualified under section 206C of the
Act and can also be asked to pay compensation under section 1317H of the Act. Apart from civil
penalties, criminal penalties can be also be imposed if the acts are carried with dishonest and
reckless actions as can be imposed with an imprisonment of five years and a fine of $340,000.
(Bevan 2013)
Application of Law
Micelles decide to leave the service of Jack and thus she was offered a position as director for a
new catering company based in Geelong, ‘Le Petit Plat Pty Ltd.’ the main roles and
responsibilities that are allocated to Michelle is that she was held to be the executive managing
director of the company and has is the director of the catering department and is also part of the
board of directors of the company.
Now, Michelle is possessed with all the directorial duties that are made part of the Corporation
Act 2001. However, during the first month of being a director took loan of $600,000 from Best
Bank Limited on behalf of the company. The loan was taken so that Michelle signs a million
dollar contract to purchase ten delivery vehicles, which are weather proof and refrigerated, and
thus suitable to transport perishable foods safely. But, the loan was taken by Michelle without
reading the financial reports of the company. The reports have decided that the company is in
financial difficulties.
Now it is submitted that there are several directorial duties that are violated by Micelles.
It is submitted that there is breach of duty of care and skill as Michelle has taken loan from the
bank without seeking the financial reports of the company. The director must act with all care
and diligence before taking any decision on behalf of the company and non- compliance of the
same is nothing but the breach of section 180 of the 2001 Act. The duty is said to be breached

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because the acts of Michelle is not as what a prudent man would have acted in the similar
situation.
Michelle is also liable for violation of section 588G of the Act that is, incurring insolvent trading
of the company while being the director of the company. it is submitted that Michelle is the
director of the company and he took loan of $600,000 from Best Bank Limited on behalf of the
company. Thus a debt is raised upon the company by Michelle when he was the director of the
company. The company was already in financial difficulties before the debt is taken and because
of the new dent raised by Michelle, the company is not in the position to pay off the debt. Thus,
there is clear violation of section 588G of the act and Michelle is held to be liable for insolvent
trading. Michelle cannot take the defense of section 588H as his acts are not carried out after
reviewing the financial reports of the company or by seeking any advice.
So, Michelle must face the consequences and can be disqualified from his position and can also
be impose with fine and compensation. If the acts are carried out with reckless intention then he
can also be imposed with imprisonment.
Conclusion
It is thus concluded that Michelle is found to be in violation of section 180 and section 588G of
the corporation act and he can thus be imposed with both the civil and criminal consequences.
Issue 2(b)
‘Le Petit Plat’ is seeking further advice. What changes could Le Petit Plat’ make with respect to
the operation of their businesses, in particular regarding the personal risks of a director? Provide
ONE example and explain your answer in particular how it would have helped managing the risk
better in our scenario.
The corporation Act 2001 is the enactment that guides the working of a company. Every
company must either run by its constitution or by the replaceable rules or by both. Thus, one of
the options that is available by the company is that it can alter the constitution of the company
and therein restrict the liability of the directors of the company. As per section 136 of the Act the
constitution of the company can be altered by passing a special resolution with seventy five
percentages of the votes of the shareholders and the changes are binding on company.

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Thus, when the liability of Michelle is restricted then the risk of the director of the company can
be restricted in nature.
Also, in order to manage the risk in the given scenario, it is important that objects must be set out
in the constitution of the company as per section 125 of the act. an object can be made part of the
constitution wherein the power of the director to secure finance from the debt can be curtailed,
thereby, the risk of the company can be minimized. If by using section 125 of the act, the power
of Michelle is curtailed to secure finance, then the task can be managed better in the given
scenario.
Thus, the company has the power to manage the liability of Michelle and to manage the risk of
the company by alerting the constitution of the company and by changing the object clause of the
company.

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Reference List
Books/Articles/Journals
Caffrey, B 1991, Guidebook to Contract Law in Australia, CCH Australia.
Collins, C 2003, The Law of Contract, Cambridge University Press.
Gibson, A and Fraser, D 2013, Business Law 2014, Pearson Higher Education AU.
Turner C 1999, Australian Commercial Law, LBC Information Services.
Case Laws
ASIC v Adler and Ors [2002] NSWSC 171.
Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 59 ALJR 393;
Commonwealth Bank of Australia v Friedrich (1991),
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Goldberg v Jenkins (1889) 15 VLR 36;
Hall v Poolman (2007),
Hely-Hutchinson v Brayhead [1968] 1 QB 549.
Metropolitan Fire Systems Pty Limited v Miller (1997);
Morley v. Statewide Tobacco Services Ltd [1993],
Power v Traveller (2005),
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.
Salmon v Salomon & Co Ltd [1897] AC 22.
Walker v Wimborne (1976) 137 CLR 1.
Woodgate v Davis (2002) 55 NSWLR 222
Online material
Bevan C (2013) A guide to directors Duty in Australia
<http://www.findlaw.com.au/articles/32/directors-duties.aspx >.

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PWS (2018) A guide to directors’ duties and responsibilities for non-listed public companies and
proprietary companies in Australia
<http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf>.