ACC220 Law of Business Associations Assignment: Hypothetical Analysis

This assignment solution addresses two hypothetical scenarios related to Australian business law. The first question examines the application of the Corporations Act 2001 concerning the authority of company representatives, focusing on issues like the Indoor Management Rule, object clauses, and the enforceability of contracts. It analyzes a situation involving a company, its directors, and a solicitor, and assesses the validity of a contract entered into by a managing director exceeding their authority. The second question delves into the duties of company directors, specifically concerning potential breaches of duty under section 181 of the Corporations Act and related sections. It involves a scenario where directors of two related companies are alleged to have prioritized the interests of one company over another, and the analysis considers potential penalties for such breaches, including disqualification. The solution references relevant case law and legislation to support its arguments.

Contents
QUESTION 1..................................................................................................................................2
QUESTION 2..................................................................................................................................3
Reference List..................................................................................................................................5

QUESTION 1
The solution deals with the application of section 125, section 140 and the authority of the
representative of the company.
Miles and Patricia are operating farm and in 2014 they decided to involve their children. So
Avocado Smash Pty Ltd (“AS”) is incorporated and the farm is transferred to AS. Miles and
Patricia are the directors, Alicia (daughter and Chief Financial Officer) and Leighton (Managing
Director from 1st January 2015 for 3 years). Coral (solicitor) drafted the constitution.
An object clause was introduced which limited the activities to organic farming of avocadoes.
Also, Coral is the solicitor and can only be removed for misconduct. He is given 6% shares and
is thus the minority shareholder. Nuala was appointed as Company Secretary (CS).
The Corporation Act 2001 is the guiding force of the company incorporated in Australia. As per
section 124, the legal status of a company is distinct and separate1. It requires officers for its
working. A director is the officer appointed at the said post and includes all person who are
carrying the acts of a director2. As per section 198C, a Managing Director is responsible for
carrying day to day activities s of business.3
Now, Leighton was acting as MD from 2018, thus, he is the de facto manager.
The first concern that was raised is whether AS is bound by the contract with Build Em
Architects considering that Leighton has exceeded his authority?
In company law, directors are authored to represent the company. The power can be granted to
the directors actually or impliedly4 or ostensibly5. When the agents act outside their authority and
enters into contractual relationship with outsider, then, if the outsider is acting with good faith
then the acts are binding under Indoor Management Rule6.
1 Salomon v Salomon & Co Ltd [1897].
2 Grimaldi v Chameleon Mining NL [2012] FCAFC 6.
3 Julie Cassidy, Concise Corporations Law, (Federation Press, 2006).
4 Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964])
5 Stephen Judge, Business Law, (Macmillan Education UK, 2009). Hely-Hutchinson v Brayhead [1968].
6 Royal British Bank v Turquand (1856); Crabtree-Vickers Pty Ltd v ADMAA Co Pty Ltd (1975).

As per section 128(4), assumptions under section 129 can be raised by outsider if acting in good
faith. As per section 127, if the document is signed by one director and CS, then, it can be
assumed that the officer has the required authority as per section 1297.
Now, Leighton is only allows to undertaken transactions up to $50,000. Beyond that board of
approval is required. He appointed Nuala as CS and solicitor. In 1st August, Leighton entered into
contract with Build Em Architects (BEZ) @ $150,000. The contract is signed by Leighton and
Nuala.
The contract with BEZ is valid as the document is signed by the MD (Leighton) and Nuala (CS)
and thus BEA can rely on section 129 assumptions and IMR provided it is acting in good faith.
Now, Whether the agreement by Leighton is considered to be in breach of the objects
clause?
As per section 125, the company must act as per the provisions of the object clause. But, in order
to avoid suffering to outsiders, as per section 131, the acts are not considered to be ultra virus
even if they are outside the object clause8.9
So, the contract by Leighton with BEA is outside the object clause, but as per section 31 such
acts are valid and enforceable.
Now, on 10th of August, Leighton notified Coral that her services are not required.
Now, whether Coral can enforce the clause appointing her as CS and what remedy is
applicable.
As per section 140, a contract with the officers is enforceable by the company with members and
vice versa. Thus, a member can sue the company provided his member’s rights are violated10.11
7 Petri Mäntysaari, Comparative Corporate Governance: Shareholders as a Rule-maker, (Springer Science & Business Media,
2005).
8 Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444.
9 David Ferguson, The Statutory Contract, 2013, <
http://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract>.
10 Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881.
11 Tomasic, et. Al, Corporations Law in Australia, Federation Press.

So, when Leighton terminated the service of Coral, then, her member’s rights are not violated.
So, she cannot sue the company as per section 140. She can seek remedy for breach of contract.
QUESTION 2
The solution deals with the duties of the director.
Great Games Ltd (GG) manufactures/sells outdoor play equipment for adults. Zak, Taylor and
Abdullah are directors. GG owns 60% of the shares in Great Adventures Ltd (GA) (
Market adventure packages). Zak, Taylor and Abdullah also sit on the board of GA along with
two independent non-executive directors (Bethany and Chris). These two companies advertise
their products together
The main issue that arose is whether Zak, Taylor and Abdullah have breached their
directorial duties (section 181 o other equivalent duties) towards GA, if yes then what are
the penalties?
A company is distinct and requires directors for its operations12. The directors are imposed with
several duties13.
Section 181 submits that the directors/officers must act with good faith securing the company
interest and for proper purpose14. Non compliance of registration of share transfer is breach of
section 181. The test is objective and consider from the point of the court15.
As per section 191-195, the directors must avoid clash of concern and gave preference to the
interest of the company over their own interest16.
As per section 182-183, no company director must abuse his position and information for his
own gain at the loss of the company.17
As per section 180, the directors must act with care and diligence. If inadequate advice is
furnished knowing that the shareholder is taking heed of the advice then it is violation of section
18018.
12 Salomon v Salomon & Co Ltd [1897].
13 Julie Cassidy, n3.
14 Australian Metropolitan Life Assurance Co Ltd v Ure (1923)
15 The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008]; ASIC v Adler [2002].
16 Aberdeen Railway Co v Blaikie Bros (1854).
17 R v Byrnes (1995).
18 Brunninghausen v Glavanics (1999).

Violation of the duties might result in disqualification of director (section 206B), fines and
compensation. If the breach is reckless then jail of 5 years can be imposed.
Now,
GG is in financial difficulties and is not able to pay the Bank. on 20th July 2018, board meeting
of GA was carried out wherein it was decided that GA will gave loan to GG so that bank
payments can be done. The loan is granted on the note that it is in best interest of GA as if there
is failure of GG then it will hamper the reputation of GA.
It is submitted that Zak, Taylor and Abdullah are the directors of GG and GA both. it is
submitted that Zak, Taylor and Abdullah acted without good faith and they thought of their own
infest over the interest of GA. Bethany and Chris were right as the grant of loan was to protect
their the reputations of GG and not to bring any reputational gain to GA. Thus, there is breach of
section 1181 and section 191-915. Also, the acts of Zak, Taylor and Abdullah are not in good
faith and they used their position and information for their own interest and thus there is breach
of section 181,m182-183.
So, they must be imposed with penalties and can be disqualified.

Reference List
Books/Articles/Journals
Cassidy, Julie, Concise Corporations Law, (Federation Press, 2006)
Judge, Stephen , Business Law, (Macmillan Education UK, 2009);
Tomasic, et. Al, Corporations Law in Australia, Federation Press.
Mäntysaari, Petri , Comparative Corporate Governance: Shareholders as a Rule-maker,
(Springer Science & Business Media, 2005)
Case laws
ASIC v Adler [2002] NSWSC 171;
Australian Metropolitan Life Assurance Co Ltd v Ure (1923)
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461.
Brunninghausen v Glavanics (1999) 17 ACLC 1247.
Crabtree-Vickers Pty Ltd v ADMAA Co Pty Ltd (1975) 133 CLR 72).
Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 481.
Grimaldi v Chameleon Mining NL [2012] FCAFC 6
Hely-Hutchinson v Brayhead [1968] 1 QB 549.
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881.
Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444.
Royal British Bank v Turquand (1856) 6 E&B 327;
R v Byrnes (1995) 17 ACSR 551.
Salomon v Salomon & Co Ltd [1897] AC 22.
The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008] WASC 239

Online Material
David Ferguson, The Statutory Contract, 2013, <
http://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract>.