Business Law: Corporate Liabilities & Director Roles under the CA 2001

This case study delves into two primary legal issues within the realm of Australian business law. The first issue examines whether ABC Ltd. can successfully claim a mortgage on land owned by Sailaway Pty Ltd., focusing on the validity of the mortgage given a potentially forged signature and prior knowledge held by ABC Ltd.'s manager. The analysis applies provisions of the Corporation Act 2001 (Cth), specifically sections 127, 128, and 129, alongside relevant case law such as Royal British Bank v Turquand and Northside Developments Pty Ltd v Register-General, to determine if the indoor management rule applies. The second issue addresses the eligibility of individuals to serve as directors of No-Tax Agents Pty Ltd, considering Conrad's wish to appoint his company and Marcia's criminal conviction. This part applies section 201B and 206B of the CA, determining that neither the company nor Marcia can be directors. Furthermore, it explores whether ASIC can prosecute Conrad for repeated company insolvencies under section 206F of the CA, even without a liquidator finding fault, ultimately discussing ASIC's power to disqualify directors in the public interest. The document is contributed by a student and available on Desklib, a platform with AI-based study tools for students.

Running Head: BUSINESS LAW
Business Law
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Question 1
Issue
The issue identified by going through the facts stated by the problem is that whether ABC ltd can
successfully claim the mortgage in relation to the land owned by Sailaway Pty Ltd which has
been mortgaged for getting a loan.
Rule
The issue which has been identified would be addressed by applying the relevant provisions of
the Corporation Act 2001 (Cth) which governs organizations in Australia.
It has been provided through the provisions of section 127 of the Act that a document in relation
to the company will only be entitled to be legally valid if it has been signed by at least two
directors of the company along with or without the common seal of thee company.
It has been provided through the provisions of section 128 of the Act that any person who is
dealing with the company has the right to rely on assumption which are provided in section 129.
It is provided through the provisions of section 129(5) of the Act that any document which
appears to have been signed as per the provisions of section 127(1) has been executed legally. In
addition as per the provisions of section 129(6) of the Act any document which appears to have
been fixed with the common seal as per the provisions of section 127(2) has been executed
legally.

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However, the provisions of section 128(4) of the CA specifies that an assumption is not entitled
to be made under the provisions of section 129 if the person making the assumption suspected or
knew at the time of the dealing that the assumption is not correct. The provisions have been
discussed in the case of Sunburst Properties Pty Ltd v Agwater Pty Ltd and Soyfer v Earlmaze
Pty Ltd.
Under the provisions of section 129(3)(b) it has been stated that a person has the right to assume
that a person who is held as the agent or officer of the company has the power to discharge duties
which are customarily exercised by the type of agent in any other company.
Further in the case of Royal British Bank v Turquand (1856) it has been stated by the court that
any outsider who is linked in a dealing with the company has no obligation to make an inquiry
whether the rules which are provided in the internal management of the organization have been
acted in accordance with.
Another case which dealt with similar issue is the case of Bank of New Zealand Pty Ltd v Fiberi
Pty Ltd. The directors did not comply with the requirements of the constitution and executed the
document through a fake company secretory for mortgage. The court held that the transaction
was valid as per the assumptions under section 129(1) of the CA.
However an exception to the famous indoor management rule had been provided in the case of
Northside Developments Pty Ltd v Register-General (1990) 170 CLR 146. In the given situation
it was held by the court that when the third party does not make an inquiry which would have
been made customarily or normally by any person in the same position the doctrine of indoor
management rule can be denied to such person.
Application

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It has been provided through the scenario that Bill and Alan are the directors and shareholders of
the company Sailaway. Alan who is also the chairman of Broadacres has obtained a loan by
putting a land owned by Sailaway on Mortgage. The Loan has been obtained from a financing
company called ABC Finance Ltd. He has managed to secure a loan of $1.5 million from ABC
to be directed to Broadacres. However in the given situation Broadacres has failed in business
and is unable to pay the loan and ABC want to exercise their right on the land which had been
mortgaged by Alan. It has been stated by the provisions of section 129(5) that where a document
appears to have been signed by two directors of the company as per section 127(1) it can be
assumed that the document is duly executed. It has also been stated by the above discussed cases
of Royal British Bank v Turquand that when a third party deals with the organization it can
assume that all internal regulations of the organization has been complied with. In addition the
rule had been discussed by the case of Bank of New Zealand Pty Ltd v Fiberi Pty Ltd where the
court held the contract valid even when it was signed by a fake secretary. It has been provided
through the scenario that Alan has forged the signature of Bill, however through section 129(5),
127(1) and the cases of Bank of New Zealand Pty Ltd v Fiberi Pty Ltd and Royal British Bank v
Turquand it can be stated that ABC has the right to assume that the document has been signed
properly and all internal rules of the company has been complied with. Evidently, it can be stated
that the mortgage deal between Sailaway and ABC is binding and valid.
However it has also been provided in the scenario that, Tom who was the manager of ABC had
the knowledge that Sailaway does not deal with real estate transactions through the earlier
dealings which took place between them. It had been provided through the case of Northside
Developments Pty Ltd v Register-General that there is a specific situation when the indoor
management rule can be exempted. In this case it was held by the court that when the third party

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does not make an inquiry which would have been made customarily or normally by any person
in the same position the doctrine of indoor management rule can be denied to such person.
Further it has been stated through the provisions of section 128(4) of the CA that an assumption
is not entitled to be made under the provisions of section 129 if the person making the
assumption suspected or knew at the time of the dealing that the assumption is not correct. Thus
as Tom had knowledge in relation to the suspicious nature of the transaction it was his duty to let
his close friend who executed the transaction know about the suspicious nature of the dealing as
a reasonable person. Thus as per the provisions of the section 128(4) and the Northside case the
indoor management rule would not be applicable in the situation and the transaction is not valid.
Conclusion
ABC cannot exercise their mortgage right over the land owned by Sailaway.
Question 2(a)
Issue
The issue which has been identified in relation to the situation is that who can be appointed as
the directors No-Tax Agents Pty Ltd legally under the provisions of the CA.
Rule
It has been provided through the provisions of section 201B of the CA that in order to be a
director a person has to be a natural person (Not an artificial person as created by law eg private
compan) who has at least attained the age of 18 years. He must not have been disqualified by the

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provisions of the existing law from managing the affairs of a company. He must have provided
consent to work as a director under the provisions of section 201D of the CA.
The general definition of a director signifies him or her as a person who has been employed as
the officer of the organization and has the obligation of managing the business and being the
member of the board.
Under the provisions of section 206B as person is automatically disqualified from being the
director of a company if it is found that they have been adjudged guilty in a criminal offence or
have been declared bankrupt. As per section 206B (1) (a)(1) a person cannot be a director if he is
convicted of an offence in relation to decision making which affects the substantial or whole part
of business. Under section 206B (1) (a)(2) a person cannot be a director if he is convicted of an
office in relation to decision making which affects financial standings of the company. Under
section 206B (1) (b)(2)a person cannot be director if he has been convicted of an offence
involving dishonesty and imprisonment of 3 months or more. The disqualification period as per
section 206B (2) (a) starts on the day of conviction and ends 5 years after the day. Where there is
imprisonment the disqualification period under 206B (2) (b) is five years after getting released.
Application
The wish of Conrad that his home company should be appointed as a director of the company in
context cannot be executed. This is because it has been specifically provided through the
provisions of section 201B that a director has to be a natural person and as a company is an
artificial person it cannot be a director.
Further Marcia will also not be eligible for being the director of the company under the
provisions of section 206B. This is because it has been provided through the section that as

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person is automatically disqualified from being the director of a company if it is found that they
have been adjudged guilty in a criminal offence or have been declared bankrupt. Here Marcia is
serving imprisonment for falsifying company account and still has a five month period left. It has
been provided through (1) (b)(2)a person cannot be director if he has been convicted of an
offence involving dishonesty and imprisonment of 3 months or more. Thus Marcia is
disqualified. Further where there is imprisonment the disqualification period under 206B (2) (b)
is five years after getting released. Thus Maria can only be the director after 5 years of being
released.
Conclusion
Both the company and Marcia cannot be the directors of the company
Question 2(b)
Issue
The issue which has been identified in this section is that whether Conrad can be prosecuted by
ASIC for making 2-3 companies insolvent even where the liquidator did not find any fault on his
part.
Rule
It has been provided through the provisions of section 206F of the CA that ASIC has the power
to disqualify a person from being the director of a company. The period for which such person
can be disqualified as the director is a period of 5 years. Under section 206F (1)(a) ASIC has the
right to disqualify a person from managing the company if within a period of 7 years
immediately before the notice under section 206F(b)(i) is issued the person was the officer or

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director of two companies and within 12 months of the person ceasing to be the director the
company has entered liquidation and a notice in relation to the inability of the company to pay its
debts have been provided by the liquidator under section 533(1)
Under section 206F(b) the ASIC notifies the person why he should be disqualified and gives
them an opportunity to be heard. Under 206F(c) if the ASIC is satisfied that it is justified to
remove the director he is removed. The ASIC also considers public interest under 206F(2)(b)(ii).
Application
It has been provided in the scenario that Conrad’s family company has been subjected to
liquidation. The liquidator has not found any proof that there has been fault on the part of the
director. However ASIC has a record that over the last 9 months Conrad has a similar record
with two other company. In the situation it has been stated by section 206F of the CA that ASIC
has the power to disqualify a person from being the director of a company. Under section 206F
(1)(a) ASIC has the right to disqualify a person from managing the company if within a period of
7 years immediately before the notice under section 206F(b)(i) is issued the person was the
officer or director of two companies and within 12 months of the person ceasing to be the
director the company has entered liquidation and a notice in relation to the inability of the
company to pay its debts have been provided by the liquidator under section 533(1). Thus as the
same situation has happened with Conrad and liquidator has provided notice under section
533(1), the ASIC may suspend Conrad for managing the corporation for a period of 5 years.
While doing so it will consider position of Conrad and public interest.
Conclusion
ASIC may suspend Conrad for managing the corporation for a period of 5 years

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