LST5CCL Company & Commercial Law: Analyzing Agency and Director Duties

This case study solution addresses two primary issues related to company and commercial law. The first issue examines whether Glitzy Touch can sue Jack based on transactions made by Michelle, focusing on agency law, specifically actual and apparent authority. It concludes that Jack, through his representations, created apparent authority for Michelle, potentially making him liable. The second issue identifies statutory duties violated by Michelle, particularly the duty to avoid insolvent trading and the duty to act with care and diligence, referencing relevant sections of the Corporation Act 2001 and case law. It outlines the potential consequences Michelle could face for breaching these duties. Furthermore, the document provides suggestions for Jack to prevent similar situations in the future. Desklib is a platform where students can find similar solved assignments and past papers.

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Contents
Solution 1....................................................................................................................................................2
Issue 1(a).....................................................................................................................................................2
Applicable Law.......................................................................................................................................2
Application..............................................................................................................................................3
Conclusion...............................................................................................................................................4
Issue 1(b).....................................................................................................................................................4
Solution 2....................................................................................................................................................5
Issue 2(a).....................................................................................................................................................5
Applicable Law.......................................................................................................................................5
Application of Law..................................................................................................................................7
Conclusion...............................................................................................................................................8
Issue 2(b).....................................................................................................................................................8
Reference List.............................................................................................................................................9

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Solution 1
Issue 1(a)
Whether Glitzy Touch can sue Jack for the invoice which was raised based on the transaction
made amid Glitzy Touch and Michelle?
Applicable Law
The governing law that helps in evaluating the issue raised is agency law. There are three parties
who are involved in any relationship of agency. In the agency relationship, the principal
authorizes an agent to act for him with the outriders and the contracts that are made by such an
agent within his authority will bind the outsider and the principal. So, the agent’s acts within the
authority that is granted to him by the principal with the outsider will establish a contractual
relationship amid the outsider and the principal and is held in the leading case of Said v Butt1.2
Generally, the authority that is granted to an agent is divided into two broad categories3:
i. Actual authority of an agent – An authority is considered to be actual in nature when
the delegation of the authority is made by the principal in the name of the agent
actually. Actually implies that there should be some expression given by the principal
which portrays that an authority is delegated to an agent by the principal and is held
in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]. The
actual authority is normally or two kinds.
a. Express actual authority – When an express undertaking is used by the principal
for conferring authority on the shoulders of the agent, then, the authority that is
possessed by such agent is called express actual authority. The expression can be
in the form of words, gestures, textual etc and is analyzed in Construction
Engineering (Aust) Pty Ltd v Hexyl Pty Ltd4.
b. Implied actual authority – When an implied undertaking is used by the principal
for conferring authority on the shoulders of the agent, then, the authority that is
possessed by such agent is called implied actual authority. The authority is raised
1 Said v Butt (1920)
2 Michael Adams, Australian Essential Management Law, Routledge 1997.
3 Paul Latimer, Australian contract law, 2012.
4 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985).

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impliedly, that is, which is derived from an act which the agent is also permitted
to do and is rightly evaluated in the leading case of Great Northern Railway Co.
vs. Swaffield5 and ANZ Bank Ltd v Ateliers de Constructions Electriques de
Charleroi 6
ii. Apparent authority of an agent – Now, when no authority is possessed by the agent
actually by the principal, but, the authority is granted to an agent by the principal by
making a kind of representation in front of the outsiders, then, the authority that is
assumed by the agent is called apparent authority. In the leading case of
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd7it was held that
when the principal makes some kinds of overt acts/omissions which makes the
outsider believe that the agent does possess authority to bind the principal, then, any
act which is undertaken by the outsider with such an agent on the good belief that the
agent does have the authority then there is a valid contractual relationship amid the
parties under the apparent authority. So, the outsider can sue the principal as there is a
binding contractual relationship that is made amid the agent and the outsider8.
Application
Jack has appointed Michelle as his chef manager at Le Petit Gâteau’, the bakery café on which
Jack is the sole owner. When Michelle was appointed then he was granted with various
responsibilities and powers, that is, he was capable enough to direct the chefs and the other
assistant at the bakery, He is also capable to check everything that is moving outside and kitchen
and is also empowered to have discussions with Jack regarding the bake wares, mixes and
supplies. Now, as per Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd these are some of
the authorities that are given by Jack to Michelle directly and by giving an expression. Thus,
these are the actual express authorities that are possessed by Michelle.
Apart from this, Jack has also granted a kind of apparent authority to Michelle. Jack normally
signs the order forms and gives the same to Michelle who then takes the signed notes to Glitzy
Touch and secures the purchases from him. Thus, by doing these acts an overt representation is
made by Jack in front of Glitzy Touch wherein he asserts that Michelle has the authority to seek
5 Great Northern Railway Co. vs. Swaffield (1874) LR 9 Exch 132.
6 ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi (1966).
7 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
8 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971].

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purchases from Glitzy Touch. It was no where submitted to Glitzy Touch that the purchases are
granted only when the signed notes are provided by Jack.
Thus, there is a clear apparent authority on Michelle. Based on such apparent authority, Michelle
once placed an order of $5,000 worth of supplies to Glitzy Touch. The order was made without
any signed notes as Jack was out of town and at that time Glitzy Touch has offered Michelle to
purchase edible gold leaf sheets at much reduced prices. Michelle agreed with the offer without
seeking the permission of Jack. Now, this contract that is made amid Glitzy Touch and Michelle
is valid as the contract is made within the authority of Michelle which is assumed by him under
the representation made by Jack in front of Glitzy Touch.
Glitzy Touch can prove that the contract that is made by it is made with an honest belief that
Michelle is the authorized representative of Jack and has no knowledge that Michelle does not
possess that required authority that is needed to bind jack by his actions.
Conclusion
It is concluded that Jack by making a representation in front of Glitzy Touch that Michelle is the
person who purchases the supplies on behalf of Jack has raised an apparent authority in favor of
Michelle. Michelle within the authority that entered into a contract with Glitzy Touch and thus
the contract is valid and Glitzy Touch can sue Jack for Money provided Glitzy Touch ahs no
knowledge that Michelle has no authority and that contract by Glitzy Touch is made in good
faith and honesty.
Issue 1(b)
What actions must be taken by Jack to avoid the behavior of Michelle and to avoid the instances
in near future? A possible suggestion is provided.
Jack is aware that Michelle has entered into contract with Glitzy Touch without seeking his
permission. Jack is aware that these actions can be repeated by Michelle in near future, thus, one
of the possible suggestions that can be sued by Jack is that he must clarify Michelle that he is not
permitted to seek supplies and to accept offers from the suppliers unless and until the same is
approved by Jack himself. Thus, Jack can intentionally curb the authority of Michelle which was
indirectly assumed by him as apparent authority.

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Also, one of the suggestions that can be given to Jack is that he must bring a clarification to
Glitzy Touch and specifies that Michelle is not permitted to accept the offers that are given by
Glitzy Touch. By giving such a declaration Jack will bring in the notice of Glitzy Touch that
Michelle has no authority to bind Jack by entering into any kind of contractual relationship with
Glitzy Touch.
These are some of the suggestions which are given to Jack and which he must use in order to
curb the behaviors of Michelle and avoid any kind of future risks.
Solution 2
Issue 2(a)
What are the various statutory duties that are violated by Michelle and what are the
consequences that can be faced by Michelle because of such breach?
Applicable Law
If any person wants to operate his business by way of a company then it is necessary that the
business must be incorporated as per the guidelines issued by the Australian Securities and
Investment Commissions and as per the provisions of the Corporation Act 2001. Once a
company is formed then it is an independent person in law. In the leading case of Salmon v
Salomon & Co Ltd9 the court held that when any company is formed then it possess the feature
of a separate legal entity, perpetual succession, limited liability, can sue on its own, enter into
contract etc.
The separate legal personality of a company signifies that the company is in itself capable to
make contracts and any act that is undertaken by the company is by the company only. The acts
of the company are carried out with the help of the officers and directors of the company. Any
person who is undertaking the acts of a director is considered to be the director of the company
as per section 9 of the Corporation Act 200110.
There are several duties that must be furnished by a director. Two of the most prominent duties
include, the duty to avoid insolvent trading and the duty to act with all care and diligence.
9 Salomon v A Salomon and Co Ltd [1897] AC 22
10 Shafron v ASIC [2012].

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The duty to avoid insolvent trading – the duty to avoid insolvent trading is made part of section
588G of the Corporation Act 2001. The section simply submits that if any company director is
found to be involve in insolvent trading of the company, then, is guilty of violating section 588G
of the Corporation Act 2001 and thus must face the consequences. The concept of section 588G
was rightly established in the leading case of Woodgate v Davis11. In the leading case of
Metropolitan Fire Systems Pty Ltd v Miller12, it was held that it is one of the paramount duties of
the company director that any acts of him which results in the insolvency of the company must
be avoided on highest basis and every attempt must be made by the director to avoid any
situations which results in the incurrence of the insolvent trading of the company.13
Now, a company director is considered to have violated section 588G of the Corporation Act
2001 provided that there is some liability or debt that is raised by the director of the company14.
When the debt is raised then the director must hold the position of the director. Also, it is
because of the raising of the debt that there are chances that the company will run into
insolvency or the company might have been insolvent when the debt was raised and is held in
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)15. It is also necessary that the
company must not be in the position to pay off his debts16. When all the elements are comply
with then the director is considered to be in the violation of section 588G.
But, as per section 588H, a company can take a defense by proving that his acts are based on any
professional advice or he has taken the decision in good faith, etc. The director was held not
liable for insolvent trading as he has secured himself by proving the defense under section 588H
of the Act17.
The duty to act carefully and skillfully – As per section 180 of the Act, the acts of the director
must be carried on with all care and diligence. The duty of care and diligence must be carried on
like a prudent man in the given situation18.
11 Woodgate v Davis (2002)
12 Metropolitan Fire Systems Pty Ltd v Miller (1997)
13 Ryan Purslowe, Decisions In The Twilight Zone Of Insolvency - Should Directors Be Afforded A New Safe Harbour? , 2011, <
http://www.austlii.edu.au/au/journals/UNDAULawRw/2011/5.pdf>.
14 Hall v Poolman (2007).
15 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008).
16 In Hymix Concrete Pty Ltd v. Garrity (1977) & Queensland Bacon Pty Ltd v Rees (1966).
17 Commonwealth Bank of Australia v Friedrich (1991).
18 State of South Australia v Marcus Clark (1996) 19 ACSR 606.

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The non compliance of the directorial duties might result in the imposition of fines,
compensation and disqualification of the directors. If the violation of the duties is reckless then
fines and imprisonment can also be imposed on the defaulting directors.
Application of Law
Michelle resigns from the bakery of Jack and joins Le Petit Plat Pty Ltd Company on the post of
a company director. Michelle is controlling the catering part of the company. She was also made
part of the board wherein she was taking part in the decisions, however she never went to the
financial reports of the company and all the decisions are taken without analyzing the financial
reports of the company.
After taking the post of the director of the company, Michelle took a loan of $600,000 from the
Best Bank Limited. The loan was taken mainly because to enter into contract for the purchase of
vehicles in order to transport the perishable goods safely. The contract was made by Michelle
without taking any heed to the financial reports of the company. If Michelle would have taken
heed of the financial reports of the company, then she would have been area that the financial
position of the company was not sound in order to sustain the debts that are raised by Michelle.
At this stage, it is submitted that there is clear violation of section 588G of the corporation Act
2001 on the part of Michelle. Michelle was the director of the company when she took the loan
of $600,000 from the bank. Further, the company was already not in financial sound position
when the loan was taken. Also, because of the raise of the liability by Michelle, the company is
in the position to become insolvent in nature. Thus, there is clear breach of section 588G on the
part of Michelle.
Also, Michelle is not able to them the defense under section 588H of the Act as his acts are not
based on any professional or made on an honest belief.
Also, Michele is found to be in ovulation of section 180 of the Act as the acts that is carried on
by her is not carry on with adequate care and diligence. No care is taken by Michelle while
taking loan on behalf of the company. It is the duty of Michelle that she should have read the
financial reports of the company before seeking any loan from the bank. so, there is violation of
section 180 of the Act.

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Since there are violation of section 588G and section 180 of the Act thus, Michelle can face
consequences in the form of fines, compensation and disqualification. He can also be prosecuted
for the reckless action.
Conclusion
Michelle has violated section 588G and section 180 of the act and thus he cam face civil and
criminal consequences for the same.
Issue 2(b)
Now it is important to give advice to ‘Le Petit Plat’ regarding the changes that must be bought by
the company so that the personal risk of the company director can be considered by bringing
changing the operation of the business.
It is now submitted that the company acts and behaves as per the object clause of the
constitution. Section 125 of the act submits that the company must carry out its operations as per
the object clause that is made part of the contract. One of the objects can be made part of the
constitution which includes that the directors of the company are not permitted to seek loan for
the company, when this object is made part of the constitution, then the operation and risk of the
company can be secured. Also, it can also be submitted that the directors liability can be limited
to certain extend and there by the position of the directors can also be secured.
Thus, these changes can be bought only by bringing alteration to the constitution. The alteration
can be bought as per section 136 of the Act. It is necessary that by passing a special resolution by
75% votes, changes can be bought to the constitution of the company.

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Reference List
Books/Articles/Journals
Adams, Michael , Australian Essential Management Law, Routledge 1997.
Latimer, Paul , Australian contract law, 2012.
Purslowe, Ryan , Decisions In The Twilight Zone Of Insolvency - Should Directors Be Afforded
A New Safe Harbour?, 2011, <
http://www.austlii.edu.au/au/journals/UNDAULawRw/2011/5.pdf>.
Case Laws
ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi (1966)
Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985).
Commonwealth Bank of Australia v Friedrich (1991).
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Great Northern Railway Co. vs. Swaffield (1874) LR 9 Exch 132.
Hall v Poolman (2007).
Hymix Concrete Pty Ltd v. Garrity (1977) & Queensland Bacon Pty Ltd v Rees (1966).
Metropolitan Fire Systems Pty Ltd v Miller (1997)
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971].
Said v Butt (1920)
Salomon v A Salomon and Co Ltd [1897] AC 22
Shafron v ASIC [2012].
State of South Australia v Marcus Clark (1996) 19 ACSR 606.
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008).
Woodgate v Davis (2002)