University Law Assignment: Jones Hardware and BNZ Bank Case Study

This case study analyzes the legal issues arising from the actions of Mr. and Mrs. Jones, who operate Jones Hardware Pty Ltd. Mrs. Jones, a director and with Mr. Jones (also a director and secretary) seeks a loan from BNZ Bank to expand the business and establish a new company. The case examines whether BNZ can enforce its mortgage, considering the Corporations Act's assumptions, especially section 129. It assesses Mrs. Jones's potential breach of director's duties, including acting without the knowledge of her husband, and the implications of using company assets for a separate venture. The analysis references relevant legal principles, including the separation of legal entities, director's responsibilities, and the importance of due diligence. The case study concludes that Mrs. Jones breached her director's duties and that the mortgage's validity is questionable, referencing cases like BNZ v Fiberi Pty Ltd. The assignment highlights the importance of adhering to corporate governance principles and the potential legal consequences of failing to do so.

1
Name:
Course
Professor’s name
University name
City, State
Date of submission

2
Question 1
Explain whether BNZ bank can enforce its mortgage over the building. Consider
whether it can rely of the assumptions in s129 of the Corporations Act.
Under section 128 (4) - a company or a person is not entitled to make assumptions with the
company if at the time they suspected that the information given was incorrect. Under
subsection 3, assumptions may be made if and when there are suspected forgeries of
documents. A person is entitled to make assumptions when dealing with a company but are
not required to proceed with transacting with the company if the assumptions are incorrect
and not factual. Section 128 (2) entitles one to make assumptions with a person who purports
to directly or indirectly have an acquired title in the company1.
Under section 129(4) of the corporation Action, assumes that a person who is held out to be
an agent or an officer of the company. It only applies if the person has authority to expressly
or impliedly given to act on behalf of the company.
Mr & Mrs. Jones operate a Hardware store in Katherine under the name Jones Hardware Pty
Ltd. They are both directors of the company but Mr. Jones also acts as the company
secretary. They have banked with BNZ bank for the last 15 years. Mrs. Jones borrows
$300,000 from BNZ Bank and specifies that purpose of the borrowed funds. Mrs. Jones says
that they will use the funds to expand the business to establish a new company and to expand
their business into Western Australia2.
1 Act, C., 2017.
2 Chakrabarti, R. and Kagade, M., 2018.

3
Businesses and corporations are separate and autonomous in operations from their owners.
They are separate legal entities. They are also distinct from the people who operate and
manage the business. The assumption should know that due diligence is important and
mortgaging another business from properties of the original business is not permissible
especially where the new companies has different shareholders from the Hardware. The
ability to insulate the assets and wealth of a business is enshrined in the corporation act. Due
to separation of legal entity status, the corporation has the legal capacity to enter into a
contract although it must be not by false presence3.
Under section 129(4), an agent or a person having business dealings with a registered
business may rely on records from registrar of companies so as to ascertain the details of the
important persons of the business. The important people in the company include the directors
and the company secretary. In this case, Jones Hardware Ltd has two directors who are Mr.
Jones and Mrs. Jones. However, Mr. Jones sums up as the company secretary. The
company’s details are kept in ASIC which includes the information about the directors of the
company and the secretary of the company. This information is also available to the public
for confirmation4.
The responsibility of ensuring the accuracy of the information provided by a person acting
directly or indirectly for the company to take the loan is bestowed on the bank officials. This
means that in case there is a default for repayment of the loan, the company is not liable to
take any measures on the property of Jones Hardware. It is held that an outsider dealing with
3 Eaton, S. and Tumelty, M.E., 2017.
4 Engel, K., 2016., pp.42-43.

4
a company makes assumptions that the rules stipulated in internal management of the
company is complied with5. Mrs. Jones says that they will use the funds to expand the
business to establish a new company and to expand their business into Western Australia.
Corporate relations with the outsiders
Case example: The Bank of New Zealand vs Fiberi Pty Limited
In the case of BNZ Vs Fiberi Pty Ltd, the documents can be executed using the seal of the
company by a given director but the authorization must be given by all the directors in the
company through a meeting. Attention must be made to all the directors of the company
including the company secretary to make sure that they all have given consent for the
transactions to happen. The requirements are provided in the constitution and the corporation
Act. However, in the case of Jones hardware, these requirements have not been complied
with in order to execute the mortgaging of the property. There are two directors in Jones
Hardware Pty Ltd who are Mr. Jones and Mrs. Jones. However, the company secretary who
is Mr.Jones never authorized for the loan approval. He was not aware of the illegal dealing
that his wife was engaging in with the other directors in creating a new company6.
Held: The mortgage in the case of BNZ v Fiberi Pty Ltd was that the mortgage was valid.
The case stated that the mortgagee was entitled to rely on section 129 (1) of the act and to
make assumptions that compliance was already done in this case. In this case, a person
5 Giraudo, E., Giudici, G., & Grilli, L. (2019). 48(9), 103801.
6 Kaur, G., 2015. pp.145-152.

5
should and cannot make an assumption if in the process of the dealing they suspected that the
assumptions was incorrect.
Conclusion
The case of Mr. & Mrs. Jones shows an illegal activity and an assumption that compliance
was done for a mortgage of the property. The company secretary who is Mr.Jones never
authorized for the loan approval. He was not aware of the illegal dealing that his wife was
engaging in with the other directors in creating a new company. There are two directors in
Jones Hardware Pty Ltd who are Mr. Jones and Mrs. Jones. However, the company secretary
who is Mr.Jones never authorized for the loan approval. He was not aware of the illegal
dealing that his wife was engaging in with the other directors in creating a new company. An
exemption to section 128 (4) is not applicable in this case.
Question 2
Has Mrs. Jones breached the director’s duties in establishing a new company and
approaching the clients from her previous establishment?
Yes she has.
Mrs. Jones has breached the director’s duties as she is establishing the new company without
the knowledge of the other director who is her husband. She is also in breach of the director’s
duties for establishing contact with the clients of the hardware7. For a loan to be taken of $
7 Keay, A., 2016. 16(1), pp.39-68.

6
300,000 all the directors must be aware of what is happening and what the money will be
used for.
The company’s director’s role is to manage the affairs of the business. The duties of the
directors include implementing and determining policies and decision making. They also call
meeting for statutory decision making. In this case, Mrs. Jones has not called a meeting to
inform her husband that she is taking a mortgage and creating a new company with another
director. All the directors have the responsibility of binding the contracts with lenders and
other suppliers. The company constitution sets out the duties and responsibilities of each
director.
As a director, Mrs. Jones must act honestly in the interest of the hardware. She must also act
with reasonable care and duty at all times. In the company’s constitution, Mrs. Jones must act
in good faith and in the best interest of the company. While taking the mortgage and creating
a new company without the knowledge of her husband and a co-director, she is not acting in
good faith. She has not exercised power as a director for the best interest of Jones Hardware.
The company’s constitution sets conditions for directors which are, not agreeing or allowing
a business to be carried in a manner that is likely to cause huge financial losses or substantial
risks to the creditors. Mrs. Jones should take due diligence and care that a reasonable director
would in exercising the same business. She has not complied with this statutory demand of
the companies Act and is making the company loose financially through the mortgage.
Supposing the company had called for a meeting to discuss the issues, there would not be a
problem in taking a mortgage. However, Mrs. Jones is taking a loan with the property of their
hardware as collateral and starting a new business which is the same as the one they are
operating with the husband. The fact that the husband is not aware of what is happening
shows a breach of director’s duties especially to act in good faith and to prevent the company

7
to have unnecessary financial risks and losses. The company secretary who is Mr.Jones never
authorized for the loan approval. He was not aware of the illegal dealing that his wife was
engaging in with the other directors in creating a new company8. This shows an outright
breach of the director’s duties by Mrs. Jones which contravenes the companies Act and is
punishable by the law.
References
Act, C., 2017. Getting your “Act” together. Changes, 4.
8 Springett, D., 2019. pp.26-29.

8
Chakrabarti, R. and Kagade, M., 2018. Corporate Governance—Evolution and Challenges in
the New Companies Act. Available at SSRN 3200708.
Eaton, S. and Tumelty, M.E., 2017. Director's duties under the Companies Act 2014.
Engel, K., 2016. Tax trap for small professional service companies: corporate tax-
domestic. TAXtalk, 2016(58), pp.42-43.
Giraudo, E., Giudici, G., & Grilli, L. (2019). Entrepreneurship policy and the financing of
young innovative companies: Evidence from the Italian Startup Act. Research Policy, 48(9),
103801.
Kaur, G., 2015. Key Highlights of the Companies Act, 2013. Journal of Business Thought, 5,
pp.145-152.
Keay, A., 2016. Assessing and rethinking the statutory scheme for derivative actions under
the Companies Act 2006. Journal of Corporate Law Studies, 16(1), pp.39-68.
Springett, D., 2019. The risks of holding dormant companies. TAXtalk, 2019(75), pp.26-29.

9