Charles Darwin University LAW513: Corporate Law Case Study Analysis

This case study analyzes a corporate law scenario involving 'Jones Hardware Pty Ltd,' Mrs. Jones (a director), and BNZ Bank. The primary issue revolves around whether BNZ Bank can enforce a mortgage over the company's building, considering Mrs. Jones' actions. The analysis applies sections of the Corporations Act 2001, particularly concerning director duties, company seals, and the assumptions third parties can make. The case examines the validity of a forged signature, Mrs. Jones' breach of director duties by securing a loan for a new venture without informing her husband, and the implications for the bank. The conclusion determines whether the bank can enforce its mortgage, emphasizing the bank's lack of knowledge of internal irregularities and the application of relevant legal principles. The study further discusses whether Mrs. Jones breached any director duty, considering her actions in securing the loan and approaching the clients of Jones Hardware Pty Ltd for her personal benefits.

Running head: CORPORATE LAW
Corporate Law
Page 1

CORPORATE LAW
Table of Contents
Explanation of Whether BNZ Bank can enforce its Mortgage over the Building...........................3
Discussion of Whether Mrs Jones Breached any Director Duty.....................................................7
References......................................................................................................................................10
Bibliography..................................................................................................................................12
Page 2

CORPORATE LAW
Explanation of Whether BNZ Bank can enforce its Mortgage over the Building
Issue
The issue to be addressed is determining whether Bank of New Zealand (BNZ) can enforce the
mortgage over the building.
Rule
Referring to Section 129 of the Corporations Act, it is evident that “a person may assume that
anyone who appears, from information provided by the company that is available to the public
from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed;
and (b) has authority to exercise the powers and perform the duties customarily exercised or
performed by a director or company secretary of a similar company” (Australasian Legal
Information Institute, 2019). According to section 128 (4) of this particular Act, the person will
not be able to make any assumption or exercise any kind of the power under the section of 129, if
they suspected that the assumption made by the party was not correct during period of dealing
(Australasian Legal Information Institute, 2019a). Section 123 of the Corporation Act 2001 also
stated that the common seal is a rubber stamp where the name of the company and the
association number are mentioned. It is essential to have the common seal of the company, as it
also plays the role of the signature while executing the document (Australasian Legal
Information Institute, 2019b). This can be referred to the recent case of Santander UK PLC v. (1)
Ashley Shaun Fletcher and (2) Paula Denise Fletcher [2018] EWHC 2778 (Ch), which offers a
useful reminder on mortgage enforcement under undue influence.
According to Section 127 (1) of the Corporations Act, the company may proceed with the
document without putting common seal in following cases, if the documents consist of the
Page 2

CORPORATE LAW
following signatures, which are of two directors, one secretary and one director of the company,
or in case of proprietary company the signature of sole director or secretary. On the other hand,
Section 127 (2) of the Corporations Act confirmed that “a company with a common seal may
execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by”
the members which are mention in Section 127 (1) (Australasian Legal Information Institute,
2019c). These are the rules that had been implied in the case of ‘Jones Hardware Pty Ltd’ and
BNZ.
Application
After analyzing the case, it is understood that Mr. and Mrs. Jones were the directors of the
company named ‘Jones Hardware Pty Ltd’, a hardware store popular in Katherine. Mrs. Jones,
who is the director of the firm, had visited the BNZ bank for taking a loan of $300,000 in order
to establish a new company with her friend. However, she had a good relationship with the bank
manager, as it possessed a close association with the hardware company from the past 15 years.
She applies for a loan stating a reason for expanding their business in Western Australia.
However, it was decided that Mrs. Jones would be the director and her best friend would be the
shareholder of the new establishment. Bankers considered the asset of the company to be the
security for the loan, which was the building where the company would operate.
Mrs. Jones affixes the company’s common seal on the mortgage document and her friend signed
in the designation of secretary and receives the advance from BNZ Bank. As per the scenario, it
could be understood that Mrs. Jones is in the designation of director and has power over the
company to make the required decision. Thus, she took the decision on behalf the company that
Page 2

CORPORATE LAW
her friend is the share holder of the new company and while receiving the loan Mrs. Jones and
her friend signed in the mortgage documents as the director and the secretary.
Moreover, the fact was that the common seal of Jones Hardware Pty Ltd was used in the
document of mortgage in clear agreement to meet the requirements of Section 127 of the
Corporations Act. Thus, the requirements of signature for two witnesses, i.e. the director and the
secretary were addressed by Mrs. Jones and her friend respectively. It was hence then found that
the signature done by Mrs. Jones’ friend at the place of the company’s secretary was forged, as
the actual authorized person was Mr Jones. It is clear that the fake signature made by Mrs. Jones
would not result in the cancellation of the assumption, which was made by the BNZ bank. As a
result, the document can be executed.
Thus, according to the case, the information provided by the director of the firm was that Mrs
Jones and her friend duly appointed a new director and secretary of the organization, who
possessed the power to exercise their respective powers. Besides, all these facts related to Jones
Hardware Pty Ltd’s common seal are used in the mortgage document, which acts as the witness
in the agreement. Consequently, the mortgage document was accordingly carried out by the
Jones Hardware Pty Ltd for incorporating Section 129.
However, Section 128 (4) was specially enacted for the third parties while dealing with the
companies. It supports the company or the owner in making a false statement for a wrong
purpose. Thus, in the case of Mr and Mrs Jones, the banker was not aware that the assumption
made by Mrs. Jones was not correct. She states that the companies are going to expand the
business, thus they are seeking for a loan but Mr. Jones had no knowledge regarding such issues.
Since her statement was not correct as she was going to establish a new business along with her
Page 2

CORPORATE LAW
best friend without informing his husband. She even did not take permission from Mr. Jones for
a loan that she would be taking from the bank keeping the Jones Hardware Pty Ltd’s building as
security deposit. She also said that her friend is the shareholder of the company and signed in
place of Mr. Jones but in fact, there was no such decision made by the company. It can thus be
emphasized that BNZ bank cannot rely on the assumption of the banker as he was well-aware
about the fact of irregularities. Thus, using Section 128 (4) of the Corporation Act, Mrs. Jones
might argue that BNZ bank possessed a clear inference that the document should not rely on
irregularities.
After reviewing all the sections involved in the case, it can be stated that the BNZ bank can
enforce its mortgage over the building of Jones Hardware Pty Ltd. Similarly, these issues also
occurred in the case of SEO Company Pty Ltd, where the former director was found guilty of
withdrawing the amount from the bank for her personal purpose by using the power of
designation and by breaching the contract of duties (Carmody, B 2015).
Conclusion
To conclude, the bank was a third party which is unaware about the fact or the internal
management of the company. Thus, as per the rules, bank will consider that the assumption are
correct and has the right of enforcing the mortgage over the building.
Page 2

CORPORATE LAW
Discussion of Whether Mrs Jones Breached any Director Duty
Issue
The issue relates to the determination of whether Mrs. Jones has breached any director duty
while establishing the new company and approaching the clients.
Rule
The directors of the company were appointed by the shareholders and their fundamental duties
were to manage the daily work of the organization. Besides, they must also be present in the
board meetings of the firm to make decisions concerning the fulfilment of the obligations of the
company. The directors also need to perform along with the constitution of the organization and
can also use the powers given to them. Basically, their duties are to protect the interest of the
employees towards the company, take a decision for the long term, and act fairly and by being
honest among the members of the organization. They are also responsible for the success of the
organization, as they should have good faith in the company. This further helps to identify
whether the course of action is appropriate (Burges Salmon, 2019). The cases of Gething v
Kilner and Peskin v Anderson can be duly considered while discussing the mentioned issue
related to Mrs. Jones, wherein the breach of Directors’ duties had been questioned.
The other factor, which creates an impact over success, is the interest of the directors and the
employees (Burges Salmon, 2019). One of the rules, which would be applicable to the directors,
is that they should not take advantage of the post that they hold as per the Corporations Act. A
director is also responsible for maintaining the confidentiality of the company and therefore the
information should not be used by the director for personal purpose. They also need to proceed
Page 2

CORPORATE LAW
on behalf of the board and the powers must also be delegated to them respectively (Burges
Salmon, 2019).
Application
In this context, Mr Jones was the secretary of the company and made her wife the director. As
per the rule of the corporation act, the duties of the director is to manage and coordinate the day-
to-day job of the firm and can only exercise certain power, which is assigned to them. On the
other hand, Mrs Jones applies for the loan even though she has no power of borrowing it from
the bank for the new establishment without the involvement of Mr Jones. However, the loan
applied by Mrs Jones was not for the betterment of the current company but was for starting up a
new one by keeping the building of the past organisation as security. After establishing the new
business, she would become the director and her friend would be a shareholder of the business.
She then had the intention to leave her husband, which can thus be considered as strategy made
against Mr Jones and his company. She took advantage of her power and benefit from the third
party, i.e. the bank for getting the loan sanctioned.
While acting as a director of Jones Hardware Pty Ltd, Mrs Jones discloses the documents of the
property to the bank and made a wrong statement that they would use the loan for expanding a
current business. But the fact was that she was opening a new business and had no relation with
the older business. However, they did not open the new venture but only approached to their
customers. Similarly, this type of issues was also considered in the case of Maronis Holding Ltd
v. Nippon Credit Australia Pty Ltd in 2001, wherein the directors of the company failed in
performing their individual tasks, thereby breaching their duties correspondingly (Baxt, 2005).
Page 2

CORPORATE LAW
Conclusion
From the above discussion, it can be clearly understood and concluded that Mrs. Jones had
breached the contract of the director’s duties and used in the information of company for
personal purpose and established the new firm with her best friend, as well as approached a
larger number of clients of Jones Hardware Pty Ltd.
Page 2

CORPORATE LAW
References
Australasian Legal Information Institute 2019, Corporations act 2001 - sect 129, Commonwealth
Consolidated Acts, viewed 21 September 2019
<http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s129.html>
Australasian Legal Information Institute 2019a, Corporations act 2001 - sect 129,
Commonwealth Consolidated Acts, viewed 21 September 2019
<http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html>
Australasian Legal Information Institute 2019b, Corporations act 2001 - sect 123,
Commonwealth Consolidated Acts, viewed 26 September 2019 <>
Australasian Legal Information Institute 2019c, Corporations act 2001 - sect 129,
Commonwealth Consolidated Acts, viewed 21 September 2019
<http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s127.html>
Baxt, R 2005, Duties and responsibilities of directors and officers, AICD, Sydney.
Burges Salmon 2019, The responsibilities and duties of a company director, This Guide Provides
Directors With A General Overview Of The Key Duties And Obligations Of The Role, viewed
23 September 2019 <https://www.burges-salmon.com/news-and-insight/publications/the-
responsibilities-and-duties-of-a-company-director/>
Carmody, B 2015, Former SEO company director found guilty after withdrawing $29,000 from
the business’s bank account for personal use, Private Media Pty Ltd, viewed 24 September 2019
https://www.smartcompany.com.au/business-advice/legal/former-seo-company-director-found-
guilty-after-withdrawing-29-000-from-the-business-s-bank-account-for-personal-use/>
Page 2

CORPORATE LAW
Tomasic, R, Bottomley, S, & McQueen, R 2002, Corporations law in Australia, Federation
Press, Annandale, NSW, Australia.
Page 2

CORPORATE LAW
Bibliography
Harris, J, Hargovan, A & Adams, M 2017, Australian corporate law, 6th edition, Lexis Nexis
Australia, Sydney.
Lipton, P, Herzberg, A & Welsh, M 2017, Understanding company law, Thomson Reuters
(Professional) Australia Pty Limited, Sydney.
Page 2