Corporations Law: Analyzing Director Duties & Corporate Issues

This case study delves into two distinct scenarios under Corporations Law. The first scenario examines the authority of a managing director, Sarah, and the validity of a loan transaction she undertook on behalf of Sparkling Pty Ltd, focusing on the applicability of the doctrine of indoor management and relevant sections of the Corporations Act 2001 (Cth), particularly sections 125 and 126. It concludes that the bank can recover the loan despite internal restrictions on Sarah's authority. The second scenario analyzes the potential breaches of duty by directors Mercedes and Gregg of Joytronics, specifically concerning the duty of care and diligence under section 180 and the duty to prevent insolvent trading under section 588G of the Corporations Act. It finds Mercedes potentially liable for breaching these duties due to a hasty decision leading to financial distress, while Gregg is deemed not liable due to his lack of financial expertise and reliance on others' decisions. The analysis references relevant case law, including ASIC v Cassimatis and The Bell Group Ltd v Westpac Banking Corporation, to support its conclusions.

Running head: CORPORATION LAW
CORPORATION LAW
Name of the Student:
Name of the University:
Author Note:

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Corporations Law:
Answer 1:
Issues involved:
The matters in issues arising out of the present case study are as follows;
a) Is determining the result of the present case,
b) Is determining the ideal result in the present case study,
c) Is determining whether the result will be different in case the loan was taken for causing
the refurbishment of the cloth shops and in case the bank officer was aware that the
relation of Sarah with the Board fell out of favour.
Rules of law:
The present case can be analyzed in the light of the doctrine of indoor management which
protects the interest of the outsiders in course of their dealing with the company. The said
doctrine evolved in the Royal British Bank v Turquand (1856) 6 E&B 327 which stated that
people who are making transaction with the companies are entitled to presume that the internal
affairs of the company have been complied even if they are not.
The outsiders referred here are the shareholders, investors and other who do not form the
part of the company. Here these persons are not require to enquire about the internal affairs of
the company such that whether they are followed accordingly if they are contended that the
transaction is done according to the articles and memorandum. This doctrine is helpful to the
external members or the outsiders whose interest is protected from the company. It further states

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that they can assume that the internal proceedings are performed as per the documents which are
provided to the company Registrar. This doctrine is based on the fact that the internal matters of
any company cannot be known to the outsiders. Moreover, if this doctrine was not there, the
company can escape the creditors by not accepting the act of the officials acting on behalf of the
company.
Apart from the common law doctrine, the Corporations Act 2001 (Cth) provides the
statutory provisions that controls and regulates the creation as well as operation of the companies
in relation to the constitution which may be adopted by the company and also the officer’s
powers and duties.
In this regard, sections 125, 126 must be referred in order to analyze the case scenario.
These two sections are contained in the Part 2B.1 of the Act which provides the powers of the
company and the methods by which such powers can be exercised.
Section 125 of the Act provides that the powers can be limited by the Constitution and
objects can be set. Section 125(1) of the Act provides that when there is a constitution held by a
company, it can put restriction or prohibition on exercising such powers by the company.
However, if the company exercises its power in such a way that it is in contradiction to its
constitution, then such act of the company will not be considered invalid. Moreover section
125(2) states that the constitution of the company can state the objects of the company. Any act
performed by the company cannot be held invalid just because it is in contradiction with the
objects set in the constitution or it is beyond the scope of such objects.
In addition to these, for discussing the issues of the case, section 126 of the Act has to be
referred. It provides that power of the agents to execute a contract on behalf of the company. an

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agent can be considered to have power to exercise any contract on company’s behalf. According
to section 126(1), an individual can act as the agent of the company and in doing so, such
individual can vary, make as well as discharge contract on the basis of the express or implied
authority given to him. In this regard, such individual can be regarded as the agent and he can
even use this power without using the seal.
Moreover, section 126(2) further states this section has no effect on any operation of law.
Application:
From the facts of the case scenario, it is provided that a company named Sparkling Pty
Ltd has the function of operating three children cloth shops in Tasmania. The managing director
position of the company was held by Sarah who was appointed for this post for a term of 2 years
on 08.08.2007. This was lodged with ASIC. Even her contract of 2years had expired, he
continued to hold the seat of the managing director but it was not lodged with ASIC. By this
contract, her power of transacting was limited to an amount of 20 thousand dollars and any
transaction above this had to be approved by the company board.
Sarah on December 2019 sought a loan of an amount of 30,000 dollars from a bank
called Costello for setting a plantation of eucalyptus. But this was not approved by the board.
The board had no idea of this transaction and when it came to know it, it prohibited the loan
repayment. Here as per section 126(1), Sarah can be regarded as the company’s agent. She has
the power to make transactions on company’s behalf.
This act of Sarah cannot be considered to be invalid though it was against the constitution
of the company due to section 125(1) though she had acted against the company’s constitution.
Moreover, though the act of setting up eucalyptus plantation was beyond the object of the

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company whose main object is running cloth business but it cannot be regarded invalid u/s
125(2) of the Act.
The Bank was an outsider while it was making transaction with Sarah. Hence its interest
of getting the loan along with the interest would be protected under the provision of indoor
management. The act of the board preventing the loan repayment was beyond justification. Even
if the reason behind seeking the loan was for refurbishment of cloth stores, then also the result is
same. If the bank officer was aware that the relation of Sarah with the Board fell out of favour
then also the bank would be liable to get the loan with the interest due to the effect of the
doctrine of indoor management.
Conclusion:
Thus, it can be inferred that
a) The Bank can recover the loan with the interest from company by instituting a suit,
b) Similar result is expected in the ideal situation under the provisions of sections 125 and
126,
c) The result will be same in case the loan was taken for causing the refurbishment of the
cloth shops and the bank officer was aware that the relation of Sarah with the Board fell
out of favour.
Option 2:
Issues:
The issues involved here involves the following,

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a) i) whether Mercedes has caused breach of statutory duty or general law involving the
duty of care together with diligence as the director,
ii) whether the decision of purchasing the new premises is protected by the provisions of
section 180(2) of the Act,
iii) whether Mercedes is liable for breaching section 588G of the Act in case Joytronics
turned insolvent,
b) whether Gregg has breached his duty of care and whether he would be held liable for
insolvent trading in case Joytronics turned insolvent.
Rules:
Corporations Act 2001 (Cth) provides the statutory provisions that controls and regulates
the creation as well as operation of the companies in relation to the constitution which may be
adopted by the company and also the officer’s powers and duties.
One of the main duties of the directors provided under the said Act is the duty of care and
diligence. Section 180 of the Act provides the civil liability of the directors and officers of a
company. The directors as well as the officers of a company have the duty to act diligently and
carefully while performing any duties u/s 180(1). The relevancy of this section was laid down in
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA
1023.
In case any director is found to breach the provisions of section 180(1) then he can
safeguard himself by referring to subsection 2 of 180 of the Act. This section 180(2) of the Act
provides the business judgment rule. In order to claim the provision of this section, a director
must make the decision for a proper reason and in good faith. Moreover the director must not

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have any conflicting reason with the judgment matter and such judgment must be taken for the
best interest of the company as laid in Australian Securities and Investments Commission v Rich
[2009] NSWSC 1229.
Section 588G of the Act provides the duty of the director to prevent the company for
trading during insolvency. It states that a director of the company is said to breach this section in
case he fails to prevent the incurring debt for the company when it is found that he is aware of
the facts that there lies ground to predict that the company is already insolvent or such prediction
can be made by any reasonable person in the same situation. Further section 588G(3) states that a
person is liable for committing an offence when a debt is incurred by the company at a time
when such person acts as the director when such debt is incurred and the company is already
insolvent or may turn insolvent by incurring such debt. Such insolvency can be suspected and the
person failed to prohibit such insolvency because of his dishonest intention.
Moreover section 588H of the Act states that the defences that can be availed by the
directors of a company to safeguard them from the effect of section 588G. It states that the
defences that are available are there are reasonable grounds for believing that the company is
solvent during that time and in fact will remain so even if the company incurs any debt. He can
also claim that due to illness or any other causes the director was unable to take active part in the
management of the company. another defence that can be claimed by the directors is that he has
taken reasonable measures to prevent the company from turning insolvent.
Application:
In the present case it is seen that the fact suspected by Felix was not expressed by him
regarding one store. But Mercedes has thought that the expansion shall not be allowed further to

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explore other available alternatives. But she does not successfully act on such thought and gave
consent to Felix. This can be considered to the breach of section 180(1) of the Act. This is
because she was not careful and diligent when she was dealing with the situation. The fact that
she agreed with Felix although she was not sure about it can be regarded as the infringement of
the best judgment rule contained in section 180(2) of the Act. Here Mercedes failed to exercise
the best judgment rule as provided under the given section.
In addition to this, it was clear to Mercedes that the company was not in favorable
position but in financial distress and any decision taken without considering the relevant facts
and situations hastily can result the company to undergo insolvency. It is the duty of Mercedes
being the duty of the company to prevent the company from undergoing insolvency. This shows
that she has violated section 588G of the Act. Further she cannot claim the remedy as given
under section 588H of the Act as in The Bell Group Ltd (in liq) v Westpac Banking Corporation
& Ors [No 9] [2008] WASC 239.
Due to the lack of knowledge in financial matters as Gregg did not have any formal
education, he cannot give suitable advice for preventing insolvent trading of the company. he
blindly followed the decisions of Felix and Mercedes. Hence he is not liable for breach of
sections 180(1) and 588G.
Conclusion:
Hence the following conclusions can be reached that are submitted below;
a) i) that Mercedes has caused breach of statutory duty or general law involving the duty of
care together with diligence as the director u/s 180(2),

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ii) that the decision of purchasing the new premises cannot be protected by section
180(2),
iii) that Mercedes is liable for breaching section 588G of the Act in case Joytronics
turned insolvent,
b) that Gregg has not breached his duty of care and he would not be held liable for
insolvent trading in case Joytronics turned insolvent.

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References:
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA
1023
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229
Corporations Act 2001 (Cth)
Royal British Bank v Turquand (1856) 6 E&B 327
The Bell Group Ltd (in liq) v Westpac Banking Corporation & Ors [No 9] [2008] WASC 239