Law Assignment: Director Liability, Indoor Management, & Legal Cases

This law assignment addresses two key areas: director liability under Section 197 of the Corporation Act 2001 and the indoor management rule. The first part examines the circumstances under which a director can be held liable for a company's debts, particularly when the company fails to meet its obligations and breaches a trust. It references the case of Hanel v. O'Neill to illustrate these points, concluding that creditors can claim against directors in such situations. The second part discusses the indoor management rule, established in Royal British Bank v. Turquand, which protects outsiders who interact with a company by allowing them to assume internal rules are followed. The assignment traces the rule's evolution, including its application in Albert Gardens (Manly) Ltd v. Mercantile Credits Ltd and Hely-Hutchinson v Brayhead Ltd, and clarifies that contracts are binding when officers have the authority to act on behalf of the company. The assignment concludes that in the given case, the indoor management rule applies, binding both the company and its directors.

Running Head: Law 1
Law

Law 2
Answer 1
According to Section 197 of the Corporation Act 2001, in case director of the company incurs
any liability while acting as trustee, then director is liable to discharge whole or part of the
liability if:
 Company fails to discharge the whole or part of the liability, and
 Company is not able to pay the liability from trust assets, because trust was breached by
corporation, corporation’s conduct its operations outside the scope of its powers and any
provision of the trust deny the right of the corporation to be indemnified against the
liability.
This section further states that, directors of the company are not responsible for the liability
incurred by the company, on the ground that assets of the trust are not sufficient to meet the
liabilities of the corporation1.
In the present case, Section 197 is applied because corporation fails to discharge its liability.
Directors of the company fails to act within the scope of their powers because of which corporate
fails to indemnify the liability against the trust. This can be understood through the landmark
case law Hanel v. O’Neill2.
After considering above facts, it is clear that director of the corporation is liable towards the
creditors of the company. Therefore, Creditors can claim for their debts against the directors of
the company because they are personally liable for the debts.
1 Corporation Act 2001, Section 197.
2 Hanel v. O'Neill, (2003) 48 ACSR 378; (2004) 22 ACLC 274; (2003) SASC 409 (SC of SA 2003).

Law 3
Answer 2
Indoor management rule was introduced by common law in case Royal British Bank v.
Turquand3. Court held that outsider who enter into contract with the company has right to make
assumption that officer of the company complied with all the internal rules of the company.
Later, High Court approved this rule in case law Albert Gardens (Manly) Ltd v. Mercantile
Credits Ltd45.
There are number of contracts in which company entered with the outsiders, and those officer
who act on behalf of the company has power to bind the company by their actions. This can be
understood through case law Hely-Hutchinson v Brayhead Ltd Judges6. Court held that it was
the duty of outsiders to ensure that all the internal rules are compiled by the company before
conducting business. After some time, this rule was held inappropriate by the Court on the
ground that directors of the company are representative of the company. Third person has right to
believe that directors and other officers of the company compiled with the internal rules of the
company, and in case directors fails to compiled with the internal rules then third person face the
consequences.
For resolving this problem, Court stated that in case third party believes that officers of the
company compiled with all the internal requirements of the company, and they have power to
enter into contract on behalf of the company then such contract is binding in nature7.
3 Royal British Bank v Turquand (1856) 119 ER 886.
4 Lexology, The 'indoor management rule' explained, < http://www.lexology.com/library/detail.aspx?g=469212cf-
f6d8-458d-8a5d-2722c5d4ba99>, Accessed on 15th August 2017.
5 Austlii, (2002), Protecting Outsiders to Corporate Contracts in Australia, <
http://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html>, Accessed on 15th August 2017.
6 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
7

Law 4
In the present case, contract bounds the company and directors of the company, because both
director and company secretary have power to act on behalf of the company. In this case, Indoor
management rule is applicable and third party has right to believe that officers of the company
compiled by law.
BIBLIOGRAPHY
Website
Lexology, The 'indoor management rule' explained, <
http://www.lexology.com/library/detail.aspx?g=469212cf-f6d8-458d-8a5d-2722c5d4ba99>,
Accessed on 15th August 2017.

Law 5
Austlii, (2002), Protecting Outsiders to Corporate Contracts in Australia, <
http://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html>, Accessed on 15th August 2017.
Case law
Hanel v. O'Neill, (2003) 48 ACSR 378; (2004) 22 ACLC 274; (2003) SASC 409 (SC of SA
2003).
Royal British Bank v Turquand (1856) 119 ER 886.
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
Statute
Corporation Act 2001.