Business Law In Australia

BUSINESS LAW IN

AUSTRALIACase Study

FACTS IN THE CASE Freehills Antiques Pty Ltd. comprises of Freddy and

Fiona Freehill who are the officers and shareholders. Prudent Bank Ltd is the banker of Freehills and the

company maintains credit facility with them. Though Freddy is the managing director, yet all the

decisions in the business are made by Fiona. The constitution of the company provides that in

case of a decision concerning a financial transaction above $500,000, it must be executed under the common seal.

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..CONTINUED Due to an argument Fiona leaves for a period of two

months and goes to London. Freedy meanwhile, comes to know of an Antique fair

and with an intention to purchase property from the fair, asks for a loan of $1.25 million from Prudent.

He makes his daughter Felicity to attend office and sign the documents and represents that Felicity was the new director of Freehills.

Felicity also approaches under her new capacity to take a loan in order to lease a new Ferrari for her.

Subsequently, Freehills makes a default in payment.

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ISSUES Whether Felicity can be said to be a

company secretary? Whether the loan granted by Prudent is

enforceable? Whether the lease agreement and the loan

can be considered to be valid agreements?







RULES AND APPLICABLE PRINCIPLES OF LAW: Memorandum of Association of every company

should be maintained with the Registrar of companies.

The Doctrine of Constructive Notice. Section 125 of the Corporations Act that deals with

indoor management. Individuals trading with companies are permitted to

believe that all the measures that are necessary in the dealing have been followed and observed.







..CONTINUED Relevance of the Indoor Management rule

in Turquand’s case (Royal British Bank v Turquand)

Deed of settlement is equivalent to and parallel to the Memorandum and Articles.

The case of National Australia Bank Ltd v Sparrow Green Pty Ltd (1999).

Establishment of the legal rule that companies can act on the position of their agents and shall be liable.







..CONTINUED The case of Albert Gardens (Manly) Ltd v Mercantile

Credits Ltd. The case of Northside Developments Pty Ltd v

Registrar-General. The matter of Mahony v East Holyford Mining Co

(1875) LR 7 HL 869. Generally, changes taking place in the internal

affairs of the company are not a concern of the bank.







APPLICATION OF THE RULES: Both the banker and the Ferrari dealer have entered into

the contract on good faith and hence there is no justification as to why the contracts should not be enforced by them.

The guiltless shareholders and the creditors are at stake and the loss has to be borne by them.

Prudent had absolutely no doubts as to the uncertainty that was lying on its part and hence it is justified in going forward with the contract.

Felicity was representing herself as the company secretary at Freehills and she signed the lease document based on that capacity.







..CONTINUED Both the banker and the car dealer are

under protection by the doctrine of indoor management.

All the documents were verified by both the banker and the Dealer and hence there is no fault on their part.

Both Prudent bank and Ferrari Dealer shall be able to enforce their respective contracts in order to recover their loans and executing the lease.







CONCLUSION If an officer of the company surpasses his powers

which are conferred on him by the Articles, he shall be held liable.

Non-compliance with in-house processes does not invite any liability on the creditors.

The outsiders and the creditors have full rights to believe that all in-house processes have been complies to without any cross checking.

Thus, both the banker and the Ferrari dealer can enforce the contracts.







REFERENCES Krawitz A., (2002), Protecting Outsiders to Corporate

Contracts in Australia,Murdoch University Electronic Journal of Law, Volume 9, Number 3.

Chapple L. & Lipton P., (2002), Corporate authority and dealing with officers and agents, Published by Centre for Corporate Law and Securities Regulation and CCH Australia Limited, Melbourne.

Morrisson D., The continued role of the common law indoor management rule due inquiry exception, Available From website: https://lr.law.qut.edu.au/article/download/409/398

Vijaychandranan A., (2008), The indoor management rule, Available From website http://vijayhighcourt1.blogspot.com/2008/10/indoor-management-rule.html.







..CONTINUED Sealy L. & Worthington S., (2007), Cases and materials in

company law, Oxford University Press, pg. 137-138. Cain T., The Rule in british bank v turquand in 1989,e

publication .edu.au, Vol. 1, Issue 2, Article 8 Hinchy R. & McDermott P., Corporate Liabilty, Available

From website wps.pearsoned.com.au/wps/media/objects/2604/2667009/.../Chapter4.do.

Tomasic R. , Bottomley S. & McQueen R., (2002), Corporation Law in Australia, Federation Press, Second Edition, Pg. 234.

Law Teacher, (2015), Contracts made by agents, Available From website: http://www.lawteacher.net/free-law-essays/contract-law/contract-made-by-agents.php







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