Company Authority and Governance on Contracts Involving Managers and Agents - Assignment Example

Question 1 Company authority and governance on contracts involving managers and agents A company, being an abstract entity, can only engage in contracts through actions of individuals. Section 126 of Corporate Act provides that the power to make a contract within a company be exercised by a person acting with the implied or expressed authority for the company (Tomasic, Bottomley, & McQueen 177). A contract may have or may not have a common seal. Section 126 and 127 provides the provisions on how a company may enter into contracts through its departments, mainly through the board directors or a person charged to represent the company (Latimer 231). A company may also engage enter into a contract indirectly through an agent. The agent may be an employee of the company or an officer acting on behalf of the company. However, the contract liability of the company on agent actions is governed by the agency law. The laws and principles that govern and regulate agency contracts are outlined in the Corporation Acts in section 128-130 (Tomasic 179). According to these laws and principles, the acts of an agent bind the company only if they are within the company’s object position as outlined in its constitution (Duncan 155). The acts that are not within the scope of the company’s objects are referred as ultra vires, which means (“beyond powers”) (Gibson, Rigby and Tamsitt 78). However, ultra vires has indirect effects through actions which may have indirect relevance. This may involve breach of duty by the managers or oppressions of members on winding up applications by managers (Latimer 231). A distinction should be made between the acts that involve ultra vires but may be beyond the powers of the company and those acts that are within the powers of the company but are outside the authority of the agents or officers exercising the power (Tomasic 179). A confusion has occurred in previous cases such as in the case of Rolled Steel Products (Holdings) Ltd v British Steel Corporation which stated: “the primary nature of ultra vires is usually used to describe those acts which are beyond the capacity or level of control of the involved company” (Dine 284). The phrase is sometimes used to define acts which may not be beyond or are outside the capacity of the company but only beyond the authority lying within the board of directors or among the majority shareholders of the company. In many instances the fact or the sense underlying the use of the phrase is usually unclear (Duncan 157). The actual authority also arises when the principle or the manager of the company has given consent to the agent to act on his behalf. This is usually derived from the express or implied authority to the principal when the agent enters into particular transactions or performs certain acts. Consequently, the outsiders do not involve the deal or contract directly but rather they deal with the delegated person whom the board has appointed (Latimer 233). In some cases, an officer may be designated the managerial role to act with the consent of the board. This has been conferred by the court where controllers within the board of directors have full authority to carry these roles through “actual authority” of appointing de facto managing director (Duncan 157). The example case involves that of Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd, where the director was taken to have expressed the authority to act on behalf of the company on a situation where he held a controlling position of a shareholder but assumed the managing director role with the acquiescence of other directors (Duncan 158). The transactions were entered without prior reference to the company’s board and no attempt was advanced to interfere with his role to control the company’s affairs (Duncan 158). So in conclusion, it is indeed true to conclude that “when a company contracts with outsiders, the law should always regard that the company managing director has authority to either make the contract or hold out someone else in the company as being authorized to make the contract, regardless of whether the managing director has actually been appointed or is simply held out in that capacity by the company”. Question 2 Issues The issues that require determination in this part of the questions are as follow; Do the actions by the company directors to sell some assets that previously belonged to Super and Duper, settlement of external debts by the company funds and failure to disclose the same to the shareholders contravene corporation Act. Should the directors use the company’s funds for other reasons different from what was disclosed to the shareholders and without their authority? Finally, does Rich’s endorsement as stated in the disclosure statement make him liable in anyway under the circumstances. Discussion Based on the facts of the case, Super and Duper have a disclosure document that departs significantly from the way that it is stated and the manner in which the company is being managed. For instance, in the disclosure statement they claim that secured funds from the investors will only be used to “develop and market the new product” while this is clearly not the case since the same funds have been used for other purposes such as acquisition of assets whose value is in doubt and settlement of external debts. Section 728 of the corporation Act warns against issuance of disclosure statements that are “misleading or deceptive” and continues to list circumstances under which this can be regarded to be the case (Corporation Act 2001). Deviating from the provisions of the disclosure document as is the case here is considered to be misleading and deceptive. Section 297 of the Corporation Act, requires companies to prepare financial statements that are able to show “true and fair view” of the company’s financial status (Corporation Act 2001). Towards this end, the Act requires financial statements to comply with accounting standards and also to be detailed enough as to include notes of financial statements where such provisions will enable achievement of the same. In summary, the financial statement must be able to clearly show the “financial position and performance of the company” (Corporation Act 2001). Consistent with this is section 286 which requires companies to keep proper and detailed financial records that depict the true nature of financial transactions of the company (Corporation Act 2001). Now, based on the case scenario, it is clear that the company under the management of Super and Duper did not abide by the requirement of this Act during the preparation of the financial statement as it is clear that notes which should have shown the details and extent of the company’s financial dealings were non-existent. Additionally, even the financial statement itself does not have enough details as to indicate how the indicated company asset was acquired, it’s true worth and present status. Section 297 also requires that three mandatory documents be provided during the annual financial statement; one of this is “directors declaration” (Corporation Act 2001). Again, based on the case scenario the directors of this company also failed to provide this declaration which should have served to inform the shareholders and the public the financial position of the company and the adherence to the laws regulating preparation of the financial statement. None of these was provided and no disclosures were made, and it’s probably due to this failure that the shareholders realized at the last minute the true financial position of their company which by then had become bankrupt. The circumstances under which Super and Duper transferred the partnership business to the company are also suspect. Section 191 of the Corporation Act requires that directors disclose “material personal interest” where there is conflict of interest between the duties of directors and transactions of the company (Corporation Act 2001). In this case a clear conflict of interest is evident because the two directors were transferring a business that they owned to the company in which they are the directors and it appears that the directors did nothing to address and disclose this conflict as required by law. The reasons why the law requires these disclosures are evident in section 182 subsection 1. Section 182 requires directors not to improperly use their position so as to enrich themselves or to cause detriment to the wellbeing of the company (Corporation Act 2001). This is most likely to happen in matters where conflict of interest arise as is described in the case scenario where not only does Super and Duper sell an asset that privately belonged to them so as to enrich themselves, but also in the process contribute towards the bankruptcy of the company in which they are the directors. Even more gross violations of this regulations continues to happen when they also go ahead to have the company pay debts that were accumulated by their earlier business venture. In any case section 180 which has to do with “care and diligence” requires that directors among other things comply with business judgment rule which sets the boundaries within which the business judgments must be made by the directors within the Corporation Act regulations (Corporation Act 2001). This requires that the interest of the company be foremost in these considerations, and cannot be achieved in circumstances where there are vested personal interests by the directors in some dealings that are in conflict with the company interests. Remedy Section 588FDA describes circumstances under which transactions by directors can be termed as “unreasonable director-related transactions” which are voidable under division 2 category part 5.7b of the corporation Act (Corporation Act 2001). This means that should a court of law determine that the circumstances under which the $900,000 asset was transferred to be falling under the above category, the transaction will be made null and void and in the process returning the money to the company. Since the disclosure document contravenes section 728(1); all the directors including Rich will be liable for prosecution and will be personally held responsible for losses arising as a result of this contravention. This is because section 730 provides the persons involved in the preparation of the disclosure document with options of correcting a potential mistake well in advance before it costs investors money. Consistent with section it is clear that Rich did not at any time write to the directors at anytime for purposes of correcting an anomaly in the disclosure statement if he was aware of it. In any case section 729 lists the persons liable in the event where there is contravention of subsection 728(1); in this case it will be all the directors and “a person named in the disclosure document with their consent as having made a statement” (Corporation Act 2001). This second requirement fits the description of Rich who the law requires to undertake due diligence on the company in which one has been named or been enjoined in a disclosure document as is the case here. In conclusion, the penalties for all the contraventions discussed here are various and ranges from civil to criminal prosecutions which means that despite being held personally liable for the financial losses, the directors will also be most likely be facing criminal cases with jail sentences. Works Cited Corporation Act 2001. “Corporation Act 2001, Australia.” 2012. Web. 10 Oct. 2012. < http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>. Dine, Janet. Company Law. London: Palgrave Macmilan, 2001. Print Duncan, William. Joint Ventures Law in Australia. Sydney: Federation Press, 2005. Print. Gibson Antony., Rigby Simion. & Tamsitt, Girrum. Commercial Law: In Principle. 3rd edition, Sydney: Thomson Law Book Co. 2005. Print. Latimer, Paul. Australian Business Law. North Ryde, CCH Australia, 1992. Print. Tomasic Roman, Stephen Bottomley, and Rob McQueen. Corporations Law in Australia. Sydney: Federation Press, 2002. Print. Turner, Cole. Australian Commercial Law, 27th edn. Victoria: Thomson Reuters. 2008. Print. Read More