Balancing Conflicting Interests of the Corporate and the Third Party - Essay Example

Title: Balancing Conflicting Interest of the Corporate and the Third Party TABLE OF CONTENTS HEADING PAGE I. Synopsis……………………………………………………………………….1 II. Introduction … ……….……….…………………………………….……….1 III. The Analysis of Common Law Doctrines and Relevant Corporations Act …..1 IV. Balancing Competing Interest ………………………………………………...5 V. Balancing of Statutes (us128, 129) and Common Law doctrines…………......7 VI. Conclusion……………………………………………………………………..8 VII. Bibliography…………………………………………………………………...9 I. Synopsis: There is an ongoing debate for a long time as to the enactment of proper law that makes it clear under what circumstances the third party or contractor dealing with a company can do so without being exposed to the risk. There is need for emphasis about where the company can be held liable for the debts incurred on it’s behalf and also the extent to which the third party can deal without enquiring about the authority. II. Introduction: This analysis is divided into three parts. First it is specified the authority of an agent to act on its behalf. Second how the contractors or third party are protected against the common law doctrine of indoor management and also the provisions of Sections 128 and 129 of the Corporations Act 2001. Thirdly analyse the need and effectiveness of those sections whether it needs amendment or given its complex nature it is effective in reflecting the actual intention of Parliament. III. The Analysis of Common Law Doctrines and Relevant Corporations Act: In order to determine the authority of Directors, agents or organs who professes or executes the contract on behalf of the company, it is necessary to understand the well established doctrine of Actual Authority. The clearest way an agent can have an authority is by way of the principal vesting that authority to the agent. This can be done by the principal and agent agreeing to something consensual and granting the authority to the agent who is clearly demarcated. The actual authority can be seen to be derived from the very fact that the principal appointing the agent to a designated position.1 “The nature of an agents implied authority is ascertained by looking at the circumstances of the person’s appointment and manner in which she conducts business of the company, and the circumstances of the particular transaction in question.”2 “The actual authority can be comprised of the powers which are expressly granted and those which arise impliedly from the express grant.”3 It is specified that a contract can only be enforceable if it is entered by an agent of the company with authority vested on him. This is where problem arises as outsiders are to make a contract through an agent and in case of dispute the agent’s authority is denied by the company in order to escape the liability. The board of Directors has power to grant or express actual authority to persons over such matters in which the Board has express power to act. In the given circumstances it can be stated that vide Section 198A of Corporations Act when an agent is appointed by the Board in a standard office, subject to anything contrary it will be assumed that the appointee shall have usual powers vested in normal circumstances. In case of appointing someone as Managing Director it implies to vest on him the following powers like supervising daily affairs and the other managers, and being in charge of the business of the company.4 In case of directors in a multi director company their power is collective as a board.5 In Panorama Developments it was held that the company secretary is now considered to be a company officer with extensive duties and responsibilities.6 There are exceptional situations of acquiescence by the company, suppose the individual director’s male fide act is knowingly ignored and not prevented by other board.7 If a company by its conduct acts in such a manner that implies that the respective person has considerable authority, then the company shall be estopped from denying the fact and the person will be treated as having ostensible authority. In Australian Corporation Law the following points are to be satisfied to prove that ostensible authority, there must be a representation by word or conduct that the person actually had authority i.e. the agent must be held out, the representation has to originate from someone with actual authority e.g. MD and may be embedded in the constitution of company, the representation was meant to be relied upon and was actually relied by the contractor. However in circumstances where the contractor had actual knowledge of fact he cannot claim safeguard under this doctrine.8 It is to be understood that the law for protection of contractors must be balanced. This balancing should be in both ways e.g. there are conflicting interests of both parties that need to be evenly matched.9 The first interest is about ‘business convenience’ where it is impractical and cumbersome to deal with the company if contractors have to investigate the internal proceedings. The second approach is the urge and necessity to safeguard the interests of shareholders and creditors.10 According to Judge Mason overemphasis of first interest, "facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies."11 The Corporations Law through doctrine of Indoor Management and under Sections 128 and 129 have adopted a business convenience approach, business contracts are held much above pecuniary and other interest of officers members and creditors of the company.12 However there is conflict of opinion, Corporations Law and the statutes extend greater protection to contractors in following cases. In Common Law the doctrine of indoor management was evolved in Royal British Bank v Turquand13 where any person dealing with a company in good faith and without any suspicion of irregularity or impropriety cannot be held liable for any actual occurrence of irregularity in respect of internal management, i.e. like propriety in appointment of directors, board meeting is properly convened or all board members are intimated and quorum was present during the meeting. However two exceptions are when a normal, customary enquiry was not made and reasonable action of a person in this situation.14 In case of common law if it is seen that under doctrine of constructive notice it is deemed that the contractor had knowledge of all public documents of company then he can be barred from benefiting under the IMR rule. In the case of Irvin vs. Union Bank of Australia the court restricted indoor management doctrine as the contractor could search public document to make an enquiry.15 However Section 130 abolishes doctrine of constructive notice in case of documents lodged in ASIC. Section 130 has changed the policy favouring contractors where doctrine of Indoor Management can apply widely with out interference from doctrine of Constructive notice. It must be noted that a company cannot be a benefactor of indoor management nor can indoor management be the reason to assume something which has not occurred, and also an insider cannot get help from this doctrine. Indoor Management doctrine has the following residual powers and still assist an contractor in the following cases, action by third party, situations outside scope of Section 128,129, situations prior to statutory assumptions, dealings with otherwise than a company i.e. society or credit union etc. IV. Balancing Competing Interest: Sections 128,129 provide added protection where by the contractor can make certain assumptions while dealing with the company. The company cannot argue against these assumptions in court of law and also us 128(4) the contractors may not rely on assumptions knowing them to be false here objective test is applied to know that the person knew about falsehood, assumptions can be made even if the officer or agent of the company forges any document or acts fraudulently. Assumptions are stated under Section 129 that a person dealing with a company may assume compliance with the company’s constitution and replaceable rules. Section 129(2) any person specified in ASIC as director or company secretary is assumed to be duly appointed and has authority to act on behalf of company. 129(4) specify that a person may assume that an officer or agent will perform their duties properly. As per section 128(4) the legislatures have tilted the balance in favour of contractor than in common law, however the courts have struck a balance and a person dealing with company are obligated to do verification and prudent enquiry according to CJ Mason, "such a principle will compel lending institutions to act prudently and by so doing enhance the integrity of commercial transaction and commercial morality".16 In Morris vs. Kanssen it has been stated that in liberal interpretation of Section 128(4) will lead to "encourage ignorance and condone dereliction of duty" in case lenders fail to make reasonable enquiry. For these reasons predecessor to section 128(4) Courts were reluctant to depart from common law and it is certain that new legislation was meant to give the contractors more protection which the Common Law was lacking.17 It should be kept in mind that us 128(4) onus of proof of finding whether a person knew an assumption to be false is on the company. It is further required that the parliaments intention are to be taken into account. The actual knowledge or suspicion has to be considered, however the objective test requirement is very strict and not like the earlier interpretation of current law. Section 128(4) changes the fact of a stranger ought to have done to that of the actual knowledge or suspicion of the contractor. However there are two versions, one relies on the old interpretation of actual knowledge and the other interpretation states that the real intention of parliament was to stress on assumptions made by the contractors about internal management of companies. It is true that this section stresses on the actual information and state of mind. For determining the knowledge or suspicion the court will stress on the experience and general knowledge of the contractor. It is also not required that a person has to be like a prudent and reasonable person to pass the test of actual knowledge and suspicion. It can be clearly concluded that parliament’s real intention is not to objectively interpret the act, it is to create a favourable provision for contractors than that existed during the previous legal sections were active, also despite the provision of objective test it can be assumed that to change the position of past common law interpretation the past objective test seems to be excluded to find it easier for contractors to do business with companies. V. Balancing of Statutes (us128, 129) and Common Law doctrines: In the early 19th century Turquand’s case the contractors were obligated heavily while dealing with companies, in 1960, 1970’s decisions as in Freeman & Lockyer18 and the Crabtree-Vickers19 case made mandatory for contractors to ascertain if directors had the necessary power to bind companies. These decisions forced legislations to be introduced to create business convenience, safeguarding contractor interest against that of corporate and its creditors. Kirby P remarks that the intention of legislature is to adopt a business convenience approach in order to carry out smooth business activity. It can be safely concluded that we should have statutory assumptions under sections 128 and 129.20 These assumptions improve the positions of contractors from that in Common Law and are meant to simplify the law, clarify the law and grant contractors more protection. However the parliament is not successful altogether as it needs to codify the law to make it simple, to clarify it needs clear pronouncement of High Court or clarifying the areas and scope of assumptions and to use clear and direct language to exclude controversial provisions of Common Law. Gummow J in the ACT Case considered that the statutory assumptions were not a "comprehensive code" but a set of provisions to repair the Common Law's failings.21 Some more clarifications of sections 128 are needed e.g. meaning of dealings us 128(1), us 128(3) is it, unauthorized fixing of company seal or simple forgery by counterfeit seal, correct test in knowledge or suspicion is objective or subjective as per 128(4). Who is an officer us 129(3) and does it allow ostensible authority and requirement of reliance, 129(4) what are the type of duties referred to, 129(5) or 129(6) a distinction needed to be made between substantive and formal authority. A clear interpretation from the High Court or the legislature on the correct application of the above issues would be necessary. Hammond states "I do not believe that Parliament has been sufficiently clear in its wording and explanation of the provision to force the courts to alter their approach to these types of situations." 22 VI. Conclusion: It should be borne in mind that a balance needs to be made so that the law does not seem uneven. Parliament by s128, 129 have taken a business convenience approach to further the interest of contractors and also efficacy of business interest is put above financial interest of officer’s members and creditors of companies. However if the motive is to cure the deficiencies of common law then further reforms are needed by legislation to safeguard the contractors interest. VII. Bibliography Books Baxt et al, Afterman & Baxt's Cases and Materials on Corporations and Associations, 8th ed (Australia: Butterworths 1999) Burnett B, Australian Corporations Law, (Australia: CCH 2001) Cassidy J, Concise Corporations Law, 3rd ed, (Australia: The Federation Press 2001) Christos Mantziaris, David Martin Native title corporations (ed 2000) p.220 Hanrahan P et al, Commercial Applications of Company Law, 2nd ed. (Australia: CCH 2001), p.4 Ian Turley Principles of commercial law 2nd ed. (2001) p.31 L. S. Sealy, Sarah Worthington Cases and materials in company law 8th ed. (2007) p.136 Peter Gillies Business law 12th ed. (2004) p. 456 Roman Tomasic, Stephen Bottomley, Rob McQueen Corporations law in Australia 2nd ed.( 2002) p.234 Ross Grantham, C. E. F. Rickett Corporate personality in the 20th century (1998) William David Duncan Joint ventures law in Australia 2nd ed. (2005) p182 Peter Gillies Business law 12th ed. (2004) p.490 Case Laws Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 at 51 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 Dawson J stated in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146] Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424 at 427 Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Irvine v Union Bank of Australia (1877) 2 App Cas 366 Lord Denning Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 Morris v Kanssen [1946] 1 All ER 586; AC 459 Nece Pty Ltd v Ritek Inc (1997) 24 ACSR 38 Northside Developments Pty Ltd v Registrar-General ["Northside Case"](1990) 170 CLR 146 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 Royal British Bank v Turquand (1856) 119 ER 886 Law Journal Hammond C, (1998), 16 Companies and Securities Law Journal, p 562 Acts Australian Securities and Investments Commission Act (ASIC) Corporations Act 2001 Cth In Australia corporations are registered and regulated by the Commonwealth Government. Corporations law has been largely codified in the Corporations Act 2001 (Cth). The Act is the result of a successful High Court of Australia challenge in New South Wales v Commonwealth (1990) 169 CLR 482 ('The Corporations Act Case'). Earlier the commonwealth couldnot legislate to form a corporation, Section 51(xx) of the Australian Constitution was found to only provide sufficient power to legislate for formulation of corporates in the Commonwealth. The Act was an outcome of the resolve of the Federal Parliament to establish modern national laws to govern corporations. Company Law Review Act 1998 (Cth) Corporate Law Economic Reform Act 1998 (Cth) Websites: Australian Parliament: http://www.aph.gov.au Read More