The Contract Made by Sona - Assignment Example

Organization law Name Institution Question 1- Management and governance Companies/corporations Corporate governance simply refers to the process by which companies or corporations are directed and controlled. It, therefore, encompasses the leadership, stewardship, authority and accountability of the people responsible for leading these organizations. In a company, the directors are responsible for leadership and control over the activities of the company. A director of a company, therefore, owes a fiduciary duty of care to the company to ensure that all actions and activities are for the benefit of the company. A company can have both executive and non-executive directors. The executive directors are the ones responsible for running the company. They are the key decision makers of the company and, therefore, are to be held responsible for any actions taken. Both the executive and non-executive directors form the Board of Directors which is responsible for the direction and control of the company. (Australian Government, 2010) The directors of a company are accountable to the Board of Directors of the company. The board is responsible for directing the activities of the company while the directors are responsible for implementing the directives of the board. The directors are, therefore, supposed to report to the board on the progress and the welfare of the company. The directors of a company are also accountable to the members of the company who are also shareholders. These are the people who have invested in the company hence they have the power to question the actions of the directors especially during annual general meetings. Further, the Corporations Act 2001 provides for the duties of a company. The Australian Securities and Investments Commission has the power, under the Act, to deal with those directors who have breached the duties under the Act. The directors have to comply with the company’s constitution as well as the replaceable rules under the Act.(Australian Government, 2010) Partnerships The Partnership Act 1891, section 1(1), defines a partnership as the relationship between two or more persons carrying on a business in common with a view of making profit. A partnership is, therefore, formed through an agreement between the partners. The partnership agreement creates certain fiduciary obligations such that the partners are required to exercise their rights and powers for the benefit of each other and of the partnership. The partners in a partnership are responsible for managing the affairs of the partnership. The decision of either partner, therefore, binds the other partner as well as the partnership.It is, therefore, the responsibility of the partners to make decisions in regard to the activities together. In some cases, the partners may decide to put a limit on the powers of a single partner. This means that a partner will not be required to exceed such powers. In many cases the limitation lies in the value of a contract that bide the partnership when entered into by a single partner.Every partner is considered as an agent of the firm and of the partnership and, therefore, is required to ensure that the decisions made are in the best interest of the partnership. (Callison et al., 2012) A partner is accountable to the firm or the partnership and to the other partners. Section 29(1) of the Partnership Act 1891 requires a partner to account to the firm and to the other partners for any benefit that is derived by the partner without the consent of the other partners that relates to a transaction that concerns the partnership. Under section 30(1), a partner will also be held accountable to the firm where such a partner engages in any competing business. In such a case, the partner will be required to pay all the profits made by the partner. It is, therefore, the responsibility of all the partners in a partnership to ensure that their decisions are for the benefit of the partnership. Where this is not the case, the partner in question will be held accountable by the other partners in the business. Question 2 Issue The issue is whether Free Spirit Pty Ltd is bound to the contract entered into by Sona. Rule Section 127(1) of the Corporations Act 2001 provides that a company can execute a document without the use of a common seal only if the document is signed by two directors or by a director and a company secretary of the company. It is only in a sole proprietor company where the sole director can sign the document without the presence of another director or an officer of the company. Application According to section 127(1) of the Corporations Act, a company document is considered to be legally executed, without the use of a common seal, where the document is signed either by two directors or by one director and a company secretary. Where such is the case, the document will have been executed correctly and, therefore, the company would be bound by the contents of the document. In this case, the contract in question would have been correctly executed had it been signed by both Sona and Sam. However, Sona is the only one who signed the document in regard to the contract for the loan amounting to $180,000. According to the provisions of the Act, such execution of the contract was in contravention of the Corporations Act. Further, the company’s constitution stated that the managing director, Sona, would have the capacity to bind the company to contracts worth less than $50,000. The loan taken by Sona was clearly beyond the amount indicated in the company’s constitution. The question, therefore, arises as to whether the company can be bound by a document which was wrongly executed and where the managing director was actually in breach of the constitution of the company by acting beyond her powers. Section 129 allows a person dealing with a company to make certain assumptions which are protected by the law. Section 129(3) allows a person dealing with a company to assume that anyone held out by the company as an officer, has been duly appointed and has the power to perform duties that would normally be exercised by an officer in such a position. In this case, Sona had interacted with the bank officials on several accounts when depositing the weekly earnings. The company had held her out as an officer of the company. The bank was, therefore, justified to assume that she had the power to enter into a contract on behalf of the company. Section 129(1) on the other hand provides that a person may assume that the constitution of the company and the provisions of the act have been complied with. According to this provision, both the bank’s accountant and the lending officer would be justified in assuming that Sona had complied with the provisions of the company’s constitution and, therefore, proceed to award the loan even in the absence of another director. (Tomasic et al., 2002) The position held by section 129(1) is further elaborated by the indoor management rule. This rule was developed in Royal British Bank v Turquand ALL ER [1856] 435 where the court stated that a person dealing with a corporation has no obligation to ensure that the internal rules have been complied with (Cain, 1989). The person will, therefore, not be required to ensure that any procedures in the articles or policies of the company that give authority to a person acting on behalf of the company have been complied with.The rule was developed to prevent a company from escaping liability by denying authority of its officials as was provided in the earlier doctrine of constructive notice. In this case, the bank was not required by law to ensure that the internal rules giving Sona the authority to act on behalf of the company had been complied with. To this extent, it would seem that the company would be bound by the contract entered into by Sona. However, under Common law, the due inquiry exception exists to the indoor management rule. This exception prevents an outsider from presuming that everything has been done correctly where, had he conducted inquiry; he would have known that something was wrongly done. In Lyford v Media Portfolio Ltd [1989] 7 ACLC 271, the court held that this exception applies especially where, due to connection or relationship with the company, the person ought to have knowledge of irregularity and, therefore, conducted some enquiry. In case such person failed to conduct the inquiry, such person would neither be allowed to rely on the indoor management rule or on the assumptions under section 129 of the Corporations Act. (Austin & Ramsay, 2007) According to Bank of New Zealand v Fiberi Pty Ltd This exception applies [1992] 10 ACLC 1557, the exception applies where there is a relationship between the person and the company. In this case, the bank was the company’s bank and, therefore, from the relationship with the company, the officials at the bank were supposed to enquire as to why Sona was signing off the loan without another director. This requirement was complied with when the bank’s accountant and the lending officer questioned Sona as to why she was signing off the loan alone. Sona responded that the others were unavailable and that it was okay for her to sign off the loan alone. (Tomasic et al., 2002) Conclusion The company is bound to the contract made by Sona. The fact thatSona contravened the company’s constitution by entering into the contract for the loan without another directordoes not mean that the company can escape liability for the loan. The indoor management rule and provisions of section 129 of the Corporations Act protects the bank. The bank officials conducted the enquiry required hence the bank is not exempted from relying on the indoor management rule. This means that the company is bound by the contract for the loan entered into by Sona. References Corporations Act 2001 Partnership Act 1891 Australian Government (2010). Corporate governance handbook for company directors and committee members. Commonwealth of Australia. Retrieved September 13, 2015, from: https://www.dss.gov.au/sites/default/files/documents/05_2012/gov_handbook_2010.pdf Cain, T. E. (1989). Rule of British Bank v Turquand in 1989, The Bond L. Rev., 1, i. Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Federation Press. Austin, R. P., & Ramsay, I. M. (2007). Ford's principles of corporations law (Vol. 14). Sydney: LexisNexis Butterworths. Callison, J. W., & Sullivan, M. A. (2012). Partnership Law and Practice: General and Limited Partnerships. West. Read More