Law of Business Association Corporations Act

Question: Discuss about the Law of Business Associationfor Corporations Act. Answer: Issue The main issue is to determine whether the company is bound by the contract. Rule Any document or letter (without seal) extended to the third party, on behalf of the company would be considered as legal document only if it has signed by the following entities under the Section 127 of Corporations Act 2001 (Cth). Two directors of the company One director and a secretary of the company In case of sole proprietary firm, letter extended by the sole director According to the Section 129(3) and Section 129(4)[1], an individual person would be considered as officer or agent of the given company if the following conditions are fulfilled[2] Person has been duly authorized by the company Director of the company has extended the authorization to agent to work on behalf of the company. Moreover, it is essential to note that if the third party has received any of the above mentioned documents then in such cases, the third party can rely on the details mentioned in the document. Further, under the subsection 128(3)[3], an outside party can rely on the assumption that the concerned agent is authorised to enter into a legal relation, irrespective of the fact that the authorization mentioned in the document is correct or not. This understanding is also reiterated in the indoor management rule as per which, the outside party can enter into the contract with the agent of the company assuming legal authorization if no reasonable suspicion is present. If the agent does not have the requisite authority, then also the company is liable to discharge the contractual obligations.[4] The leading case in this scenario is Royal British Bank v Turquand[5] case. The only condition to be fulfilled is that the outsider has entered into the contract in good faith and does not know about that the agent does not have such authority. Application Case Facts Harry who is the managing director of the given company has extended the authority to William to enact a contract with the third party. William is bankrupt and cannot act as a director of the company. Harry has also provided a letter addressed to the other party that William is a director of the company and hence, has the authority to form a contract. The third party was not aware about the fact that William has been instructed to only negotiate the contract but lacked the authority to enter into the contract. However, William signed the contract with the third part as an agent of the company. It is apparent that William had been authorized as an agent of the given company by the managing director Harry, irrespective of his bankruptcy. Moreover, Harry has extended a letter to the third party clearly stating that William has the authority to enter into a contract. The third party was not aware about the fact that William is a bankrupt and does not have the legal authority to enter into contract. Under the provision of indoor management rules, the rights of third party are protected if they enter into contractual relation with company in good faith. Clearly, in this case the outside party also had no clues about the internal understanding which was not documented in the letter sent. Therefore, a legal contract has been enacted between the company and third party. In this scenario, it has been assumed that the third party was aware about the fact that Harry was only acting but not appointed as managing director and thus, no contract would be enacted between the parties. This is because the outside party cannot assume protection under Section 128 as Harry is not a director as defined by Section 129(2).As a result, it is quite possible that the powers may be curtailed and hence the contract should have been enacted by the company only after confirmation from a appointed director about the authorization of the agent executing contract on companys behalf. Conclusion In the first case, a legal enforceable contract has been formed between the third party and company is liable to perform the contractual obligations or else the third party can sue the company for breaching the contract. In the second case, no contract has been enacted between the parties under the assumption that the third party is aware that Harry does not have the position of managing director. Issue The central issue is to determine whether the contract has been executed between the concerned parties and to comment whether bank can enforce the guarantee against the company. Rule Under the verdict of various case laws and Section 127, it is apparent that in order to create a contract between the parties, the contractual documents must be signed by the following entity of the company[6]. The company has only one director and a secretary then it is essential that the document must be signed by the director and the sole secretary of the company. The company has two directors then it is imperative that both the directors must sign the document in order to recognise as legal document for the enactment of the contract. The company is functioning as a sole propionate firm then the signature of a director would be essential to enact a contract. It is noteworthy that if the contractual or guarantee document does not comprise the seal of the respective company and company has two directors, then it is pivotal that both the directors sign the document in order to create legal relation of perform any work on behalf of the company under the Section 127. Duly signed document on the part of the both the directors under the subsection 127(1)[7] would result execution of the contract and the third party can assume that the information provided in the document is correctly represented and they can rely on the assurance provided[8] Further, as per Section 126, the contract can be formed by the agent of the company if the agent has authorized by the company in the accordance of agency law. Moreover, a company is considered a legal entity itself under the common law and the agent who is working on the part of the company can enact the contract with the third party. The representation made by the agent of the company would enforceable on the company, irrespective of the fact that the principal has authorized the agent for that relevant work or not. Indoor management rule will protect the rights of the third party, under the condition when that party was not aware about that the person is authorized to perform such acts, contracts or working fraudulently on behalf of the company under the highlights of Section 128 (4)[9] of Corporations Act 2001 (Cth). In such scenario, the company has the liability to perform the duties as promised or enacted by the agent. Application Case Facts: Maria and David are the two directors and shareholders of a company. Maria has borrowed $100,000 from bank for companys progress and for some private work. Maria has taken the money on her own name and she has provided a bank guarantee from the company. Moreover, Maria has signed the loan documents and she also put fraudulent signature on behalf of David. David is not aware about this act of loan and fraudulent signature on the part of Maria. It is apparent from the relevant law and case facts that guarantee document contains the signature of both the director, which is essential in order to execute a document. However, it is evident that Maria has fraudulently signed the guarantee on behalf of David. Bank which is third party in this case, does not know that Maria has fraudulently signed the contract because of the different handwriting. They are aware that Maria and David are the two directors and the guarantee document must contain both the signatures, which is a prerequisite under the section 127. Further, Maria is working as an agent on the part of the company and has the authority to create legal relationship with the outsiders. Moreover, it is noticeable that the act of Maria comprises dual purposes i.e. progress of the company and also private use. Further, the act of the agent on behalf of the company for the progress of the company would be considered as enforceable contract. Therefore, a contract has been enact ed between the parties and Maria has acted as an agent for company and her contract with the Bank is enforceable on the company despite the fraudulent signature as the indoor management rule would seek to upheld the interest of the bank as it was not aware. Conclusion It can be concluded that if Maria does not meet the repayment of the loan, then Bank can enforce the guarantee against the company and the company would have to repay the outstanding loan amount.