Thursday, December 12, 2019

Cases and Materials on Corporations Method †

Question: Discuss about the Cases and Materials on Corporations Method. Answer: Introduction: In the present question, the issue is related with the capacity of the creditors of Woodcraft Pty Ltd to recover their money from the company. For example, you need to be seen if Forest Products Pty Ltd can recover the amount of $20,000 from the company. In the same way, it also needs to be seen if Eastpac Bank Ltd can recover the amount of $500,000 that were borrowed by the company to purchase a stud. Similarly, it has to be considered a National Finance Ltd. can recover the amount of $2,500,000 that was used for purchasing a commercial property. The law provides that under certain circumstances, addressing can be held personally liable regarding the debts arising out of first business. Similarly, the beneficiaries of the test can also be held liable to indemnify the trustee where the trust funds are insufficient to fulfill the liabilities of the trustee that have been incurred during the course of those businesses. Although trusts are used extensively for businesses, estate management and charitable purposes, but it is significant to know the risks involved and to seek appropriate legal advice in order to mitigate these risks. Some of the key principles that are related with liability and indemnity and that need to be kept in mind by trustees and beneficiaries are as follows:- The law provides that a trustee (including a corporation) can be held individually accountable regarding the debts that have been incurred during the course of business of the trust.[1] This also provides that the liability of a trustee towards the creditors is not restricted to the extent of the assets of the trust.[2] According to the Corporations Act, 2001, it has been mentioned in section 197 that the directors of corporate trustee to be considered as being jointly and individually liable regarding the discharge of the debts of the Corporation increase the corporation has not and is not in a position to discharge its debts and where the corporation is not eligible to be indemnified from the assets of the trust due to (a) breach of trust by the company and/or (b) if the corporation has acted beyond the scope of its powers as a trustee or if (c) a term of trust denies or limits the rights of the company to be indemnified. The court stated in the decision given in RJK Enterprises P/L v Webb[3] that section 197 of the Corporations Act should not be considered as rendering a director accountable when there is the pride of indemnity in place but insufficient funds are present to fulfill the indemnity. This position is contrary to the position adopted by the court in Hanel v ONeill.[4] In this decision, it was stated by the court that s. 197, Corporations Act can be construed as meaning that the directors of corporate trustee's can be held as guarantors for the liability that has been entered into by the trustee. However, it was explained by Douglas J that s. 197 has been amended in 2005 with a view to amend a perceived anomaly that was present as a result of the interpretation of decision by the Supreme Court of South Australia and also to override the decision given in Hanel. In order to make sure that the liability of the directors of the trustee operations extends only so far is intended when this sect ion has been set in its original structure in the corporation law. The court further stated in TFML Ltd v MacarthurCook Fund Management Ltd.[5] that a trustee who enters into a contractual obligation while performing the trust may limit its liability to the extent of the right of indemnity arising from the assets of the trust. However in Yara Australia Pty Ltd v Oswal[6], it was held that the limitation will not follow as a result of the mere description of a party as a trustee. Therefore the law provides that the trustees are entitled to be reimbursed under equity and also the legislation, from the assets of trust, regarding all charges and expenses that may be incurred by them while executing the trust. This right of the trustees was to be given priority as against the rights and interests of the beneficiaries concerning the enforcement of indemnity. In order to secure these rights, a trustee as the charge or a lien over the assets.[7] Under these circumstances and applying the legal principles mentioned above, it can be said that in this case, Forest Products Pty Ltd can recover $20,000 from the beneficiaries of the trust. This amount was due when the company had ordered timber worth $20,000 from Forest Products. At the same time, acting on the advice given by the solicitor, the company decided to diversify into real estate and horse breeding business. For this purpose, Michael and Claire had taken a loan of $500,000 from Eastpac Bank Ltd as the directors of Woodcraft Pty Ltd. At this time, Eastpac was advised that Woodcraft Pty Ltd is acting as a trustee and similarly a copy of trust deed was also provided to the bank. It had been mentioned in the trust deed that the trustee is authorized for involving in wholesale and retail furniture trade. Therefore in this case, the directors of the corporate trustee can be held personally liable for repaying the amount of $500,000 to Eastpac Bank Ltd., because in this case a copy of trust deed had also been provided to the bank. At the same time, another amount of $2,500,000, and also been borrowed by the company from National Finance Ltd. for the purpose of producing a commercial property. However, the hopes of earning rental income were also frustrated when the company could not find suitable tenants for the property. Under these circumstances, the company was unable to pay its debts. As a result, in this case, National Finance Ltd. can recover the amount from the two directors of the company, Michael and Claire. The issue in this question is a contract signed by Tom and Jack can be enforced against the company. This issue arises due to the fact that it has been mentioned in the constitution of the company that before entering into a contract by the company, a formal approval from the board is necessary. Only then, one director and company secretary can sign the contract. But in the present case, Jack and Tom had signed the contract without obtaining the approval of the board of the company. However, the law provides protection to the outsiders in case of corporate contracts in order to balance competing policy issues. Therefore, under the common law, with the help of the notion of indoor management rule and under the statutory law, through sections 128 and 129, more of a business convenience approach has been adopted in order to protect the outsiders while they are dealing with companies.[8] Under this policy of business convenience, it is necessary that the accuracy of business transactions are generally given preference is compared to the financial interests of the innocent officers, members and the creditors of a company. The common law indoor management rule provides that when an outsider is going to form a contract with the person who purports to be acting on behalf of the company but who does not have the necessary authority, the contract was voidable at the option of the company unless it was ratified.[9] However such a situation resulted in a particularly harsh outcome for the outsiders, especially the creditors, who were dealing with the company in good faith and who did not have the resources to find if all the necessary internal approvals and requirements are satisfied in case of the particular transaction.[10] To deal with this issue, common law came up with the indoor management rule. This rule was provided in Royal British Bank v Turquand which is also popularly known as the Turquand's Case.[11] According to the indoor management rule, it doesn't provided that when an outsider is dealing with a company under good faith and without having any notice or reasonable grounds to suspect any impropriety or irregularity is not impacted by any such actual impropriety or irregularity concerning an internal regulation on management of the company. As this rule provides that an outsider is not required to check if the necessary internal action has been taken and therefore the outsider can resume the all the internal requirements are fulfilled wh ile entering into the transaction. This assumption is known as the indoor management rule because it covers all the matters that are within the management of the company and are not public.[12] Similarly, the indoor management rule has also been incorporated in the Corporations Act, 2001. The relevant sections in this regard are Ss 128 and 129 even if the indoor management rule also has residual application.[13] Therefore this rule can still assist an outsider and continue to be relevant for the companies in case of the action by third parties, situations falling beyond the scope of Ss 128 and 129; regarding the dealings with the corporations that does not fall under the definition of a company mentioned in section 9 of the Corporations Act.[14] In this context, there are certain assumptions present in Ss 128 and 129 that can be made by an outsider while dealing with a company. Section 128 provides that these assumptions can be made by any person dealing with a company.[15] The court had stated in Gye v McIntyre[16] that the term "dealings" as a very wide score and therefore it includes much more than a legally binding contract or a deal. By giving a wide interpretation to the term, it is considered to include a single transaction, purported dealings and pre-contractual negotiations.[17] According to section 128(4), a person cannot rely on the statutory assumptions if at the time of the dealing, the person knew or had reason to suspect the assumption was not true. This exception is applicable in cases where the outsider has actual knowledge or suspicion and not merely the circumstances where any reasonable person would be put on inquiry.[18] Moreover, the statutory assumptions mentioned in s129(5) and (8) can only be made wh ere it appears that the document has been instituted by the corporation in accordance with s127. Due to this reason, where it appears that the contract was entered into on way out for the company by person, it will be prudent for the outsider to make inquiries regarding the source of the authority of the person entering the contract on behalf of the company.[19] As a result of the application of the above-mentioned legal principles to the facts of this question, it can be said that although the constitution of Midas Ltd., required that the formal approval of the board was necessary before entering into a contract, and in this case the approval of the board was not present, still the contract signed by Jack and Tom can be enforced against Midas Ltd. raises that in these days, the statutory assumptions mentioned in s. 129 can be made by the outsider. Therefore it can be assumed that all the internal rules of management were complied with before entering into the contract. The effect is that the contract can be enforced against the company and the company is bound to perform its obligations under the contract. Bibliography 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) Fisher S et al, Butterworths Tutorial Series: Corporations Law, 2nd ed, (Australia: Butterworths 2001) Hanrahan P et al, Commercial Applications of Company Law, (Australia: CCH 2000) Hanrahan P et al, Commercial Applications of Company Law, 2nd ed (Australia: CCH 2001) Lipton et al, Understanding Company Law, 10th ed (Australia: LBC 2001) Meagher et al, Equity: Doctrines and Remedies, 3rd ed (Sydney: Butterworths 1992) Redmond P, Companies and Securities Law Commentary and Material, 3rd ed (Australia: LBC 2000) Tomasic and Bottomely, Corporations Law in Australia, (Australia: The Federation Press 1995) Elders Trustee v Reeves (1987) 78 ALR 193 Gye v McIntyre (1991) 98 ALR 393 Hanel v ONeill [2003] SASC 409 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 RJK Enterprises P/L v Webb Anor [2006] QSC 101 Royal British Bank v Turquand (1856) 6 EB 327 TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 29 Yara Australia Pty Ltd v Oswal (No 2) [2013] WASCA 187

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