A prime objective of registering a company is to execute a business with the third party or with the contractor. In order to conduct a business with outsiders, a company should execute a contract with the outsiders. As mentioned in s124 of Corporation Act 2001 . A company is a separate legal entity and distinct from its members. Now the question arises, how does the company execute a contract with the third party if it is a separate legal entity? In order to come up with the solution we have to highlight some key points of Organic Theory and Law of Agency.
Organic theory explains that a company has two organs that are the board of directors and the members in general meeting. The boards of directors and members are the directing mind of the company and have a strong influence on management policy and their activity is regarded as that of the company. However, it is almost impossible for the outsider to have a direct dealing with the above mentioned organs. However, an agent or employee can execute the contract on behalf of its company and s126 gives legal power to a person acting on behalf of the company and the company is bound for the act of their agent. And this could be done by the Law of Agency
In order to execute the contract the agent should have some authority. As these authorities can be delegate by actual or ostensible way. The authority which is granted by a principal to its agents under a contract is an actual authority. Actual authority may be express or implied. Like in this case Kapoor acted as a managing director with the approval of board was an express actual authority. As with the implied actual authority an agent who is appointed to manage a business has implied authority to make contract that a manager does in this position. In ostensible authority a principal represents that an agent has authority to act on his behalf without any written agreement. If the third party is aware of the representation and transact with the apparent agent then the company will be estoppel from denying the representation. Therefore, meaning that the company cannot deny if it is representing its agent to the third party. In that case, one would question, how a third party would be known of that the agent they are dealing with possesses one of these authority? To answer this, one must expand his knowledge upon indoor management rule and section 128 and 129 of corporation act 2001.
Indoor Management Rule
Turquand’s case was the inspiration for the indoor management rules. The rule explains if a company’s board of director wants to give authority to an agent then they have to fulfill some procedural conditions that are, the directors must be properly appointed, members must be fully informed, quorum must be present at the time of making decision. However, the issue is how would the third party be aware of the fulfillment of such conditions? By the help of the indoor rules a third party is allowed to make some assumptions such as there is no procedural defects while appointing directors, a director’s board meeting was properly called and held, board approval required has been obtained. For instance, the IMR, third party is allowed to make some assumptions in s128 & 129 too.
Section 128 and 129
The main purpose of s129 assumptions is to protect third party who deals with an agent in a good faith of conducting business. A third party is allowed to make some assumption while dealing with a company on a regular activity of their business. These assumptions are explained in s129 and company is liable not to disagree with their assumption. However, the third party may loss the right to assume if he is aware that the assumptions are incorrect. A person may assume, dealing with a company, that its constitution or any other rules have complied with s129(1). The section doesn’t require having knowledge of the company’s constitution as we have seen in Oris Fund Management Ltd v NAB (2003) VSC 315. And as per s128(4), third party is not allowed to make assumption if he have doubts with the non compliance of company’s constitutions. Under s129(2), third party may assume from the information provided to the public from ASIC about the director and company secretary. In Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR11, it was held that a predecessor of s128(1) allowed s129 assumptions to be made only in relation to assertions by the company that they are not correct. Where an assertion of non compliance with the constitution is made by a third party, the rule in Turquand’s case and its limitation will still apply. In Richard Brady Franks Ltd v Price (1937) 58 CLR 112, the common law established rule that a company cannot avoid a contract entered on its behalf by other agent who have breached his fiduciary duty where the third party was acting in a good faith.
Analysis Of The Statutory Assumptions
The rule in Turquand’s case placed heavy burden on third party dealing with companies. Case like Freeman v Lockyer re emphasized the need for outsiders to ascertain if organs had necessary power to bind the company. Those decisions led parliament to introduce the statutory changes to make business convenience. These results in introduce the s128 and s129. Now the question is whether these sections are protecting the outsiders in any fraudulent act by the company.
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