Whether the company bound by the contract by the two mentioned directors?
Bankruptcy Act of 1966
Corporations Act 2001
Application of the facts
A director of a company is a person employed by the company who executes all duties related to management of the company affairs. Although according to the case of Salomon V Solomon (1897) 31 a company is a corporate entity with perpetual succession, can own property and is capable of suing and being sued, the execution of its duties is done by the directors (Ciro& Symes, 2008).
According to the facts given, Peter a director has been declared bankrupt but he enters into a contract with Bruce and a third party relating to the company. According to the Australian corporation Act 2001, an undischarged bankrupt is prohibited from affairs of the company and one can not transact the affairs of the company in the capacity of a director. In addition, under Part X of the Australian Bankruptcy Act, one is totally barred from managing any corporation and if he/she was a director before the bankruptcy proceedings, he/she ceases to hold such a post. The only exception created to accept such a disqualification is in circumstances whereby the party declared Bankrupt seeks leave of court to manage the company. This includes those people who have earlier executed a deed as provided under Part X of the Bankruptcy Act 1966 (Wishart, 2008).
In the present facts, Peter was the director of the company but he has been adjudicated bankrupt hence he lacks the legal capacity to enter into a contract on behalf of the company. The provisions of the Corporations Act 2001 outlaws a person adjudicated bankruptcy to trade or enter into a contract without the leave of the court. Peter has breached the said provisions and hence court will fine him $5,500 or one year imprisonment. Court has a wide discretion to award either a fine or an imprisonment. To avoid bankrupt parties representing the company, it is prudent for the company to file a notice of cessation to the registrar of the company’s office with the name of the replacement (Tomasic,Bottomley & McQueen, 2002).
The facts further state that Bruce who is the managing director represents Peter like a director of the company. A third party subsequently enters in a contract with the company. The legal wording of Bruce acts is indoor transactions principle. However, the misrepresentation he has done to the unsuspecting third party is dealt with in favor of the third party. The company through the misrepresentation of a Managing Director is bound by the contract entered into. Indoor management rule means a company officer with information which is not accessible by the public about the company. The indoor management principle is to the effect that the genuine party who contracts with the company should not be put at a disadvantage. The common law position on indoor management is to the effect that the company is bound since the third party can not be taken to get more information than the accessible public information. In such a case whenever it is proved that the third party entered in the contract in good faith, the company is bound by the contract (Tomasic,Bottomley & Mcqueen, 2002).
The dealings indicate that Bruce was aware of the bankruptcy status of Peter but he went ahead to represent him as if he had the capacity to contract. The Australian Corporations Act 2001 prohibits any officer of any company who negligently or fraudulently breaches their fiduciary duty owed to the company. The common law fiduciary duty requires the officers of the company to act in good faith and to the best interest of the company. From the facts given Bruce who is the managing director of the company has breached his duties by engaging in fraudulent dealing.In the case S & Y Investments Pty Limited V Commercial Union Assurance Ltd 85 FLR 285, court held that a company can be held vicariously for the acts of the officers, employees or agents acting on behalf of the company (Ciro& Symes, 2008).
For one to act as an agent of the company, he/she must have either express authority, implied authority as it was stated in the case of Freeman & Lockyer V Buckhurst Part Properties Ltd  2 QB 480 where court held that the misrepresentation made by the company’s agent must have been relied on by the third party to his or her detriment. The issue of Peter representing himself to have agent powers to the reliance of the contracting third party will be taken as if Peter had the said powers. If Bruce was in acting capacity, the company would be vicariously liable for any fraudulent acts to the third parties (Cassidy, 2006).
The Australian Company law is to the effect that there are duties established whereby officers of the company must at all material times follow. A director once adjudged bankrupt he/she ceases to be a director of the company. In case of a transaction between the bankrupt director and a third party the company is held vicariously liable and the director is held personally liable. The indoor principle protects a party from being disadvantaged out of a misrepresentation.
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