Introduction
According to Corporations Act 2001, a company will enter into a contract with other companies given that there is an outsider making transactions on behalf of the company. This paper attempts to explain the act by focusing on ways to protect an outsider in case they are prone to unscrupulous dealings from the insiders. In cases where a company enters into a contract with an outsider by way of forgeries or faked authority, the outsider’s company receives the protection from the act. The first part of the paper focuses on the ability of a company to enforce a guarantee and mortgage contract. The second part of the assignment will attempt to explicate the ability of a company to enforce such contracts given that the company assumes a partnership nature.
The Indoor Management Rules and Forgeries
Woodward & Sievers (2001, p. 45) highlight that it is important to make examination on the scope of corporate law in Australia. In particular, the case involving David’s acts of forgery serving as a director of ABC Pty Ltd has significant effects on the ability of the common law to enforce and guarantee contract on Easyloan bank. It is essential to notice that ‘The Indoor Management Rules and Forgeries’ in the corporations act of 2001 does not exquisitely resolve issues that revolve around forgeries. First, the rule has it that forgery is completely different doctrine that does not constitute a rule on itself (Lipton & Herzberg 2001, p. 18).
It usually carries no weight to assume that false signatures used by David to guarantee mortgage to his benefit would be a point of consideration when enforcing the law to ensure that ABC Pty Ltd pays Easyloan Bank the amount of personal loan it guarantees to David.
As elucidated by (Law &Pascoe 2000, p. 92), a company can enforce a guarantee and mortgage contract against another company if the guiding principles of estoppels are able to enhance its denial of the authenticity of the signatures and the subsequent authority of the guarantor. It is therefore noticeable that the corporations’ act of 2001 treats forgery as a different doctrine that falls within the basic principles of estoppels (Ford & Austin 1995, p. 93). In line with these arguments, Easyloan Bank will not only be able to enforce guarantee and mortgage contract against ABC Pty Ltd but will also assume responsibility of nullifying the authority bestowed on David.
An obvious perspective that would arise regarding the ability of Easyloan Bank to enforce guarantee and mortgage contract to the ABC Pty Ltd is the balance of competing interests (Gray & Mannix 1994, p. 123). In the second part of Corporation act 2001, it is imperative to protect outsiders from corporate contract. The law articulates that a director of a company who purports to enter into a contract on behalf of his/her company with a bank through false signatures and without authority may limit the ability of the bank to enforce a binding contract with the company. In this case, the law stipulates that Easyloan Bank is unable to enforce guarantee and mortgage against ABC Pty Ltd. Although David was able to solicit the correct signatures, he acted without the substantive authority to enter into a binding contract with Easyloan bank on behalf of the company.
Further, it is important as a matter of provision for Easyloan Bank to have been able to investigate David effectively on his ability to wield authority of entering the company into a binding contract (Gardner 1996, p. 79). In addition, Gardner (1996, p. 79) says that it is also important to understand that Easyloan Bank’s director, David, has the responsibility and role of promoting efficient business transaction even though it may end to becoming a huge source of loss for ABC Pty’s shareholders as well as other creditors. While we focus on the two arguments, it is apparent that there are two issues at competition.
First, Corporations’ Act of 2001 highlights that there is the interest of business convenience that would be under threat if persons entering their companies into legally binding contracts would face necessary investigation from the company that is negotiating a contract (Woodward & Sievers 2001, p. 117). This would be the first interest that would be the importance of the validity of instruments. In addition, there is the interest of protecting the stakeholders as well as the creditors.
There should be an emphasis of balancing the two interests in the sense that one should not place increased focus on one end (Lipton & Herzberg 2001, p. 129). Over emphasis of the first interest may enhance the commission of fraudulent and incline favor only to those who deal with the company without necessarily considering the interests of the stakeholders who might be the victims of persons purporting to act on behalf of the company through unscrupulous acts.
Notably, the common law through the rule of indoor management have adopted a more proactive approach in protecting companies from outsiders who attempt to enter into contracts on behalf of the company(Lipton & Herzberg 2001, p. 131). In fulfillment of the first interest, that involves business convenience, the efficacy of a company or business is important and precedes all other material and financial interests of officers and other actors of specific company. It important to underscore that while we recognize the need to strike a balance between these two competing interests, the common law fails to provide the extents to which one interests ought to precede the other in a number of occasions.
Indoor Management Rule (IMR)
The common law stipulates that in cases where outsiders purportedly acted on behalf of their respective companies without relevant authority, the contract is void at the disposition of the company. As such, in the case involving David who is an outsider, ABC Pty Ltd can declare the contract as voidable. Otherwise regarded as the Indoor Management Rule, the provision reflects harsh outcomes for outsiders who may have utilized the principle of good faith in their actions and faced constraints in the ability to establish the actual authority of the signatories at the point in which they were entering a contract (Lipton 1991, p. 132). To be able to resolve this seemingly cyclical problem of competing interests, IMR has been critical in making such deliberations and was typical of Turquand’s case.
It stipulates that a company should fulfill some provisions and requisite conditions that would see it give an agent substantive authority to enter into concrete contracts with other companies (Whincop 2000, p. 19). According to IMR, the appointment of directors (Chen, David and Sarah) ought to have strictly followed the rules and principles that guide such actions. Besides, there must have been a properly convened meeting and information regarding entering into a contract provided to all members. Finally, there must be a quorum during the meeting in which the members transfer authority to outsiders. How is it possible for a company to prove that the validity of actual wielder of authority when entering into a binding contract?
Under this rule, an outsider who may be acting in utmost good faith and showing no cause for suspicion in case of irregularities may not suffer from the actual fraudulent dealings and irregularities involving internal regulation. As such, an outsider gets absolution on the necessity to countercheck on whether the company indeed had put in place measures and is able to assume that a company has undergone through the actual procedures.
Thus, the rule covers all activities of the company that are not within the domain of the public. IMR allow an outsider to assume that there has been a proper process of appointing the directors of the company. Besides, it is within the discretion of the outsider to assume that the company had convened a meeting of the directors during which all approvals regarding the replaceable rules are within the company’s constitution (Woodward & Sievers 2001, p. 79). The IMR has the property of ensuring that a company may enter into a contract with person as well as private corporate.
In this case, it is very possible to hold ABC Pty liable to any loss that may have resulted from the escape of one of their directors who has decided to defraud the company. Under IMR, Easyloan Bank entered a contract with ABC Pty like outsiders. As such, the former had the no probable cause for suspecting that David was out to defraud them. Besides, the bank was under no obligation not to assume that ABC Pty had convened a meeting, made appropriate adjustments to the company’s constitution and followed all other matters of relating to internal management. IMR provides that the innocent stakeholders of Easyloan Bank receive protection from fraudulent dealers.
Although it may seem apparent that ABC Pty’s director could continue to defrauding their company by use of fake signatures, it is important also to notice the low level of enactment of investigative protocols when entering a contract. In line with Turquand’s case ruling, the judges opted to protect the innocent stakeholders at the expense of a company whose director had used forgery to enter into a contract (Woodward & Sievers 2001, p. 89).
Under special situations, IMR may be inapplicable making it possible for Easyloan Bank to incur the costs of irregularities. Under instances where the outsider possesses knowledge of the existence of irregularities during the transaction, IMR may become void and inapplicable (Whincop 2000, p. 28).
The rationale is that it requires subjectivity to unravel the actual knowledge. In other words, it is important to notice that the rule attempts to discourage outsiders from ignoring some aspects of irregularities deliberately when entering into a legally binding contract. In this case, Easyloan Bank ought to apply the IMR since it is apparent that the irregularities by David did little to enhance its ability to have prior knowledge of the impending irregularities. If David could have colluded in any way with the outsiders, the case could absolve ABC Pty from the misdeeds.
Moreover, the common law stipulates that an outsider may fail to derive the properties of the IMR when a court put them into inquiry. This exception articulates that an outsider may not utilize the IMR owing to their inabilities to make inquiries that would conventionally typify such a transaction. In addition, the court may deny a company the benefits of the IMR owing to unreasonable inquiries and poor investigations that may accrue other outsiders facing such transaction.
For instance, if an outsider enters a contract and fails to appraise reasonable aspects of irregularities under normal circumstances, they may face court’s injunctions that may deny them the ability to use the rule in their arguments. This was apparent during the Northside Case during which the court ruled in favor of the assertion that despite the lack of prior knowledge, the outsider ought to have made significant efforts to enhance their knowledge on the facts that were discoverable at the point of entering the contract. There should be reasonable proof that the outsider was able to questions all aspects of the contract.
IMR and Partnerships
Easyloan Bank would still have been able to enforce a mortgage contract were David, Chen and Sarah involved in a partnership arrangements. The rationale is that the corporation act of 2001explicates that the IMR is not beneficial to companies (Whincop 2000, p. 36).
The principles that guide IMR dictate that a company ought not to rely on the rule to derive benefits. In other words, the IMR aims at offering protection to unknowing outsiders who might want to enforce a contract and may not comprehend the actual internal management and actual arrangements that the company undergoes. For instance, in occasions where a company attempt to liaise with another person, Q, and are trying to uphold specific transactions contrary to a claim by another person or company that the contract is invalid, IMR applies in favor of the person, Q. This is also applicable for companies that wish to uphold their transactions and assume a position similar to Q (Lipton & Herzberg 2001, p. 179)
Lipton & Herzberg (2001, p. 179) say that it is also important to realize that the IMR rule rarely benefits an insider despite being in transaction. The rationale is that a director within the partnership arrangement may not be in need of the application of IMR similar to an outsider. Besides, the rule does not offer any protection to the insiders since they rarely lack the knowledge about the internal operations of the company. As such, the partners could not depend on IMR to enhance increased benefits. These assertions were evident during the Morris Vs Kanssen case (Woodward & Sievers 2001, p. 142).
Conclusion
In sum, Easyloan Bank has the ability to enforce mortgage and guarantee contract on that ABC Pty Ltd. Indoor Management Rule aims at protecting the outsiders and companies such as Easyloan Bank from fraudulent acts by their insiders. The rule recognizes that the outsiders may fail to understand the internal operations of a company. In line with corporation’s act of 2001, an outsider can assume that the company has convened meeting, realigned all things that needed to approval and achieved a requisite quorum (Ford & Austin 1995, p. 71). As such, if Easyloan Bank had no reasonable grounds to suspect David for irregularities, it has the ability to enforce a guarantee and mortgage on ABC Pty Ltd. This is even if the directors were acting as partners.
References
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