Is Jack Liable For The Payment Of The Invoice? An Analysis Of Agency Law And Director’s Duties
Background and Issue
Is Jack liable for the payment of the invoice?
When any two parties share the relationship of a principal and an agent, then, they are governed with the laws of agency. An agency is established amid the parties when any person (as an agent) is hired by the principal in order to carry out functions on behalf of the principal with the third parties. Any contractual relationship which is carried out by the agent with the third parties has a binding effect on the principal. When any agent acts for the principal, then, an indirect association is established amid the third party and the principal, wherein, the third party can hold the principal liable for the acts that are carried on but the agent within his authorities. No principal can deny the existence of such acts/omissions which are carried on by an agent within the authority. (Turner 1999)
In the leading case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964], the courts have established that the authority that is presumed by the agent from the principal are normally of two kinds, that is, actual and ostensible authority. (Gibson and Fraser 2013)
An actual authority is said to be possessed by the agent when the principal directly confers or delegates authority to him. This can be done either expressly or impliedly. An actual express authority is granted to an agent when the principal directly himself confers or delegate power to the agent to represent him in front of the third parties. The grant of the authority is very direct, that is, either by words, or by acts, or in written form. The only requirement is that the delegation is direct and expressed and is held in the leading case of Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985). But, an actual implied authority is an authority that is assumed by the agent impliedly, that is, these are the authority that are assumed by the agent in order to comply with the express authorities, that is, they are derived from the express authority itself and is held in the leading case of Hely-Hutchinson v Brayhead [1968]). Both, these authorities are actual authorities that are delegated to an agent by the principal thereby making the principal personally liable for the acts or omissions undertaken by the agent within such authority.
Now, there is yet another authority that can be possessed by an agent and is called apparent authority or the ostensible authority. An ostensible authority is present and is possessed by an agent when the principal makes any kind of representation which portrays or gives a feeling to the third party that the agent is the delegator or the authorized representor of the principal. In such authority if any act or omission is carried out by an agent with the third party then such act or omission is binding on the principal and the third party has all the authority to sue the principal for the compliance of such act or omission and is held in the leading case of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971]. In the leading case of Goldberg v Jenkins (1889), the apparent or the ostensible authority is established and it was held that in order to make an agent authorised and to assume powers to bind the principal by his acts or omissions, it is necessary that there should be some representation made by the principal in front of the third party which makes the third party believe that the agent is the authorized representor of the principal and any act under such authority will grant power to the third party to sue the principal. (Collins 2003)
Agency Law: Applicability and Analysis
Le Petit Gâteau’ is owned by Jack. He runs the bakert café as a sole proprietor. The bakery sells freshly baked artisan bread and a range of pastries to patrons. Michelle is appointed as a chef manager at the bakery.
Now, there are several responsibilities that are allocated by Jack to Michelle expressly. Thus, the express authority that is allocated to Michelle includes:
- He is mainly authorized to supervise everything that moves out of the kitchen.
- He is in full control of all the culinary assistants and the chefs.
- He discussed the purchase of the supplies, mixers and bake wares with Jack.
Now,
Michelle discuses regarding the purchase of the supplies, mixers and bake wares with Jack and it is after the discussion, Jack suing off the orders internally and then it is Michelle who then dispatches the orders to the suppliers. Thus, it is Michelle who is dealing with the suppliers directly on behalf of Jack.
Now, Glitzy Touch is one of the suppliers of Jack. It is in regular dealing with Michelle on behalf of Jack. After securing orders from Michelle it sends invoices to Jack.
Now, it is submitted that there is ostensible authority that can be possessed by Michelle on behalf of Jack. It is submitted that Jack has made a representation in front of Glitzy Touch that Michelle is the authorized representative of Jack and is thus permitted to secure orders on behalf of Le Petit Gâteau’. Jack by sending the orders through Michelle has made the outsider believe that Michelle is authored to seek orders. This representation is made by Jack on his own. The delegation of authority on Michelle is direct. Glitzy Touch is giving orders to Michelle on the basis of the said authorization only. There are no reasons to make Glitzy Touch believe that Micelle is not permitted to seek orders on behalf of Jack.
It is thus submitted that in the month of November when Jack was on a work trip to Montreal, an offer is received by Michelle from Glitzy Touch to purchase a supply of edible gold leaf sheets at less than half of the usual cost. The offer was found to be very attractive by Michelle and the application of the gold leaves on the cakes and chocolates might be very beneficial in the festive season. Michelle is also aware that Jack was discussing him with the challenges that they might face in the season. Michelle was not able to reach Jack and thus confirms the order to Glitzy Touch.
Now, it is submitted that Glitzy Touch’ is in regular tough with Michelle and seek order from him on behalf of Jack. This authority is granted to Michelle by Jack himself and Glitzy Touch’ is aware of the same. Thus, there is clear presence of ostensible authority on the part of Michelle and the order of $5,000 worth of supplies that is taken by Michelle with Glitzy Touch’ on behalf of Jack is valid in nature.
Director’s Duties and Insolvent Trading
The order is considered to be valid as Glitzy Touch’ is not aware of any defect in the authority of Michelle, that is, Jack has not expressly allowed Michelle to confirm the order to the gold leaves with Glitzy Touch.
Conclusion
Thus, the order of $5,000 worth of supplies by Michelle with Glitzy Touch’ is valid as the same is carried under the ostensible authority that is assumed by Michelle on behalf of Jack. Thus, Jack cannot refuse to pay the invoice that is raised by Glitzy Touch’.
What are Jack’s options regarding Michelle’s behavior and to avoid this problem in the future? Provide ONE possible suggestion and give reasons for your answer?
As Michelle is the agent of Jack and he has possessed ostensible authority to bind Jack by his acts and omissions. But, it is submitted that Michelle has possessed this authority and because of such authority has made a contractual relationship with Glitzy Touch. But, Jack has faced setbacks as he has not signed the order form to secure purchases from Glitzy Touch’. But, the contractual relationship is held to be binding as Glitzy Touch’ is under the impression that Michelle is authored to bind Jack by his actions.
Now, in order to recover from the behaviors of Michelle and to avoid any kind of future problems it is necessary that Jack must make an express declaration in front of Glitzy Touch’ and specifies that Michelle is only authored to bind Jack by his actions provided the order forms must be signed by Jack.
Also, Jack can provide a disclaimer wherein he can specify that Michele is only authored to do certain acts and beyond such acts Jack is not liable to make good any loss that is suffered by any third party inclusive Glitzy Touch. Thus, it is suggested to Jack that he must use declaimers and restrict the authority of Michelle and prevent him to undertake tasks which are only authorized him to do.
Whether Michelle has breached any statutory director’s duties and is personally liable for the debt?
The Corporation Act 2001 is the governing force that guides the acts and working of any company. As per Salmon v Salomon & Co Ltd (1897) once a company is formulated then it is a separate legal entity in law and the acts of the company are only carried out in the name of the company. But, since a company is not a natural being and does not have mind of its own, thus, it requires directors for its working. Section 9 of the Corporation Act 2001 submits that a person is said to be the director of the company provided he is complying with the acts and duties that exists with the position of a director. Thus, it is not the position of a director that makes him a director, rather, it is the acts and duties comply with by a person which makes him a director. So, a de-facto director and a shadow director are also called the director of a company and he must also comply with the duties of a director.
Conclusion
The various duties that are imposed upon a company director include: (PWS, 2013)
- Section 180 of the 2001 Act – Section 180 (1) submits that when a director is complying with his directorial duties then he must take all adequate care and skill before complying with such duties. As per section 180, the care and skill of a director must be judged as what a reasonable prudent man would have acted in the similar situation. As per ASIC v Adler and Ors(2002) a director can protect him provided he can prove that his acts are based on sound decision making, expert advice, etc.
- Section 588G of the 2001 Act – Section 588G of the Act submits that no company director must indulge in any act which results in making the company insolvent and is held in the leading case of Woodgate v Davis(2002). It is the duty of the director that he must make sure that the company must not indulge in any acts which raises the debt of the company which the company is not able to pay and is held in the leading case of Walker v Wimborne (1976). Any company director is held to be liable for incurring insolvent trading provided there are few essential requirements are comply with which includes:
- As per Hall v Poolman(2007), when the debt is raised by the company, then, the same is raised by the director of the company;
- As per Morley v. Statewide Tobacco Services Ltd[1993], it is necessary to prove that there are possibilities that because of the incurrence of the debt the company will be insolvent or the company was already insolvent when the debt is raised by the director of the company;
- As per Power v Traveller(2005), it is necessary that the company is not able to set off its debts.
When all the element are comply with then the director is held to be liable for incurring debt and trading insolvent and so there is breach of section 588G of the Act. However, as per Commonwealth Bank of Australia v Friedrich (1991), if the director can prove that he made all the resemble efforts to make sure that the company does not become insolvent and that his acts are based on expert advice then the director is not held to be liable for insolvent trading and this defense is held in section 588H of the Act. Also, as per Metropolitan Fire Systems Pty Limited v Miller (1997) if the director is of the view that the debt raised by him will not result in the insolvency of the company then there is no violation.
But, if any director is found to be in violation of his duties under section 588G of the Act then he can be impose with civil penalties of $220,000, he can be disqualified under section 206C of the Act and can also be asked to pay compensation under section 1317H of the Act. Apart from civil penalties, criminal penalties can be also be imposed if the acts are carried with dishonest and reckless actions as can be imposed with an imprisonment of five years and a fine of $340,000. (Bevan 2013)
Micelles decide to leave the service of Jack and thus she was offered a position as director for a new catering company based in Geelong, ‘Le Petit Plat Pty Ltd.’ the main roles and responsibilities that are allocated to Michelle is that she was held to be the executive managing director of the company and has is the director of the catering department and is also part of the board of directors of the company.
Now, Michelle is possessed with all the directorial duties that are made part of the Corporation Act 2001. However, during the first month of being a director took loan of $600,000 from Best Bank Limited on behalf of the company. The loan was taken so that Michelle signs a million dollar contract to purchase ten delivery vehicles, which are weather proof and refrigerated, and thus suitable to transport perishable foods safely. But, the loan was taken by Michelle without reading the financial reports of the company. The reports have decided that the company is in financial difficulties.
Now it is submitted that there are several directorial duties that are violated by Micelles.
It is submitted that there is breach of duty of care and skill as Michelle has taken loan from the bank without seeking the financial reports of the company. The director must act with all care and diligence before taking any decision on behalf of the company and non- compliance of the same is nothing but the breach of section 180 of the 2001 Act. The duty is said to be breached because the acts of Michelle is not as what a prudent man would have acted in the similar situation.
Michelle is also liable for violation of section 588G of the Act that is, incurring insolvent trading of the company while being the director of the company. it is submitted that Michelle is the director of the company and he took loan of $600,000 from Best Bank Limited on behalf of the company. Thus a debt is raised upon the company by Michelle when he was the director of the company. The company was already in financial difficulties before the debt is taken and because of the new dent raised by Michelle, the company is not in the position to pay off the debt. Thus, there is clear violation of section 588G of the act and Michelle is held to be liable for insolvent trading. Michelle cannot take the defense of section 588H as his acts are not carried out after reviewing the financial reports of the company or by seeking any advice.
So, Michelle must face the consequences and can be disqualified from his position and can also be impose with fine and compensation. If the acts are carried out with reckless intention then he can also be imposed with imprisonment.
Conclusion
It is thus concluded that Michelle is found to be in violation of section 180 and section 588G of the corporation act and he can thus be imposed with both the civil and criminal consequences.
‘Le Petit Plat’ is seeking further advice. What changes could Le Petit Plat’ make with respect to the operation of their businesses, in particular regarding the personal risks of a director? Provide ONE example and explain your answer in particular how it would have helped managing the risk better in our scenario.
The corporation Act 2001 is the enactment that guides the working of a company. Every company must either run by its constitution or by the replaceable rules or by both. Thus, one of the options that is available by the company is that it can alter the constitution of the company and therein restrict the liability of the directors of the company. As per section 136 of the Act the constitution of the company can be altered by passing a special resolution with seventy five percentages of the votes of the shareholders and the changes are binding on company.
Thus, when the liability of Michelle is restricted then the risk of the director of the company can be restricted in nature.
Also, in order to manage the risk in the given scenario, it is important that objects must be set out in the constitution of the company as per section 125 of the act. an object can be made part of the constitution wherein the power of the director to secure finance from the debt can be curtailed, thereby, the risk of the company can be minimized. If by using section 125 of the act, the power of Michelle is curtailed to secure finance, then the task can be managed better in the given scenario.
Thus, the company has the power to manage the liability of Michelle and to manage the risk of the company by alerting the constitution of the company and by changing the object clause of the company.
Reference List
Books/Articles/Journals
Caffrey, B 1991, Guidebook to Contract Law in Australia, CCH Australia.
Collins, C 2003, The Law of Contract, Cambridge University Press.
Gibson, A and Fraser, D 2013, Business Law 2014, Pearson Higher Education AU.
Turner C 1999, Australian Commercial Law, LBC Information Services.
Case Laws
ASIC v Adler and Ors [2002] NSWSC 171.
Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 59 ALJR 393;
Commonwealth Bank of Australia v Friedrich (1991),
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Goldberg v Jenkins (1889) 15 VLR 36;
Hall v Poolman (2007),
Hely-Hutchinson v Brayhead [1968] 1 QB 549.
Metropolitan Fire Systems Pty Limited v Miller (1997);
Morley v. Statewide Tobacco Services Ltd [1993],
Power v Traveller (2005),
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.
Salmon v Salomon & Co Ltd [1897] AC 22.
Walker v Wimborne (1976) 137 CLR 1.
Woodgate v Davis (2002) 55 NSWLR 222
Online material
Bevan C (2013) A guide to directors Duty in Australia <https://www.findlaw.com.au/articles/32/directors-duties.aspx >.
PWS (2018) A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia <https://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf>.