Explain whether BNZ bank can enforce its mortgage over the building. Consider whether it can rely
of the assumptions in s129 of the Corporations Act. and whether an exception to the assumption by
way of s128(4) is applicable. Refer to case law to explain your conclusion.
Answer:
Any legal cases can be enumerated in 5 parts.
1. Facts of the Case: Mrs Jones completed a loan application to borrow $300,000 which states purpose
the funds will be used for. In the application Mrs Jones advises that the funds will be used to expand
their business into Western Australia and establish a new company. The shareholders and directors
of the new company will be Mrs Jones and her friend. The relevant bank manager knows Mr & Mrs
Jones well and has always met with them both. The bank manager is concerned with the loan
applications however makes no further enquiries. The banker manager agrees with Mrs Jones to lend
the money on the basis that the bank can take security over the company’s major asset being a
building from which the company operates. Mrs Jones lends the monies to a new company in which
she is a director and shareholder in with her best friend. Mrs Jones intention is to establish the new
company with her best friend and then leave her husband. Mrs Jones obtains the loan and mortgage
documents from the bank. She affixes the common seal of the company and her best friend signs as
secretary. The bank advances the money. Mrs Jones lends the monies to the new company. The new
company establishes a business in Western Australia and then commences the process of
approaching the largest clients of Jones Hardware Pty Ltd.
2. Question Arise: In the aforesaid case , a legal question has arised, whether BNZ bank can
enforce its mortgage over the building? Whether Bank Manager can go further for execution of
mortgage agreement, based on the evidences available with the managers.
3. Relevant Laws: Each Country has its own law. In Australia Corporation Act has been enacted to
deal with such type of situations.
Provisions of Section 128 of Corporation Act 2001
Proper performance of duties
128 (4) provides therein that "A person may assume that the officers and agents of the company
properly perform their duties to the company.:
The Bank wants to take the plea that they can take assumption that Director of the Company has
properly performed their duties to the Company and hence mortgage documents are to be enforced
at once.
4. Relevant Case Laws: Purported dealings under s128(1) Soyfer v Earlmaze Pty Ltd (Hodgson CJ
in Eq) “if it can be assumed (and cannot be denied by the company) that a company has duly
executed a document, I do not think there is any separate question as to whether this was duly
authorised.”
Further in other cases, law has established practice to decide in favour of Bankers and against the
corporations.
5. Conclusion or Decision: Based on the evidences and law of the country, Bank can go for
enforcing the mortgage documents and Company denial is not acceptable on any of the grounds.
Question: Briefly discuss whether Mrs Jones has breached any director duties in establishing the
new company and approaching clients.
Ans.: The Directors of the company are in fiduciary relationship with the company. They are supposed
to work with honestly, reliability and competency for the development and growth of the company.
There actions should only be in the best interest of the company. Any activities done by the directors
which if affects the interest of the company or against the company, or the activities is causing financial
losses to the company or affecting the performances of the company or are detrimental to the financial
position or performance of the company, than these are unethical, illegal also. Mrs Jones has breached
clearly the duties as director while establishing a new company, advancing the loan to that company
and by approaching with the clients of existing company through new company for getting orders in
new company. Its a clear case of breach of duties are punishable under the laws of the country.
Owners believe on directors and based on such faith, directors manages their investment. its a case
of breach of trust. She will be punished for all such offences.
Link 2:
As per corporate law, any corporation can lend money to any officer or another employee of the
corporation or any other employee or director whenever in judgment of directors such as loan,
guarantee or assistance may expected to benefit the organisation. The loan, gurantee or other
assistance may be secured or unsecured in such a manner as board of director shall approve.
So on this basis only director cannot make such decision. There is need of approval of each of them.
Mortgages, obligations or other securities sold by corporation deemed lawful investment only for
security purposes not for personal usage purposes.
In first case mary is not liable to the car finance company. Car finance company needs to take
approval of other directors before financing the car. Because this cannot done only on one directors
basis. So in this case the approval of mary is not taken. Hence she is not liable to pay for the loan of
her husband.
In second case mary again is not liable to easy loan bank. Easy loan bank need to take approval of
all the directors but they do not demand for the document needed to show that mary was no longer
company secretary in the corporation. They must rely on word of mouth. They must complete all the
proper documentation. They do not take approval of all boards of directors. Hence she is not liable in
this scenario. According to section 129 of corporation act permits a person dealing with a company
to assume that document has been duly executed. For a company with two or more directors the
documentation have been executed by two directors or directors or secretary. The assumption only
applies when a person is dealing with the company. So on this basis the documentation must be
executed by all the directors but easy loan bank did not do so.
Link 3
A company can execute a contract under the Corporations Act in different ways. The first way is by
getting it signed by the two directors of the company, or one director and one company secretary or
by the sole director and secretary of a company. Second way is through the company seal but it should
be witnessed by the director and company secretary. Third way is execute it through an agent and the
identity, authority and duration of such role as agent should be properly specified. Finally, through any
other way the company has specified which is very rare.
Eastpac can definitely enforce the mortgage over the building and whether it can rely of the
assumptions in s129 of the Corporations Act because the document brought or surrendered by Mrs
Quibble has the seal of the company and the signature of both hers and her husband.
Although the assumption is that the person performs his or her duty properly for the company but in
this case, the bank cannot assume that way because the manager then will be liable to his company
for not performing his job well. So the bank has to act against the mortgage although Mr. Quibble was
not aware of the mortgage.
In the past, the famous case of Hospital Products vs USA Surgical determined the
fiduciary relationship between directors and their company. The directors are
expected to be honestly, reliability and competency when their governance and
decision making can directly impair and affect the company’s wealth. The
corporations act 2001 specifies four main duties for directors: care and diligence,
good faith, use of position and use of information. In similar circumstances, the
director must exercise his/her powers and perform his/her duties with the same
care and diligence as reasonable businessman (sec180). The decision-making for a
proper purpose must be appropriate and goodwill for the best interests of the
company (sec181). The decision is not made based on self-judgment according to
self-subjective opinions. Furthermore, the duty of a director is not to improperly
use his/her position information for indirect or directly gaining material personal
interest which can cause detriment to the corporation (sec182, 183). These duties
still remain its validation in effect after ending contract with the company. In
these cases, if the directors direct or indirect violate of the above obligations,
they will face with penalties as criminal sanctions, civil sanctions, disqualification,
or commercial consequences (sec184). In the previous case, Mr. Barker had
clearly breached the duties of director. Based upon the above legal principles, he
breached the duties of care when he imposed his power to deal with supplier the
10 times the price higher contract. In reasonable business situation, it needed the
agreement and confirmation between two directors, when an individual director
does not usually have any customary power to bind the company contractually to
a third party. However, in this case, Mr. Barker acted on behalf of a contracting
without Mrs. Luke’s awareness. This decision was made by himself under his selfsubjective assumption. it is important to point out that the nature of this
recklessly action was for his self-interest which was not proper purpose for the
best interest of the company and impaired its performances. Consequently, the
company was significant affected when it had to pay $2.5m debts (account
payable) for supplier. Moreover, he misused his position and power as a director,
and available information of Roofs company in order to directly gain his own
profit. The Roofs’ reputation and operating profit exceedingly impacted when his
new company returned a profit of $1.5m by using information in order to tender
for contracts which won by Roofs without commission. In general, it can say that
Mr. Barker breached four main duties for directors, he acted careless with falsity
purpose that gained self-benefit by using position, power, and information as
Roofs’ director. These dishonesty and recklessness actions significantly affect not
only financial but also reputation standing of Roofs. As these failures, Mr. Barker
might face with serval penalties. He may be ordered to pay compensation with
unlimited amount of payable for construction contracts or order contract
damages of the company (sec1317E); and disqualify director by ASIC and the
courts (Part 2D.6). In the worst case, he properly he had to take criminal sanctions
that faced to imprisonment from 3 to 12 months or up to five years for violation
and dishonesty (Crime Act, 1914, sec206B and Part 9.4B)
Steel4u Pty Ltd (‘Steel’) signed a contract for the supply of $2.5m worth of steel with No1in Roofs Pt Ltd
(‘Roofs’). Although both companies have enter into deals for as long as for 25 years, the above dealing
was 10 times the price of previous dealings and was, contrary to the previous dealings, signed only by
one of Roofs directors, Mr. Barry, who informed Steel’s manager during the contract negation that he
was starting a new company that the other director of Roofs, Mrs. Luke, was not aware of. Steel has
requested Roofs to pay the outstanding contract of $2.5m, however, Mrs. Luke, director, and secretary
of Roofs refuses to pay the contract value insofar she has not record of the contract in Roofs files.
Hence, determining whether Steel can enforce the $2.5m contract against Roofs will depend upon the
resolution of whether Steel entered into the contract as an innocent this party who assumed that Mr.
Barry was hold by Roofs with full authority to enter into that contract.