LST5CCL Foundations Of Company And Commercial Law

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LST5CCL Foundations Of Company And Commercial Law

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LST5CCL Foundations Of Company And Commercial Law

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Course Code: LST5CCL
University: La Trobe University

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Country: Australia


Jack owns ‘Le Petit Gâteau’, a waterfront bakery-café which he runs as a sole proprietorship, in Melbourne’s Docklands. The bakery sells freshly baked artisan bread and a range of pastries to patrons.
He recently hired chef manager Michelle to supervise everything that goes out of the kitchen. As the head chef, Michelle has to maintain full control of the chefs and culinary assistants. She discusses the purchase of supplies, mixers and bakeware with the owner, Jack. It was agreed that Jack would then sign off on the orders internally and Michelle would then dispatch the order to suppliers. One of their regular suppliers is ‘Glitzy Touch’ who sends the invoice for the order to Jack.
In the month of November, and while Jack is on a work trip to Montreal, Michelle receives a one-day offer from ‘Glitzy Touch’ to purchase a supply of edible gold leaf sheets at less than half of the usual cost. Michelle thinks that applying gold leaf would turn the cakes and chocolates into works of art and it is likely that it could help the café pull ahead of competitors during the festive season. Michelle and Jack had been talking about the challenges for the season, in particular to make the baked goods more attractive.
As Jack has not provided details of his hotel in Montreal, Michelle could not consult him about the purchase. She is concerned it would be difficult to get patrons in the door in the month of December, so she places an order for
$5,000 worth of supplies. On his return to Melbourne, Jack receives an invoice from ‘Glitzy Touch’. He refuses to pay as he has not signed off on the order before Michelle dispatched it.
1a) Is Jack liable for the payment of the invoice? Give reasons for your answer; in particular support your answer by citing relevant cases. (20 marks)
1b) What are Jack’s options regarding Michelle’s behaviour and to avoid this problem in the future? Provide one possible suggestion and give reasons for your answer, in particular support your answer by citing relevant cases.
Michelle is very distressed by these events and decides she needs a sea change. The special promotion for the festive season by ‘Le Petit Gâteau’ was a success, the customers loved the golden touch of the products. Still, she quits her job at ‘Le Petit Gâteau’. She is offered a position as director for a new catering company based in Geelong, ‘Le Petit Plat Pty Ltd.’. Her official position is executive manager of catering and she sits on the board.
In her first month as director, Michelle signs a million dollar contract to purchase ten delivery vehicles, which are weatherproof and refrigerated, and thus suitable to transport perishable foods safely. In the process, she borrows
$600,000 from Best Bank Limited on behalf of the company.
Michelle has not attended any board meetings since her appointment and has not read the financial reports. As such she is not aware of the company’s financial difficulties. Indeed, when she placed the order, the company already had outstanding debts that it could not pay.
2a) Michelle is worried that she might have breached any statutory director’s duties and is personally liable for the debt. Give reasons for your answer; in particular support your answer by citing relevant cases and statutory provision.
As by miracle ‘Le Petit Plat’ manages to avoid administration and liquidation by cutting back their spending. The business obtains a very lucrative contract where the transport vehicles came in handy, indeed they needed them in order to bid on a contract. However, the other directors are worried about the future and what they can do in order to manage the risks better.
2b) ‘Le Petit Plat’ is seeking further advice. What changes could it 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.


1.a. Issue
In the present case, Michelle is responsible for supervision as well as control of chefs and culinary assistants. However, Jack the owner was on a work trip, Michelle received an attractive offer from ‘Glitzy Touch’ relating to the supply of edible gold leaf sheet at a lower price. Though, she is not authorized to sign off the order. As the offer was attractive and beneficial for the organization, Michelle wanted to convey the details to Jack in order to attain the advantage of same. But as Jack did not provide the details of his hotel, she was not able to communicate with him.  Further, Michelle did not want to lose the opportunity, and she purchased an order of $5000 of supplies. But Jack refused to pay the same as it was dispatched by Michelle. The issue is whether Jack is liable or not.
The rule of law specifies that everyone is required to act in accordance with law comprising government organization and authorities. Laws are transparent, clear and appropriately available to all the citizens in an easy manner. However, the independent court system is empowered to interpret and apply the law in a reasonable manner.
Provisions relating to professed authority were concluded in the case law of Freeman& Lockyer v Buckhurst Properties. In the specified case, BP Properties had purchased and developed the land. A has not been employed as General Manager but acts like a manager,and BP is informed about this. Further, A appoints F& L architects to design plans etc.  At the same time, A was not the MD, but his actions are similar to MD’s express authority.  F&L send off the account to BP. The issue, in this case, was that BP properties reject to give payment since A is not a manager. However, it was held that BP alleged out to be a manager as the organisation accepts his demeanour.  Further, BP has to give payment to the bill which is sent by A.
The further court also implies a term in case it believes that the term represents the parties’ intention as objectively. Thus, in order to involve a term on this basis below specified conditions are required to be accomplished:

The term should be identifiable apparently.
The transaction should be adequately numerous
The current transactions fit into that course of business.
There should be no conflict among inferred term and stated term.

In the present case study as transaction accomplishes all the above requirements, it is implied by the supplier that Jack knows about the deal and has accepted his. Thus he will be liable to pay the same.
In the present case, situation exists as in case of Freeman& Lockyer v Buckhurst Properties, i.e. as Glitzy Touch is a regular supplier and they know the fact that Michelle is having the authority of dispatching orders and not signing off the same. However, she has sufficient authority to take a decision. Another case which can be considered in this situation is Case law of Hewson v Sydney Stock Exchange (1967) 87 WN INSW 422 which concludes that agent must act in the preeminent interest of Principal. In the present case principal and agent, relation exists between Michelle and Jack. Moreover, Michelle has taken a decision in the best interest of the principal. As they will not get this opportunity again and the same will help them to pull café ahead of competitors during the festive season. She has also complied with fiduciary duties of an agent, i.e. acting in good confidence required and account truthfully. Thus Jack is liable for payment of the invoice.
However, Jack was able to allege breach on the basis that Buyer is required to rely on the description. The same was concluded in the case law of Enterprises Ltd v Christopher Hull Fine Art Ltd (1990) 1 All ER 737 (UK Court of Appeal) and Ashington Piggeries Ltd v Christopher Hill Ltd (1971) All ER 847 (House of Lords). As Michelle was not authorized to sign the order and ‘Glitzy Touch’ is a regular supplier, so it is general to assume that every order is signed by Jack only. Thus he must not have accepted the order as it was not signed by Jack.
After assessing the whole situation, it can be assessed that Michelle has not taken any action for self-interest and considered profit of the organization before taking any decision. The situation can also be referred with the decision of the case of operation of the law of emergency as in case of Great Northern Railway Co. v Swaffield. In this case,the horse was sent by train,but no one was available to meet at the station. Thus, station master took the horse to stable until the owner claimed it. It was concluded that agency existed and the owner is liable for the cost of the stable. In the present case also Michele took a decision only because Jack was not available and she was also not having details of the hotel while he went for the work trip. Michelle took the decision as she knows that they will not get this opportunity again and through accepting the offer she can provide large profit to the bakery which is his responsibility as a manager and super chef. Moreover, Michelle has accomplished fiduciary duty of an agent that she should act in best interest of principal in his absence. Thus Jack is liable to make payment for the order provided by Michelle.
1.b. Issue
The issue in the present case is how a principal can avoid issues relating to the agent taking the decision out of the authority or power as Michelle did in ‘Le Petit Gateau’
Ratification provision specifies that in case agent has acted without permission of principal in that case principal has right to ratify the transaction subsequently. The same decision was made in case of Bolton Partners v Lamber (1889). Another decision of the court which can be related to the present case is a case of ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi in which element of business efficacy has been explained. As per the case business efficacy leads to make the contract work. Thus in case agent is authorised to sell goods than it is not implied that she is allowed to offer a discount. The same can be interpreted that agent is required to act within provided authority only on a compulsory basis (Poole, 2016).
In the present case in order to avoid a similar problem in future Jack can provide agent’s authority through interpretation of conditions relating to authority in power of attorney. One of such decision was made in case of D & J Hatchery, Inc. Appellee v Feeders Elevator, INC, Appellant that unauthorized acts of an agent of an organization might be ratified by the organization by conduct implying approval. Another option, which is available to clear terms with suppliers to not to accept order in case the invoice is not signed by him. Through this Jack will be able to control the offer of the order of supplies without his permission. Moreover, Michelle will also understand his responsibility and the extent to which she is able to take a decision. However, the decision made Michelle was out of the authority available to him, but she took a decision in favour of principal only as she complied fiduciary responsibility of an agent.
The most appropriate option is to develop a power of attorney or deed or agreement which clearly specifies the power or decision which can be taken by Michelle. Further, she can also include certain powers which cannot be taken by him in any condition so that no issues arise relating to same in future. Jack can get that deed or agreement signed by Michelle and assures that in case she makes any decision out of the power or authority that Jack or his organization will not be responsible for same. Moreover, she herself will be responsible for the decision as well as any payments relating to same. If once Michelle has signed the agreement she will think twice before making a decision out of his authority and will work in accordance with available powers. Jack should also make a habit of providing details relating to address and mobile no. so that Michelle or another employee can communicate with him in case of emergency. If, in the present situation Jack had provided details to Michelle before going on a work tour than it is possible that the present situation would not have arisen.
2.a. Issue
In present case now Michelle has made a significant change and quitted a job at ‘Le Petit Gateau’ and accepted the job of manager at ‘Le Petit Plat Pty Ltd.’ In the first month, she made a major decision of purchasing ten delivery vehicle without assessing the financial position of the company.   The issue is that whether Michelle has breached statutory duties and how ‘Le Petit Gateau’ could manage the risk relating to the personal risk of a director.
1. Definition of Director
As per S9CA directors are the key managerial personnel of the company, who has the responsibility to act in such a manner which leads to the best interest of the company as well as the shareholders of the company.
2. Breach of duties of director
Duties of the director under common law
As per common law, board of directors are responsible for the management and controlling of the activities carried out in the company by exercising duty of care, skill and diligence. It is the duty of the board of directors to establish the policy and strategy of the company along with to observe the operations of the policy in the good faith of the company. Further, at a reasonable period of time, directors have to monitor and review the activities of the company, so that they can evaluate whether the activities and operations of the company are as per the established set of policies and strategies.
In the Act, various statutory duties for the board of directors have been defined, which is mandatory to comply by the board of directors of the company.
The duty of the directors bifurcated into the common law, fiduciary duties and duty provided under the Corporation Act 2001.

Directors should perform their duties by complying with the principles of reasonable care so that no other person can be harmed by their activities.
It is the duty of the director to exercise due care and skills and take all the steps by which the conflict of interest can be avoided. Along with this, the director should be loyal towards the company, and therefore functions of the directors must be for a proper reason and in good faith.

Duties of the director under Statutory Law
According to section 181, of the Corporation Act 2001, states that the director should perform their duty reliably and leads to the benefit for the entire company.
Circle Petroleum (QLD) P/L v Greenslade, is on the subject of alleged failure of managing director of the joint venture business that is half-owned by oil company, for the purpose of calculating debts and was unpaid to the joint venture company. However, they are failed to exercise due diligence and due to which company suffered from losses.   
3. Defences
However, director have defence towards consequence as per rule, s 180 (2) CA which states that if director had acted in good faith then they will not be liable to pay damages.
4. Damages
In accordance with the provisions of, s 588G(1) CA director have duty to avoid insolvent trading. Therefore; director have responsibility to establish that director must establish that they have reasonable grounds regarding their judgment that company have sufficient assets and solvency position while taking any new debt as per rule  588H(2).
Statutory duties of the directors
According to section 180 of the Corporation Act, 2001, it is the duty of the director to perform their job by exercising reasonable care and diligence. In other words, the directors should perform their activity in such a manner in which a normal person would do the activity as if they were appointed as a director of the company in this situation.
As per the case law of South Australia v Clark, the Clark was appointed as a board of director and the chief executive officer of the state bank of South Australia. Clark has knowledge about that the bank was acquiring all the shares of the life assurance company and also know about the amount paid for the acquisition for the company was significantly more than the actual and real value of the company. Clark failed to take the independent valuation of the company even if the acquisition is of the very large amount. Along with this, Clark did not disclose the interest which he holds in that company.
By applying the decision of CIRCLE PETROLEUM (QLD) P/L v GREENSLADE, it has been seen that the Michelle definitely breach the duties of the director. It is the duty if the board of director to act in the best interest of the entire company. Further at the time of performing their job, they must exercise due care and diligence. According to the decision of the court in the case of South Australia v Clark, which is already described above, the Michelle breached the statutory duties of the director, and she was personally liable for the debt.
In this case, this case, the state bank of South Australia claimed that Clark breaches the duty of care.  The court concluded that the Clark breached the duty of care in the bank. It is mandatory for the board of directors to exercise the activity after considering the duty of care. Therefore the court ordered to pay the payment as damage to the bank.
2.b. Issue
In this study, Michelle breach the duty of the board of director, therefore the personal liability of the Michelle arises.  The issue is related to providing the recommendation so that in the future this same problem will not arise.
In the corporation act, various situation stated when the directors become personally liable for the damages such as when the company suffered losses due to the breach of the duty by directors, debt incurred at the time when the company insolvent and so on. Due to all the provisions, the personal risk of the director arises in the company.  Normally shareholders and the directors are the separate entity of the organization. In case of Green v. Bestobell Industries Pty Ltd. [1982] and Pioneer Concrete Services Ltd v. Yelnah Pty Ltd (1987), it has been concluded by the court that in the exceptional situation such as evading legal duties, fraud, the court has right to lift the corporate veil of the incorporation.
In the present study, due to the breach of duty by the board of director of the company named as Michelle, she was personally liable for the damages for the company. To address this type of issue, the company should set the monetary limit in the memorandum of association of the company; all the transactions above this monetary limit must be taken only after the majority of the approval by the shareholders of the company. Along with this, company should make the mandatory provisions for attending the meeting of the board of directors of the company by the board of directors of the company, and in each meeting there must be discussion regarding the financial position of the company so that every member of the board can be aware of the financial condition of the company. The company can also set the policy with respect to the new member of the board of director, with this regards company can make the rules that only after the appointment of the six months the member of the board can take a decision regarding any transaction entered by the company. Moreover,the company set the policy in the memorandum that the no member of the board of director can take the decision alone; it must be with the approval of the majority of the member of the board of directors of the company. Along with this, the company can also set the minimum number of members required to hold the Coram in the meeting, so that conflict of interest of the board of directors can be minimized.
For instance, if the company ‘Le Petit Plat’ has a policy regarding that the significant decision by the board of directors can be taken only by holding the meeting of the board of directors and also present of the minimum number of members is compulsory. Then in such situation, Michelle cannot make the decision regarding the taking them on behalf of the company. Further, in the meeting of the board of directors, other members of the board may be aware with the financial condition of the company, and they suggest for no to take the loan for buying the vehicle as the company also has many debts that it could pay. Therefore by considering this, Michelle will not take this decision and the personal risk or the liability will not arise to Michelle.
In accordance with above analysis, it can be observed that the company by making the rules as per the above recommendation could reduce the personal liability or the risk due to the decision of the board of directors, as the major decision of the company will not be taken by an individual director.

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