Common Law : Chinese Economy

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Common Law : Chinese Economy

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Common Law : Chinese Economy

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Describe about the Common Law for Chinese Economy.

Solution 1
The main issues as per the given facts are:
Can Max be held liable for the unpaid debt of Shifty Seller Pty Ltd?
Can Betty be liable for repayment of the $500,000 loan to Eastpac Bank Ltd?
If Betty has breached the Corporations Act 2001 (Cth), what are the legal consequences under the Act?
Relevant Law
Under common law, every company must honor the contract which is undertaken by its agent in his authority. An agent can have actual or apparent authority. The authority which is expressly or impliedly construe upon an agent is an actual authority and the authority which is acquired by an agent by appearance is called apparent authority.[1]
Normally, a director can bind the company by his actions provided he is acting collectively as a board or when he is authorized to undertake the actions. However, the main question is whether the company is bound by the actions of its officers which are outsider their usual scope of authority. In such situations the common law rule of Indoor Management (IMR) applies.
In Royal British Bank v Turquand[2] IMR was established according to which an outsider who is dealing with the company in good faith and on the belief that the officer with whom he is dealing has all the requisite authority to bind the company by his actions and all internal procedures are met, then, any contract made by such an outsider with such company officer is binding upon the company. In Northside Developments Pty Ltd v Registrar-General[3], it was submitted by High Court that it is necessary that protection must be provided to innocent lenders who are dealing with the officers of the company in good faith.
But, no outsider can protect his interest by relying on IMR if:
If the outsider is aware of the defect of the officer of the company with whom he is dealing; or
If the outsider can acknowledge himself of the truth of the matter by putting into some enquiry which is reasonable in nature. If no basic investigation is carried on by an outsider with the help of which the defect would have been known then the rule will not apply.
Further, as per corporation Act 2001, there are two important provisions which prevail which are important to analyze in order to resolve the issue.
Section 9 of the Act defines a director as a person who though not described as a director but is positioned as a director and includes shadow director, de facto director[4]. Also, every other director, or company secretary or a decision make, etc are considered as co-directors of the company[5].
Section 198 A of the Act submit that the directors of the company has power to bind the company under its actual or apparent authority and is held in Howard Smith Ltd v Ampol Ltd (1974).
Section 129 grants power to an outsider to assume that all the actions of the internal management of the company must have been comply with; that the officer of the company has requisite authority to bind the company; that an agent which is held out has an apparent authority; that all the documents are executed as per law if the same are signed by the officers of the company[6].
Section 128 of the Act submit that no outsider has authority to rely on the assumptions which are laid down in section 129 if such outsider is aware of the fault or has reasonable doubts that the assumption so raised will be incorrect.
Also, every company director is the guiding force of the company and thus imposed with several duties and responsibilities which must be cater by him in all situations and circumsttbces. Some of the duties which are lay down in the Act are:
As per section 181 every director should act in good faith and in the best interest of the colony and for proper purpose.
As per section 180 every company director must Act will all due care and diligence and is held in Re City Equitable Fire Insurance Co Ltd (1925). The level of care is also imposed on non-executive directors and is held in Daniels v Anderson (1995)[7]. However, if the actions of directors are undertaken in good faith, proper purpose, no material personnel interest and have rational belief of company interest then as per section 180 (2) a defuse can be sought by a director (ASIC v Adler (2002).
As per section 182, the director should not misuse his position ( R v Byrnes (1995)).
As per section 588G, no director should be involved in insolvent trading, that is, no director should involve in any actions which results in insolvency of the company and is held in In Tourprint International Pty Ltd v Bott (1999) & Powell v Fryer (2001):
Violation of duties may involve penalties:
Violation of section 180 (1), 181, 182, 183 involves civil penalty which comprises of compensation, fine or disqualification and is held in ASIC v Vizard (2005).
As per section 588G (2), a civil penalty can be imposed for the violation of section 588G, a director can be disqualified. If the director has acted with dishonest intention then he can be imprisoned for 5 years and can be fined up to $ 340,000.
Application of Law
The law is now applied to the facts of the case.
Alex is the MD of SMART. He accepted an order of $100,000 from Max (the director of Shifty) for the supply of steel cables. The order was delivered on credit but Shifty failed to pay for the steel cables. Shifty went into liquidation without paying anything to Smart. 
It is submitted that Max was the director of Shifty and thus acquires an actual authority in common law. Further, a company director is normally authorized to take decisions and make contracts on behalf of the company.
Whenever a company officer make sa contract with an outsider
In the given situation Alex made a contract with an outsider (Max) on behalf of Smart. The contract made by Alex will be binding upon Smart by applying IMR provided he is dealing with Max in good faith and on a belief that Max has all the requisite authority to bind his own commonly (shifty) by his actions.
But, in the given situation, Alex cannot sue Max by relying on IMR as Max was well known as a bad credit risk within the engineering industry, including by Alex. Alex could have known the defect of Max’s actions by putting on a general inquiry. However, no actions were undertaken by Alex.
So, by applying the exception to the IMR, Alex cannot sue Max.
Further, Alex borrowed $500,000 from Eastpac Bank ltd on behalf of Smart to expand the business into China. The cash reserve of the company was very low when the loan was taken and suffered a loss for the past 6 months. Betty also signed the loan as a director despite feeling that Smart has some difficulty paying its bills.
In such situation, it can be submit that, the Bank, being an outsider can rely on the assumptions raised under section 129, that is, all the internal management of the company are comply with and the officers who are acting on behalf of the company has authority and capability to bind the company by their actions. There was no reason to believe that there exits any fault or any doubt that the assumptions so raised are not valid.
Thus, the bank can surely sue the directors of Smart, both Alex and Betty, for the loan amount.
Both Alex and Betty has violated several directorial duties, such as, section 180 and 181 as when they took loan from the bank then they did not acted in good faith and in the best interest of the company due care and diligence was applied as many expert commentators did warn that the Chinese economy is slowing after the boom of the last decade. Also, section 182 and section 588G were violated s they have misused their position to taken loan from the bank when the financial position of the company was not good, for instance, a cheques issued by Smart to pay its electricity bill was ‘bounced’.
Thus, both Alex and Betty must be imposed with heavy penalties.
Alex cannot sue Max as the exception to IMR will apply as no inquiry was undertaken by Alex which could have depicted the irregularity of Max.
The Bank can sue both Alex and Betty for the loan amount as the loan was undertaken by them by representing the company and under their authority and the loan was provided by relying on the assumption lay down in section 129 of the Act.
Since both Alex and Betty has violated section 180-182 and section 588G of the Act thus they must be imposed with civil penalties. Criminal penalties scan only be imposed when the violation is done with dishonest intention.
Reference List
ASIC v Adler (2002).
 Amcor Ltd v Barne & Ors (2012).
ASIC v Vizard (2005).
Corporate Affairs Commission v Drysdale (1978).
Daniels v Anderson (1995)
Freeman and Lockyer v Buckhurst Park Properties (1964).
Harris, Hargovan & Adams, Australian Corporate Law (5th ed, 2016).
Howard Smith Ltd v Ampol Ltd (1974).
In Tourprint International Pty Ltd v Bott (1999)
Northside Developments Pty Ltd v Registrar-General (1990)
Powell v Fryer (2001).
Royal British Bank v Turquand (1856).
R v Byrnes (1995).
Re City Equitable Fire Insurance Co Ltd (1925)

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