Question

‘Mr & Mrs Jones operate a popular Hardware store in Katherine through a company called ‘Jones Hardware Pty Ltd’. Mrs Jones is a director of the company and Mr Jones is also a director and secretary of the company. Mrs Jones attends BNZ Bank which has been the company’s bank for the last 15 years. 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. REQUIRED:

• 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. (Words 1,000

Briefly discuss whether Mrs Jones has breached any director duties in establishing the new company and approaching clients. (Words 500 (7.5 marks)

Answer 1

Question:

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.

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 reliationship 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.