Question

george green was apppointed by the board of directors of nature pty ltd to be the company's managing director. nature now arranges camping holiday. green arranged a $15000 supply contract on the company's behalf, with canvas tenis ltd. however nature now's constitution contains the following provision: clause 1 the managing diretor may take contracts upto $10000 but above that amount the board approval is required. greeen had not obtained the boards approval for this contract, later the board refused to recognise thecontract and to pay canvas tents ltd, advise whether the contract is enforceeable. required reasons , sections of the corporation act 2001 and relevant cases.

Answer 1

As per the Corporation Act 2001 , the Manging director can enter the transaction with the third party within the limits provided in  the company's constitution. However if the director wants to enter the transaction beyond that limit, board approval is required. And if the director enters transaction without approval, then the contract is enforceable at the option of the company. The director will be liable to the company for any losses.

Also the third party can enforce contract with the help of doctrine of indoor management. It is based on the landmark case between The Royal British Bank and Turquand. In simple word doctrine of indoor managment means that company's internal affairs is company's problem. Hence if an act which is valid as per constitution of company, then the outsider dealing with the company can assume that the director or other officers have worked within their authority.

In the given case George Green , Managing Director of Nature Pvt ltd has entered transaction with tenis ltd beyond the limit specified in the company's constitution. Therefore George will be liable to company for any losses. Also Tenis ltd can also enforce the contract as per the Doctrine of Indoor mangement based on the case law of The Royal British Bank and The Turquand.