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Relations With Third Parties in The Australian Company

Application of the facts

A director of a company is a person employed to execute all duties related to the management of a company. According to the case of Salomon vs. Solomon (1897) 31, a company is a corporate entity with perpetual succession. A company can own property, sue, as well as be sued. The directors of a company execute the duties of a company (Ciro& Symes, 2008).

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According to the facts given in the case, Peter is a director and has been declared bankrupt. However, he enters into a contract related to the company with Bruce and another third party. According to the Australian corporation Act of 2001, a bankrupt individual who has not been cleared of bankruptcy claims is prohibited from conducting the affairs of a company. Therefore, a bankrupt person cannot transact the affairs of a company in the capacity of a director. In addition, under part X of the Australian Bankruptcy Act, such a person is barred from managing any corporation. In the event that such a person was a director before the bankruptcy proceedings, the person ceases to hold such a post. The only exception is in circumstances whereby the party declared bankrupt seeks permission from the court to manage the company. This includes those people who had earlier executed a deed as provided under part X of the Bankruptcy Act 1966 (Wishart, 2008).

In the present facts, Peter was the director of the company, but he has been declared bankrupt. Hence, he lacks the legal capacity to enter into a contract on behalf of the company. The provisions of the Corporations Act of 2001 outlaw a bankrupt individual to trade or enter into a contract without permission from the court. Peter has breached the provisions and the court should penalize him $5,500 or one-year imprisonment. The court has wide discretion to award either a fine or imprisonment. It is prudent for the company to file a notice of cessation to the registrar of the company’s office; with the name of a replacement of course. This strategy will help to avoid bankrupt officials representing the company (Tomasic, Bottomley & McQueen, 2002).

The facts state that Bruce, who is the managing director, represents Peter as a director of the company. Subsequently, a third party is made to enter into a contract with the company. The legal wording of the acts by Bruce is “indoor transactions principle”. However, the misrepresentation he has done to the unsuspecting third party is dealt with in favor of the third party. The company, through the misrepresentation of a Managing Director, is bound by the contract. Indoor management rule refers to a situation where a company officer has information that is not accessible by the public. The indoor management principle acknowledges that the genuine party, who contracts with the company, should not be put at a disadvantage. The common law position on indoor management is that the company is bound by the contract. This is because the third party cannot get significant information than the accessible public information. In such a case, whenever it is proved that the third party entered into the contract in good faith or not, the company is bound by the contract (Tomasic, Bottomley & Mcqueen, 2002).

The transactions indicate that Bruce was aware of the bankruptcy status of Peter, but he went ahead to represent him as if he had the capacity to contract. The Australian Corporations Act 2001 prohibits any officer, who negligently or fraudulently breaches the fiduciary duty owed to a company. The common law fiduciary duty requires the officers of the company to act in good faith, and to the best interest of the company. From the facts given, Bruce, who is the managing director of the company, has breached his duties by engaging in a fraudulent dealing. In the case of S & Y Investments Pty Limited vs. Commercial Union Assurance Ltd 85 FLR 285, the court held that a company can be held vicariously for the acts of the officers, employees or agents acting on behalf of the company (Ciro & Symes, 2008).

For a person to act as an agent of a company, the person should have either express authority or implied authority. This was well stated in the case of Freeman & Lockyer vs. Buckhurst Part Properties Ltd [1964] 2 QB 480. In this case, the court held that the misrepresentation made by the company’s agent must have been relied on by the third party to his or her detriment. The issue of Peter acting to have agent powers to the reliance of the contracting third party will be taken as if Peter had the powers. If Bruce was serving in an acting capacity, the company would be vicariously liable for any fraudulent acts to the third parties (Cassidy, 2006).


The Australian Company law implies that there are duties established that officers of a company have to follow. A company director, once adjudged bankrupt, he/she ceases to be a director of the company. In case of a transaction between the bankrupt director and a third party, the company is held vicariously liable. Also, the director in question is held personally liable. The indoor principle protects a third party from being disadvantaged out of a misrepresentation.

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Cassidy, J 2006, concise corporations law, Federation Press, Annandale.

Ciro, A & Symes, C 2008, Corporations law: in principle. Thomson Reuters (Professional), Australia, Pyrmont.

Tomasic, R, Bottomley, S & Mcqueen, R 2002, Corporations law in Australia, Federation Press, Sydney.

Wishart, D 2008, Corporations law guidebook, Oxford University Press, South Melbourne.

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