LAWS6010 Company Law

LAWS6010 Company Law

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LAWS6010 Company Law

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LAWS6010 Company Law

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Course Code: LAWS6010
University: The University Of Newcastle is not sponsored or endorsed by this college or university

Country: Australia


1.Advise the various creditors as to their rights to recover their debts.
2.Is the Company bound to perform its Obligations under this contract?  Give reasons for your Answer.


1.According to Section 197 of the Corporation Act 2001, in case director of the company incurs any liability while acting as trustee, then director is liable to discharge whole or part of the liability if:
Company fails to discharge the whole or part of the liability, and
Company is not able to pay the liability from trust assets, because trust was breached by corporation, corporation’s conduct its operations outside the scope of its powers and any provision of the trust deny the right of the corporation to be indemnified against the liability.
This section further states that, directors of the company are not responsible for the liability incurred by the company, on the ground that assets of the trust are not sufficient to meet the liabilities of the corporation[1].
In the present case, Section 197 is applied because corporation fails to discharge its liability. Directors of the company fails to act within the scope of their powers because of which corporate fails to indemnify the liability against the trust. This can be understood through the landmark case law Hanel v. O’Neill[2].
After considering above facts, it is clear that director of the corporation is liable towards the creditors of the company. Therefore, Creditors can claim for their debts against the directors of the company because they are personally liable for the debts.
2.Indoor management rule was introduced by common law in case Royal British Bank v. Turquand[3]. Court held that outsider who enter into contract with the company has right to make assumption that officer of the company complied with all the internal rules of the company. Later, High Court approved this rule in case law Albert Gardens (Manly) Ltd v. Mercantile Credits Ltd[4][5].
There are number of contracts in which company entered with the outsiders, and those officer who act on behalf of the company has power to bind the company by their actions. This can be understood through case law Hely-Hutchinson v Brayhead Ltd Judges[6]. Court held that it was the duty of outsiders to ensure that all the internal rules are compiled by the company before conducting business. After some time, this rule was held inappropriate by the Court on the ground that directors of the company are representative of the company. Third person has right to believe that directors and other officers of the company compiled with the internal rules of the company, and in case directors fails to compiled with the internal rules then third person face the consequences.
For resolving this problem, Court stated that in case third party believes that officers of the company compiled with all the internal requirements of the company, and they have power to enter into contract on behalf of the company then such contract is binding in nature[7].
In the present case, contract bounds the company and directors of the company, because both director and company secretary have power to act on behalf of the company. In this case, Indoor management rule is applicable and third party has right to believe that officers of the company compiled by law.
Lexology, The ‘indoor management rule’ explained, <>, Accessed on 15th August 2017.
Austlii, (2002), Protecting Outsiders to Corporate Contracts in Australia, <>, Accessed on 15th August 2017.
Case law
Hanel v. O’Neill, (2003) 48 ACSR 378; (2004) 22 ACLC 274; (2003) SASC 409 (SC of SA 2003).
Royal British Bank v Turquand (1856) 119 ER 886.
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
Corporation Act 2001.
Corporation Act 2001, Section 197.
Hanel v. O’Neill, (2003) 48 ACSR 378; (2004) 22 ACLC 274; (2003) SASC 409 (SC of SA 2003).
Royal British Bank v Turquand (1856) 119 ER 886.
Lexology, The ‘indoor management rule’ explained, <>, Accessed on 15th August 2017.
Austlii, (2002), Protecting Outsiders to Corporate Contracts in Australia, <>, Accessed on 15th August 2017.
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

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