All of us who have been in business have faced this situation where for one reason or another we have been unable to collect an outstanding debt. And of course, as a law firm, we often receive instructions from clients to commence legal action to collect outstanding debts.
This story relates to a client who is in the service industry and has instructed our firm to collect a debt of $140,000. Briefly, the facts are that a contract was executed by the defendant and our client (the plaintiff) commenced and completed a series of contract milestones. The defendant did not make any representations to the plaintiff that the work was in any way deficient. The defendant met about half of the milestone payments and then ceased paying the plaintiff.
The first thing we asked for was a copy of the contract, which was purportedly executed by a person holding themselves out as a director of the company. The defendant was listed on the contract as “Terrific Potential” (not the real name). We carried out an ASIC search on the company and lo and behold there are 12 Terrific Potential entities listed. Terrific Potential (SA) Pty Ltd, Terrific Potential (WA) Pty Ltd, Terrific Potential (Qld) Pty Ltd, etc. Also none of the ASIC searches come up with the named “director”. We investigated some websites and the director is in fact named as an Associate Director[1]. This was material because the Associate Director claimed that the reason for non-payment was that the balance of the payment needed to be approved by the Board and that approval has been denied as the service provided purportedly “does not align with the goals of the business”. That was the first time our client had heard about any lack of alignment with the business goals or that there was another layer in the payment approval process.
Issue 1) Would the fact that this contract was executed by an Associate Director and not a real director be material in any future defence? We think not because of a common law precedent established in a 19th century case of Royal British Bank v Turquand which established a concept called the Indoor Management Rule. At its heart the Indoor Management Rule provides that:
“a person dealing with a corporation has no obligation to ensure that a corporation has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation”.
Royal British Bank v Turquand
In other words if the Associate Director executed the contract, the plaintiff was entitled to assume that the person had the necessary authority to do so.
Issue 2) Which entity has entered into the contract? This is a common mistake made by many people in not carrying out sufficient due diligence to actually determine the exact identity of the entity entering into the contract. If you are entering into a contract with a company do a quick $9 ASIC search to check the status of the company. This will determine for example, if it is correctly registered, if the directors listed align with your knowledge of the company’s directors, and if the address is correct. The ASIC search will also determine the company’s Australian Company Number (ACN). This is the single best identifier of the entity with which you plan to contract. There might be lots of similar company names but the ACN is unique. In our client’s case they should have detailed the contracting entity as for example Terrific Potential (QLD) ACN 123 456 789.
It is not however in this case a showstopper because there is sufficient emailed communication between the plaintiff and the defendant which actually identifies the entity. But it is a potential legal argument we would prefer not to have.
*** The key takeaway from this story is to make sure you correctly identify the entity with which you plan to contract.
If it is a company, complete the $9 ASIC search (https://asicconnect.asic.gov.au).
The other common trap is to write the contract up in the name of the business and not the entity which actually trades under that name. For example NOT just the name Fluffy Snowballs but John Bloggs Pty Ltd (ACN 123 456 789) trading as Fluffy Snowballs.
You might be contracting with a sole trader trading under a business name; for example Emily Cakefrost trading as Fluffy Snowballs.
If you plan to contract with a trading trust it would be identified something like John Bloggs Pty Ltd (ACN 123 456 789) as trustee for the Bloggs Family Trust (ABN 71 123 456 789) trading as Fluffy Snowballs. (the trust is identified by its Australian Business Number ABN which is a tax based registration and can also be searched see https://abr.business.gov.au)
If you get the entity correct then at least you know exactly which entity you need to commence legal action against to collect your outstanding debt.
[1] The title Associate Director is a name only and does not confer any powers or obligations pursuant to the provisions of the Corporations Act
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Disclaimer:
This article is not legal advice and should not be relied upon as legal advice. All articles from Apres Legal are intended to provide informative information. Legislation and case law may have been simplified and/or paraphrased. If you would like legal advice based on your current circumstances, you should contact Apres Legal.