Unauthorized purchases and director liability in Prints Pty Limited

Company Law

Brief synopsis of the situation

Jane is the Marketing Manager of Prints Pty Limited. She has recently made some purchases on company account including leasing a new car, a photocopier, a reconditioned printing press and photo copy paper supply. While all the other purchases were made by Jane on her own discretion, the printing press was co-signed by John, part owner of Prints Pty limited.

John tells Jane that while he would reluctantly accept the purchase of photocopier and paper, Jane will have to pay for her own car. Upon hearing this, Jane resigns immediately leaving Mark with the decision to look into the purchase of the printing press. The company wants to cancel this purchase as John had no authority to purchase anything on company account. Mark is now wondering if he is liable for any of these purchases.

Company policies:

The company constitution clearly indicates that no purchases can be made on company account without explicit permission of the senior management. The purchases have to be authorized by both directors or either director and the company secretary.

Every company has some policy on unauthorized purchases or unauthorized use of company funds and property. For example Penn University's policies clearly describe what constitutes an unauthorized purchase:

"An unauthorized purchase is a purchase made outside of one of the authorized buying methods shown on the Buying Decision Chart. "I didn't Know" is not an acceptable reason for making an unauthorized purchase outside to the University approved purchasing process.

Examples of unauthorized purchases include but are not limited to:

* Employee purchases product for the office, writing a personal check for the purchase;

* Employee calls a supplier and places an order for supplies without prior issuance of a purchase order or use of a Purchasing Card;

* Employee purchases a new computer for the office using a personal credit card;

* Employee signs a supplier contract for services or supplies." (http://www.purchasing.upenn.edu/buytools/unauthorized-purchase.php)

Even though Prints Pty did not have such clear description, it was enough to say that all purchases will have to be approved by directors. Since none of the purchases followed what the constitution said, Jane is in real legal trouble. As for the company, it will need to improve and revamp policies on unauthorized use of company funds and unauthorized purchases. This way the company will be better able to handle such situations in the future.

Problem in the eye of Law:

Apart from the fact that it is an ethics-related situation, it can also turn into a legal situation as what Jane did constitute breach of company law under the clauses of "unauthorized purchases" and "unauthorized use of company funds."

In this case Jane has made some serious judgment errors. For one she purchased the lease on a car for her own use without getting approval from any director. Secondly even when she asked for approval on the purchase of printing press, she commits fraud by signing the document as Company secretary when she is not the company secretary. This is fraud and Jane can easily lose the case if Mark chooses to take the matter to the court.

Ways to handle the situation

There are different ways in which such a situation can be handled. The company can drag Jane to the court; they can opt for out of the court settlement or they can simply let it slide.

If they take the matter to the court:

In option 1, they can simply take the matter to the court. Since Jane has already resigned, she cannot be terminated. So the question of termination is out of the possible solutions. Jane Miles can still however be taken to the court and asked to pay for all the unauthorized purchases including the printing press because she committed fraud when she declared herself the company secretary. The same goes for the lease on the car and other purchases. The court is likely to decide in favor of the company because the constitution states that all purchase documents had to be signed by the directors and Jane is neither a director nor the company secretary.

Out of Court settlement:

Most companies would prefer to opt for out of court settlement through mediation teams. This is when a company hired a mediator to resolve the conflict. The mediator helps in facilitating communication so each side can decide what they really want to do in a given situation. They are also explained the costs of going to the court. There are many examples of successful mediation which result in fair resolution of a given conflict.

Mediation is popular because it saves both parties the cost of going to the court. Secondly it is also good for the future of the defendant who might be refused jobs if a court case is on their record for unauthorized use of company funds. Mediation however can only be started with the consent of both parties. If Mark comes up with the idea of mediation and Jane refuses, then Mark cannot proceed and may have to resort to other options. However if she chooses to accept mediation then she will have to whatever it takes to resolve the conflict and avoid further damage to her future job prospects.

"Nationwide, mediation is soaring in popularity, mainly because it offers a risk-free way to settle legal disputes and, according to mediation firms, leads to successful resolution about 85% of the time. Although there is no central clearing-house of nationwide statistics on the use of mediation, its rising popularity can be seen in the growth of firms providing mediation services." (Kaufman, 1992)

However both Mark and Jane need to understand that in the case of mediation, there is usually no legal agreement at the end and no deal signing hence both parties depend on verbal settlement of the dispute. If however Mark chooses, they can both decide on hiring lawyers who would prepare a document for settlement terms and they can sign those documents to have a legal proof of mediation agreement.

Mediation is also good in such situation because it helps in protecting business relations and also doesn't taint the reputation of the firm or the employee involved. "According to some lawyers, mediation is gaining popularity as a way to resolve all types of business, disputes, partly because business people prefer the privacy of mediation over the possible publicity of lawsuits. "The only people who need to know about the dispute are the parties themselves," says Katini Leodas, a mediator in the Cambridge, Mass., office of Endispute Inc., which conducts alternative dispute-resolution procedures and is based in Washington, D.C. "Most businesses don't want their competitors, their customers, their suppliers, or their franchisees to know about their lawsuits. Why take the chance of setting an unpleasant precedent?" Leodas says mediation, unlike litigation, can also help keep business relationships from being shattered. "It's an important consideration," she says. "Preservation of a relationship in business often spells the difference between success and failure." (Kaufman, 1992)

The third option would be to let it slide but that is very damaging in the long run because it sets a wrong example and gives other employees a chance to do the same thing and believe that they would not be held responsible. For this reason Mark needs to take a stand and must try to resolve the problem the effective mediation and get lawyers on both side involved so mediation results can be properly documented.

Recommendation:

We have already mentioned that mediation is the best solution for this problem. Taking the case to the court will prove very costly and damaging. However Mark does need to pay for those items because from seller's point-of-view, it doesn't matter who placed the order as long as it was placed by company representative. But from internal and legal point-of-view, mark can ask Jane to pay for these items because she committed fraud by authorizing purchases on company's behalf when she had no such authority.

Why choose mediation: this is an important question. Mark must choose mediation for the following reasons:

1. To avoid litigation costs

2. To avoid the very time consuming process of court trials

3. To preserve business relations

4. To give Jane a chance to improve her future job prospects

5. To allow discrete resolution of conflict without suppliers and rivals knowing about the situation

Reference

Kaufman, Steve. (1992) See you out of court. Nation's Business