Directors: Authority, Breach of Contract, and Duty to Shareholders

This article discusses the authority of directors, breach of contract, and duty to shareholders in the context of the Corporations Act 2001. It covers relevant provisions of the Act, relevant cases, and their application. It also provides conclusions and references.

Running Head: Directors 1
Directors
Name of Student:
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Directors 2
Question 1
Part A
Issue
Priya’s Board’s appointment as Managing Director has expired and the Board has not
made a fresh appointment. However, Priya has continued to act as the company’s managing
director. Priya has entered a contract beyond the scope of her previous appointment and the
objects of the company. Is the failure by the Board to formally reappoint Priya has affected
her Authority as a Managing Director and to bind the company?
Law
Provisions of Corporations Act 2001
S 128
S 129
Cases to apply:
Hely-Hutchinson v Brayhead Ltd1
Equiticorp Finance Ltd v Bank of New Zealand2
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd3
Sunburst Pty Ltd v Agwater Pty Ltd4
Application
1 [1968] 1 QB 549
2 (1993) 11 ACLC 952
3 [1964] 2 QB 480
4 [2005] SASC 335

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The courts have found existence of authority where a company has failed to formally
reappoint its officer and the officer has continued to exercise his/her under the previous
appointment as if the contract has not expired5. In Hely-Hutchinson v Brayhead Ltd6 the court
found existence of authority where the company failed to formally reappoint a Managing
Director whose contract had run out but continued to exercise the powers of a Managing
director. The managing director was found to have both express and implied authority to bind
the company. Equiticorp Finance Ltd v Bank of New Zealand7 had a similar holding. In that
case, a corporation’s officer was found to have authority despite contract of appointment
having expired. Priya, therefore, had both implied and express authority to bind the company
provided she acted within the terms of her previous appointment and the corporation’s
constitution.
Even where the officer has exceeded the authority of his/her appointment the
company may still be bound provided apparent authority can be imputed8. Freeman and
Lockyer v Buckhurst Park Properties (Mangal) Ltd9 discussed circumstances under which
apparent authority may be imputed into a relationship. The principal must have made a
representation to a third party to the effect that the officer has the kind of authority exercised,
it must be shown that reliance was placed on the representation of the principal by the third
party to the third party’s detriment. The officers need not to know about the representation. In
this case no representation had been made to Vineyard’s Pty Ltd and as such Priya lacked
apparent authority to bind the company. However, Vineyard can rely on the assumption
under ss 129 (1), (3) and (4)10 to assert Priya’s appointment and authority. This will depend
on whether they are entitled to the assumptions based on s 12811. A person is not entitled to
5 Roman Tomasic, Stephen Bottomley and Rob, Corporations Law in Australia (Federation Press, 2002) 215
6 [1968] 1 QB 549
7 (1993) 11 ACLC 952
8 Keith Owens, Law for Non-Law Students (Cavendish Publishing, 2001) 467
9 [1964] 2 QB 480
10 Corporations Act 2001
11 Corporations Act 2001

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assumptions under s 129 where they knew or suspected defects in the assumptions, s 128 (4).
In Sunburst Pty Ltd v Agwater Pty Ltd12 it was stated that the knowledge or suspicion must be
actual and not constructive and the test for determining such knowledge or suspicion is
subjective. Seedy Vineyard believed that Priya exceeded her authority and acted beyond the
company’s objects. They actually knew the defects and cannot, therefore, rely on the
assumptions under s 129 of the Act.
Conclusion
OW is not bound by the contract based on the grounds that Priya lacked authority to
enter such a contract and Seedy Vineyards knew of the lack of authority.
Part B
Issue
Can the claim by Ted against the Company succeed where it is based on the articles of
the company constitution and not independent contract?
Law
Provisions of the Corporations Act 2001
S 140
Relevant cases
Eley v Positive Government Security Life Assurance Co Ltd13
Hickman v Kent or Romney Marsh Sheep-Breeders Association14
12 [2005] SASC 335
13 (1876) 1 Ex D 88
14 [1915] 1 Ch 881

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Southern Foundries Ltd v Shirlaw15
Application
Section 14016 provides statutory contracts created as a result of the company having a
constitution or relying on the replaceable rules. These are statutory contracts between, among
others, a shareholder and the company17. A shareholder, can therefore, sue for breach of the
terms of the constitution. However, this does not apply to all breaches but those that affect
their shareholding18. Also, a third party who is neither a shareholder nor company’s officer
cannot make any claim based on the articles of the constitution19. The principle that
shareholder can only rely on the statutory contract to claim a breach by the company was
discussed in Eley v Positive Government Security Life Assurance Co Ltd20. In Eley, just like
in this case scenario, a solicitor prepared a constitution for a company and included a clause
appointing himself the company’s solicitor and limited his dismissal to only ground of
misconduct. The solicitor was also allocated shares and became a member of the company.
The appointment was terminated and the solicitor brought an action for damages. The action
failed on the ground that the contract had no independent contract with company and that the
relationship was that of a shareholder. Hickman v Kent or Romney Marsh Sheep-Breeders
Association21 affirmed this position. In Hickman it was stated that where an outside right is
created in the constitution and the person subsequently became a member of the company,
the person cannot bring a claim on the article alleging breach of such outsider right unless it
is related to shareholding. The only way a person can enforce a service claim against a
15 [1940] AC 701
16 Corporations Act 2001
17 Julie Cassidy, Concise Corporation Law (Federation Press, 2006) 95
18 Alan Dignam and John Lowry, Company Law (OUP Oxford, 2012) 165
19 Stephen Bottomley et al, Contemporary Australian Corporate Law (Cambridge University Press, 2017) 124
20 (1876) 1 Ex D 88
21 [1915] 1 Ch 881

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company is where there exist a contract independent of the articles of the constitution as was
stated in Southern Foundries Ltd v Shirlaw22.
Conclusion
Ted cannot bring a claim against the company alleging breach of contract grounding
his allegations on the articles of the constitution. There was no independent contract between
Organic Wines Pty Ltd and Ted which was breached by the company and to be enforced by
Ted. Ted, therefore, has no claim against the company.
Question 2
Part A
Issue
The issue is whether this is proper exercise of power. Olive will bear the burden of
proving that Miles and Karim did not act in good faith and their acts violated s 181 of the
Corporations Act 2001.
Law
Relevant provisions of Corporations Act 2001
S 181
S 1317E
Part 9.4B
Relevant cases
22 [1940] AC 701

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Australian Metropolitan Life Assurance Co Ltd v Ure23
Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL24
Application
Under s 18125 directors have a duty to channel the exercise of their duties in furthering
the company’s interest. The exercise of such power must at all-time be for a proper purpose.
In exercise of their duties, directors are prohibited from taking irrelevant matters into
consideration but only those that are in the interest of the company and promoting its
business. The courts will likely interfere with director’s exercise of power where the director
considered irrelevant matters, Australian Metropolitan Life Assurance Co Ltd v Ure26. The
directors declined to effect transfer in the name of Ure. Ure was one of the shareholders of
Metropolitan. The exercise of power by the directors was in the interest of the business. Ure’s
husband had been struck off as a solicitor and the court took into consideration that he might
end up in the company’s board of director’s through his wife.
The court stated that where the company took considerations relevant matters such as
the insolvency and business ethics of the purchaser of the shares the directors power will not
be interfered with27. However, the powers will be interfered with and transfer effected where
the company took irrelevant matters into consideration, such as race or sex of the shareholder.
In Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL28 directors transferred
a shares with the intention of defeating a takeover and acquiring capital for the company. It
was held that the act was not improper but in the interest of the company.
23 (1923) 33 CLR 199
24 (1968) 121 CLR 483
25 Corporations Act 2001
26 (1923) 33 CLR 199
27 John Mugambwa and Harrison Amnkwah, Commercial and Business Organizations in Papua New Guinea
(Routledge, 2007) 314
28 (1968) 121 CLR 483

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Conclusion
The fact that Priya, through Organic Wines Pty Ltd, is one of the Seedy Vineyards Pty
Ltd customers could have influenced Karim and Miles not to register the transfer. However,
admitting Priya as one of the shareholders or as a member of the board of Seedy Vineyards
Pty Ltd is not against the interest of the company or the business of the company or raise any
issue of conflict of interest and as such Miles and Karim acted improperly and contravened s
181 of the Corporations Act 2001. Part 9.4B of the Act provides civil remedies for breach of
duties. Remedies available for Olive include claim for damages, declaration of contravention
under s 1317E, injunction and compensation for loss29.
Part B
Issue
Did Karim and Miles owe Olive duty as a shareholder of Seedy Vineyard Pty Ltd
when she was selling her shares?
Law
Relevant cases
Percival v Wright30
Hurley v B.G.H Nominees Pty. Ltd31
Coleman v Myers32
Application
29 Stephen Bottomley et al, Contemporary Australian Corporate Law (Cambridge University Press, 2017) 277
30 [1902] 2 Ch 421
31 (1982) 1 ACLC 387
32 (1977) 2 NZLR 225

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Traditionally director’s responsibilities have been interpreted restrictively and have
been limited for the benefit of the company33 Percival v Wright34. It has been interpreted to
the extent that the company is the only beneficiary while individual shareholders are left to
fend for themselves35. However, the courts have demonstrated that there are exceptions to that
tradition as was stated in Hurley v B.G.H Nominees Pty. Ltd36. In Coleman v Myers37 the court
held that there was an exception to the tradition as held in Percival case where the director is
party to the dealing. This could be where the directors are purchasing the shares from the
shareholders. The directors have a duty to such shareholders. In Brunninghausen v
Glavanics38 the court found existence of an exception where the company is closely knitted
and the shareholder is relying on the director in the sale of shares. This could be in two
shareholder companies. The director owes a duty to the other shareholder in such
circumstance. However, without the exceptions the principle in Percival v Wright applies.
Conclusion
The sale of shares to Mile and Karim took place before the contract between Organic
Wines Pty Ltd and Seedy Vineyard Pty Ltd was made. The contract was still being negotiated
and in such circumstances Karim and Mile could not disclose the negotiations and any
prospect of the negotiations based on the holding in Percival v Wright. There are no existing
exceptions as discussed in Brunninghausen v Glavanics and Hurley v B.G.H Nominees Pty.
Ltd. Karim and Miles, therefore, did not owe Olive any duty.
33 Robert Baxt, Duties and Responsibilities of Directors and Officers (AICD, 2005) 52
34 [1902] 2 Ch 421
35 Beth Nosworthy,’ Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate Beneficiary?’ (2010)
24 Australian Journal of Corporate Law 282, 289
36 (1982) 1 ACLC 387
37 (1977) 2 NZLR 225
38 (1999) 46 NSWLR 538

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References
Books/ Journals
Baxt, Rober, Duties and Responsibilities of Directors and Officers (AICD, 2005) 52
Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University
Press, 2017)
Cassidy, Julie, Concise Corporation Law (Federation Press, 2006)
Dignam, Alan and John Lowry, Company Law (OUP Oxford, 2012)
Mugambwa, John and Harrison Amnkwah, Commercial and Business Organizations in
Papua New Guinea (Routledge, 2007) 314
Nosworthy, Beth, ’Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate
Beneficiary?’ (2010) 24 Australian Journal of Corporate Law 282
Owens, Keith, Law for Non-Law Students (Cavendish Publishing, 2001) 467
Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia
(Federation Press, 2002)
Legislation
Corporations Act 2001
Cases
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
Brunninghausen v Glavanics (1977) 2 NZLR 225
Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL (1968) 121 CLR 483
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

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Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881
Howards Smith Limited v Ampol Petroleum and Others [1974] AC 821
Hurley v B.G.H Nominees Pty. Ltd (1982) 1 ACLC 387
Percival v Wright [1902] 2 Ch 421
Southern Foundries Ltd v Shirlaw [1940] AC 701
Sunburst Pty Ltd v Agwater Pty Ltd [2005] SASC 335