Director Duties and Breaches in a Corporate Group

This assignment examines the statutory and equitable duties owed by directors to their companies, specifically focusing on a situation where three directors (Jack, Alice, and Francis) serving on the board of a holding company also hold positions as shadow directors of its wholly owned subsidiary, Stores. The directors face scrutiny for providing personal guarantees for the debts of the holding company and another subsidiary, Manufacturing, using the assets of Stores instead of their own resources. The analysis delves into the potential breaches of sections 180 and 181 of the Corporations Act 2001 and the consequences faced by the directors under section 1317E.

Running Head: Law 1
Law

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Answer 1
Issue:
Part a- whether any contract exists between the Sunshine Scooter Art Pty Ltd (SSA) and
Computer Supplies Pty Ltd?
Part b- whether any contract exists between the Sunshine Scooter Art Pty Ltd (SSA) and Plastica
Pty Ltd?
Law:
It is necessary for owners of the company to file Memorandum of Association with the
company’s Registrar at the time of the incorporation of the company. It is necessary to file MOA
for the purpose of making the public free to check the documents of the company before entering
into any contract with the company. In other words, outsiders entering in contract with the
company can check whether there is any limitation of power on the company or nature of
business. Because of the above provision it becomes easy for outsiders to know the actual
position of the company and limitation imposed on directors. The main aim behind this rule is
too aware the outsiders about any limitation of power imposed on directors or authorized person
and irregularities in the company. This provision of the corporation Act is known as doctrine of
constructive notice.
This principle of corporation law create problem for outsiders who does not have any knowledge
regarding the defect in the internal procedure of the company. For solving this issue, Common
law introduced doctrine of Indoor Management.
Generally, company imposed power to manage the affairs of the company in the board of
directors of the company and board can access this power by passing board resolution in the duly

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held meeting. However, these powers are imposed by company with some restrictions, such as
some decisions of the company can only be taken by the board after the approval of the
company’s members (Krawitz, 2002).
This concept of law is not considered as fair because it imposed unnecessary burden on the
outsiders of the company to check whether person is authorized by the company to enter into
transaction and whether all the internal rules and regulations of the company are compiled. These
factors raise the requirement to protect the interest of third parties dealing with the company.
In Australia, common law develops the doctrine of indoor management and indulges the concept
of this doctrine in Corporation law through section 128 and 129 of the Corporation Act 201.
These provisions protect the outsider’s interest while entering into transactions with the
company.
Section 128 of the Corporation Act 2001 states, person has right to make assumptions under
section 129 of the Act while dealing with the company, and company cannot rely on the ground
that assumptions made by the outsiders are not correct.
Person has right to make the assumption under section 129 of the Act related to the dealings
conducted with another person who directly or indirectly connected with the company.
Therefore, company and any other person cannot rely on the ground that assumptions made by
the person are not relevant.
This assumption can be made by the person even though officer and agent of the company act in
fraudulent manner related to the dealings. It must be noted that assumption under section 129
cannot be made if outsider at the time of dealing suspects or knew that assumption made by him
is incorrect in nature (Corporation Act, 2001).

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This rule of Indoor management was approved by High Court of Australia in case law Albert
Gardens (Manly) Ltd v. Mercantile Credits Ltd. It must be noted that this case was considered
as important case for understanding the doctrine of Indoor management.
Section 129 of the Act states that outsider can make following assumptions while dealing with
the company:
Person has right to assume that company complied with the constitution of the company and any
provision of the Corporation Act which is applied on company as replaceable rule while entering
into contract with the outsiders.
Person also has right to assume that any director or company secretary who appears before the
public as the representative of the company has been duly appointed by the company, and such
person is authorized to perform the duties and exercise the power as the director or secretary of
the company which can be performed by any reasonable person acting as director or officer of
the similar company.
Person also has right to assume that officer or agent of the company who appears before the
public as the representative of the company has been duly appointed by the company, and such
person is authorized to perform the duties and exercise the power as the officer or agent of the
company which can be performed by any reasonable person acting as agent or officer of the
similar company.
Person can make assumption that person appointed as officer and agent of the company is
properly performing their duties to the company (Corporation Act, 2001).
It must be noted that this rule is applied on those outsiders only who are working with company
and entered into transaction with good faith, and they does not have any reason to believe that
any irregularity exists in the company and internal rules and regulations are not compiled by the

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person dealing on behalf of the company. This doctrine mainly provides assistance to the
outsider while entering into the transaction with the company. This doctrine is also used by the
outsider while dealing with the private corporation.
Application:
Part a- Contract is signed by the director of the company named as Bob on behalf of the
company with the third party that is Computer Supplies Pty Ltd for purchasing ten new
computers of $8000. As stated in the company’s constitution only contract above $ 10000 need
to be approved by passing board resolution in the duly held board meeting and it must be signed
by at least two directors of the company.
In this case, Bob solely sign the contract with the computer supplies Pty Ltd and also fail to pass
any resolution in the board meeting. However, rule of constitution is not applied in this case
because contract signed by Bob is below the $ 10000 and this contract is not fall under the
approval requirement. Therefore, this contract is enforceable in nature and SSA is bound to make
payment to Computer supplies Pty Ltd of $ 10000.
Part b- Contract is signed by the director of the company named as Bob on behalf of the
company with the third party that is Plastica Pty Ltd for $50000. As stated above, company
constitution imposed obligation on company director that any contract above $ 10000 need to be
approved by passing board resolution in the duly held board meeting and it must be signed by at
least two directors of the company.
In this case, Bob fails to compile with the constitution while entering into contract with Plastica
Pty Ltd. However, in this case doctrine of Indoor management is applicable and section 128 and
129 is also applied. Section 128 allowed he person to make assumption under section 129 of the

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Act while dealing with the company, and company cannot rely on the ground that assumptions
made by the outsiders are not correct.
Section 129 states that person can make assumption that company complied with the constitution
of the company and any provision of the Corporation Act which is applied on company and any
director or company secretary who appears before the public as the representative of the
company has been duly appointed by the company, and such person is authorized to perform the
duties and exercise the power as the director or secretary of the company.
This can be understood through case law Royal British Bank v. Turquand. In this case, Court
held that outsiders has right to make assumption that person representing the company was duly
authorized and implied with all the internal rules of the company. Doctrine of Indoor
management was introduced in this case. Therefore, Plastica has right to make assumption under
section 128 and 129 of the Act that Bob is duly authorized and compiled with all the internal
requirements of the company.
Conclusion:
Part a- contract exists between SSA and Computers Supplies Pty Ltd, and company is bound to
pay $10000 to computer supplies.
Part b- contract exists between SSA and plastica Pty Ltd, and company is bound to pay $50000
to plastica.

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Answer 2
Issue:
Whether three executive directors of Superdry Holding Ltd (Holdings) breach their statutory or
equitable duties under corporation Act 2001 towards the Superdry stores Ltd?
Rule:
Directors of the company are responsible to conduct day to day affairs of the company and they
are also responsible to perform their duties with reasonable care and in the benefit of the
company. However, directors manage the company for the shareholders because in actual
company is owned by the shareholders. Directors get their powers through the Corporation Act
2001 and constitution of the company, but also imposed various statutory and equitable duties on
company’s director.
Situations are different in corporate group because in this directors of the parent company are
also liable towards the subsidiary company if board of the subsidiary company is directly or
indirectly bound to follow the directions given by the board of the parent company.
In other words, if directors of the parent company are considered as the shadow director of the
subsidiary company then they are liable to perform similar duties towards the subsidiary
company what they own towards the parent company. This term shadow director is stated under
section 9 of the Act.
Directors must keep in mind that best interest of the subsidiary company can be different from
the best interest of the parent company or corporate group. Usually, company best interest is lie
within the best interest of the shareholders. While taking any decisions in the best interest of the
parent company, it is the duty of director to consider the best interest of the subsidiary company
also. In other words, directors of the parent company cannot neglect the best interest of the

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subsidiary company while considering the interest of the parent company. This can be
understood through example which states, if any corporate benefit exists for subsidiary company
while providing the guarantee for the parent company, then such benefit must be clear.
It must be noted that various duties are owned by board of parent company towards the
subsidiary company, some of these duties are summarized below:
 Directors must act in good faith while conducting operations of the company.
 Directors must applied skill and care while performing their functions.
 Directors must not engage in any trade at the time of insolvency.
Statutory and equitable duties owned by directors of parent company towards the subsidiary
company under Corporation Act 2001:
 Section 180 of the Act states that directors of the company must perform their functions
with reasonable skill and care. This duty of director is also considered as fiduciary duty
of director. This duty states, director is responsible to make the business judgment in
good faith in best interest of the company and for proper purpose.
 There is one more duty imposed on company’s director under section 181 of the Act, and
as per this duty director of the company must discharge his duties in the best interest of
the company, and act in the benefit of the director.
Remedies- if director is liable to breach any of the above duty then such director face
consequences stated under section 1317E of the Act. Non-compliance of above stated sections
related to statutory duties of director result in civil and criminal consequences. Section 1317E of
the Act states, Court has power to make declaration of contravention if any above stated section
is breached by the director of the company.

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If Court make declaration under this section, then ASIC can seek following remedies against the
director who breach his statutory and fiduciary duties under Corporation Act 2001: (Corporation
Act, 2001).
 Pecuniary penalty order against the director who breach his duties (Section 1317G).
 Disqualification of the director from managing the company (Section 206).
Case law ASIC v Vines was the case which help in understanding the breach of director’s duty
under Act. In this, Court held Mr. Vine liable for breaching the provisions of section 180 of the
Act because he transfers misleading and inadequate information to the company’s board.
Application:
In this case, board of the parent company owned 70% shares in Stores and because of which it
can be considered as wholly owned subsidiary of holdings. As per the concept of shadow
director, if board of the subsidiary company follows the instructions of the board of parent
company then parent company is considered as the shadow director of the subsidiary company.
In this case also all three directors are the shadow directors of stores. Therefore, Jack, Alice, and
Francis own statutory duties towards the stores.
In this all three directors breach their statutory duties under section 180 and 181 of the Act by
failing to provide personal guarantee for the debts of the holdings and manufacturing. They
provide the guarantee of stores for the debts of manufacturing and holdings which is not in the
best interest of the stores.
Therefore, Jack, Alice, and Francis breach their statutory and equitable duties stated under
section 180 and 181 of the Act.
Directors of the company face consequences stated under section 1317 E that are pecuniary
penalty orders and disqualification order.

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Conclusion:
All three directors of the holding company breach statutory duty owned towards subsidiary under
section 180 and 181 of the Act.

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References:
Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd, [1973] HCA 60; 131 CLR 60.
ASIC v Vines [2005] NSWSC 738.
Corporation Act 2001- Section 128.
Corporation Act 2001- Section 129.
Corporation Act 2001- Section 1317E.
Corporation Act 2001- Section 1317G.
Corporation Act 2001- Section 180.
Corporation Act 2001- Section 181.
Corporation Act 2001- Section 206.
GIA, (2014). Guidelines for Directors of wholly-owned subsidiary companies. Viewed at:
https://www.governanceinstitute.com.au/media/656514/govinst_guidelines_whollyownedsubsidi
ary_2014.pdf. Accessed on 18th September 2017.
Krawitz, A. (2002). Murdoch University Electronic Journal of Law. Viewed at:
http://www5.austlii.edu.au/au/journals/MurUEJL/2002/22.html#INTRODUCTION_T. Accessed
on 16th September 2017.
Royal British Bank v Turquand (1856) 6 E&B 327.