Business Law Report: Company Contracts and Directors' Obligations

This report analyzes two distinct scenarios within business law. The first part focuses on contractual capacity, pre-registration contracts, and the liabilities of companies and their agents, referencing relevant sections of the Corporations Act 2001 (CA) and case law such as Kelner v Baxter and Bay v Ill...Read More

Running head: BUSINESS LAW
Business law
Name of the Student
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Author Note

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Introduction
This part of the paper is to determine the contractual capacity of organizations and its
agent. The section also analyzes when an organization is bound to a contract entered upon by its
agent. The paper also highlights the provisions related to pre-registration contracts entered upon
by an organization. The first issue in the case is to determine the liability of Sunshine Scooter Art
Pty Ltd (SSA) in relation to the contract with Computer Supplies Pty Ltd. The second issue in
this case is to find out that whether can be held liable in relation to the contract with Plastica Pty
Ltd.
Relevant law
According to Section 124 of the CA a company has the power and legal capacity, like an
individual to get into a contract with another person. This capacity of the company is not affected
even it is found that the contract is not in the best interest of the company1.
As per Section 125 of the CA the constitution of the company may limit the powers of
company to get into a transaction. The provision clearly provides the even if it is expressly
mentioned in the constitution that a power of a company is limited in relation to a transaction, the
transaction does not merely become void if it is committed by the company2.
Section 126 of the CA states that any individual who acts with the implied or expressed
authority of the company has the right to enter into an act of making, discharging, ratifying or
varying a contract on behalf of the company. This power of the agent can be carried out even
without the use of the common seal of the company3.
1 Corporation Act 2001 (Cth) at Section 124
2 Corporation Act 2001 (Cth) at Section 125
3 Corporation Act 2001 (Cth) at Section 126

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It has been expressly provided by section 127 of the CA that the a company is allowed to
execute a document without the use of the common seal of the company if such contract is
signed by at least two directors of the company when the company has more than one director. In
addition where the common seal is fixed to a contract it would only be executed if it is witnessed
by at least two directors of the company4.
According to section 231 of the CA in case an individual gets into a contract or proposes to get
into a contract acting as an agent of the company on behalf of it, or for the interest of the
company before the company has been registered, the organization is has a legally binding right
to the contract if the company when registered ratifies the contract within the provided time
which has been agreed by the parties of the contract and where the time has not been agreed than
within a reasonable time5.
In addition the section provides that it is the liability of an individual to be held liable for any
damages to another party who entered into the pre-registration contract if the company does not
get registered or the company does not ratify the contract in accordance to subpart 1 of the
section. The amount which such person may be held liable for is the same amount which the
company would have been liable to pay under the contract6.
Moreover any legal proceeding is initiated to recover the damages which can be claimed
under subpart 2 of the section as the company has become registered and is not willing to ratify
the contract or enter into a substitute contract, the court has the power to do anything in relation
to the circumstances of the case including the orders which would direct the company to pay all
4 Corporation Act 2001 (Cth) at Section 127
5 Corporation Act 2001 (Cth) at Section 231
6 Corporation Act 2001 (Cth) at Section 231(1)

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the damages which the person is liable, transfer the property back to the other party which have
been received by the company and pay an amount to the other party of the contract7.
In the case of Kelner v Baxter8 an advocate who had agreed into a contract on behalf of the
company before it had been registered was held liable in relation to the contract. As the company
was not incorporated when the contract has been formed the person would not be treated as a
agent of the company.
In the case of Bay v Illawarra Stationary Supplies Pty. Ltd9 where the company had four
members but only one of such member got into a contract with the their party before the
company was incorporated therefore, the court held that only such person is liable to the contract
and not the other three members.
Analysis
In the given circumstances the position of SSA in relation to the contract with CS would be
determined first. Bob is a director of the company SSA along with Adrian and Jana. Bob has
entered into a contract with CS for the supply of computers worth $8000 before the company has
been registered. The rules in relation to pre registration contract have been discussed above in the
section 131 of the CA. Applying the provisions of the section to the facts of this case it can be
stated that the company can be bound by the contract on if after registration the company ratifies
the contract. However in this case because of shortage of financial capital the company does not
want to ratify the contract. The section further states that if the company does not ratify the
contract the person who got into the contract on behalf of the company can be liable to pay
damages to the other party in relation to the contract. Thus in this case through the application of
7 Corporation Act 2001 (Cth) at Section 231(2)
8 (1866) LR 2 CP 174
9 (1986) 4 ACLC 429

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this part of the section it can be said that bob would be liable to pay damages to CS if they
would incur any loss in relation to the contract.
However part 3 of the section gives power to the court to impose a liability on the company in
case the company does not ratify the contract to be liable to the damages to be paid to the other
party through analyzing the circumstances. In this case it is likely based upon the principles of
Kelner and Bay case that court will make bob solely liable in relation to the damages in the
contract with CS. The company would have to return the computers to CS
As per the second issue in this case in relation to the contract of Bob has entered into a contract
with PP which is for a value of $50000. As per the constitution of SSA the company does only
allows a transaction which is more than the value of $10000 to be approved through a resolution.
Common law provides that any act which is outside the scope of the company is void. However
in recent cases the courts have made decisions that of the act is not at all consistent with the
purpose of the company it cannot be valid and not otherwise.
Section 125 of the CA also states that of an act is not according to the provisions of the company
it cannot be made invalid only because it is not in accordance to the constitution. Therefore as
the contract which Bob as a director of SSA got into with was not vastly inconsistent to the
purpose of the company it is binding in the company.
Conclusion
Therefore from applying the above discussed laws to the facts of the case it can be evidently
provided that the SSA is not liable to the contract with CA and SSA is bound to the contract
with PP.

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Answer 2
Introduction
In this part of the case the question is related to the duties of directors in Australia
imposed by both common law and the Corporation Act 2001. The section discusses the
circumstances which can lead to the violation of the duty. The section is also related identifying
the penalties for the violation of the imposed duties by the directors. The issue in this case is to
find out whether Jack, Alice and Francis have violated their director’s duties in relation to
Superdry Stores Ltd through making Stores provide securities to Finance Bank Ltd. The section
determines the issue by applying relevant laws to the fact of the situation and derives a
conclusion.
Relevant law
Section 180(1) of the CA states that it is the duty of a director or any other officer of the
company to ensure that when the take any decision in relation to the company than such decision
should be in the best interest of the company and must be in good faith10.
There is a test which is provided through this section to the court so that they can analyze
whether such decision was in good faith or in the best interest of the company or not. As per the
principles of the section a hypothetical reasonable director is placed in the position of existing
directors their actions are compared to the reasonable director to identify the validity of their
actions.
According to Section 180(2) of the CA, a director or any other officer of the company has
ensure that the decision they have taken in relation to the company is in accordance to section
10 Corporation Act 2001 (Cth) at Section 180(1)

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180(1) along with equivalent duties at common law and equity if the judgment taken in
accordance to the purpose of the company and in good faith. In addition, there is no material
interest of the directors personally in relation to such decision and they have taken the decision
after informing themselves in relation to it to a degree where they have belief that it is
appropriate. The directors must also have a rational belief that the interest is in the best interest
of the company. A business decision can be considered to be rational if no reasonable person
would hold the same view. The section is applicable with respect to equivalent duties under
common law such as the duty of care. Business judgment in relation to this section is any action
which is related to business operations11.
In the case of Australian Securities and Investments Commission v Rich12 there was
substantial review done by the judges in order to determine the requirements of the business
judgment rule. In this case the court found that the directors had not complied with the
provisions of the business judgment rule.
In the case of ASIC v Maxwell13 it has been decided by the court that if the directors indulged in
informed decision making than they can take decision which involves a risk in relation to the
business and such decision would be considered as a business judgment.
As discussed above section 180 of the CA is also in relation to the breach of any common law or
equity duty imposed on the directors. Any director who violates a common law duty is also liable
under this section. The breach of section 180 of the CA is a civil liability offence.
The breach of director’s duties is a civil penalty provisions which attracts penalties under section
1317E and 206C of the CA. Section 1317E provides for pecuniary penalties whereas Section
11 Corporation Act 2001 (Cth) at Section 180(2)
12 (2009) 236 FLR 1
13 (2006) 59 ACSR 373

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206C provides for suspension of directors14. Both the penalties were used in the case of ASIC v
Lindberg15
Section 182 and 183 of the CA states that the directors must not use their position or information
to create a position of conflict of interest and if such situation is created than always prioritize
the interest of the company16.
Section 232-233 CA provides for remedies to members of company against an act by directors
which may bring determent to the members or the company17.
Analysis
In the given circumstances Jack, Alice and Francis are directors of Superdry Holdings
Ltd (“Holdings”) which is the parent company of Superdry Manufacturing Ltd
(“Manufacturing”) and Superdry Retail Stores Ltd (“Stores”). Stores have the maximum number
of public investment which accounts to 70% of the total capital provided by the public.
It has been provided in the scenario that both Manufacturing and Holding are facing
financial difficulties whereas stores are doing well in relation to their business administration. In
order to ensure that Manufacturing and Holding (where the directors have maximum investment
and interest) are able to secure a loan from Finance ltd they made stores provide guarantee for
them sitting that it is in the best interest of stores.
As discussed above a section 180 provide that an decision in relation to the company
should be in its best interest. And whether such interest has been triggered or not is found out be
14 Corporation Act 2001 (Cth) at Section 1317E and 206C
15 [2012] VSC 332
16 Corporation Act 2001 (Cth) at Section 182-183
17 Corporation Act 2001 (Cth) at Section 232-233

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placing a hypothetical director instead of the alleged directors. in the given circumstances it can
be determined through the application of the test that a reasonable director would have not risk
the operations of stores by providing security as it is not in the best interest of the company. In
addition it has been seen that the directors as they have maximum interest in Holding and
Manufacturing have violated section 182 of the act by using their position to attain personal
interest at the cost of the company.
In addition the business judgment rule as provided in section 180(2) of the ACT can
however be applicable in this case as a defense of the directors for the breach of duties. The
defense although has not been used very successfully in relation to proceedings in Australia, in
the given case it can be used as a reasonable person may think that as Holding is the parent
company of Stores and Manufacturing is also related to it the loss of reputation for holding and
manufacturing can result in loss of reputation for Stores.
If the business judgment rule would not be applied than Karen can claim oppressive
action remedy under section 232-233 of the CA. in addition the directors can be liable for
pecuniary penalties under section 1317E and suspension under section 206C of the CA
Conclusion
Therefore it can be provided that the directors have violated the duty under common and
statutory law towards the company. The business judgment rule can be used as a defense

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Bibliography
ASIC v Maxwell & Ors [2006] NSWSC 1052
ASIC v Lindberg [2012] VSC 332
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1
Bay v Illawarra Stationary Supplies Pty Ltd (1986) 4 ACLC 429
Corporation Act 2001 (Cth)
Kelner v Baxter (1866) LR 2 CP 174