Company Law Assignment: Directors' Duties, Contracts, and Breaches

This report examines key aspects of company law, specifically focusing on the duties of directors and the execution of contracts. The analysis begins by evaluating the validity of contracts entered into by Sunshine Scooter Art Pty Limited, considering the roles of agents and the requirements of the company's constitution under the Incorporation Act. It differentiates between contracts where the company is bound and those where it is not, based on proper authorization and adherence to internal governance rules. The report then delves into a case study involving Jack, Alice, and Francis, assessing their potential breaches of statutory and common law duties. It highlights the directors' misuse of their positions to favor their personal interests over the company's best interests, particularly concerning a guarantee for the debts of related companies. The report discusses the application of the business judgment rule, fiduciary duties, and potential legal consequences, including civil penalties and actions for damages. It references relevant legislation, case law, and academic sources to support its arguments and conclusions.

Question 1 (a)
Sunshine Scooter Art Pty Limited is bound by the contract entered to with Computers Supplies
Pty Limited as executed on its behalf by Bob.
A company just like a natural person is an entity capable of entering into contracts in its own
name1. Being a juristic person, a company enters into such contracts by itself using its common
seal2 or through an authorized agent3. The Company is further bound by its constitution and or
any binding resolutions it has passed as far as execution of contracts are concerned.
Pursuant to s. 126 of the Incorporation Act, a Company may authorize an agent to act on its
behalf. Such an agent may do so as an individual. Where such an agent is a director of that
company then he or she may execute that agreement as a sole agent of the Company. S. 127 of
the Incorporation Act provides for execution of a company by itself with or without a seal. An
execution where the Company has more than one director, then such document and or contract
can only be enforceable if executed by two directors or a director and the Company Secretary.
The Constitution of the Company further sets out its regulations as far as execution of contracts
is concerned4. Such regulations guide not only the shareholders but equally the directors on their
conducts as the mind and the managers of the Company. An action by directors against the
Constitution of the Company invalidates such an action. It is the duty of the directors to act
within the powers given in line with the Articles of Association of that Company.
In Punt v Symons & Co Ltd (1903) 2 Ch 506, the court I emphasizing the duty of the directors to
act within the law and the Constitution of the Company , the court held that the directors could
not work outside the provisions of the Articles of Association in a bid to realize a position not
provided for by the Articles. It is on this ground that the provision of SSA Pty Limited
Constitution has to be upheld as far as execution of the agreement was concerned.
1 The Incorporation Act 2001, s. 124
2 The Incorporation Act 2001, s. 127
3 The Incorporation Act 2001, s. 126
4 Part 19 - How To Execute Legal Documents (2017) Defence.gov.au
<http://www.defence.gov.au/estatemanagement/support/SuiteContracts/Manual/Part_19_-
_How_to_execute_legal_documents.htm>.

The Constitution SSA Pty Limited provides that a contract of $ 10,000 can only be binding if
executed by two directors and if a board resolution to such a contract being entered to is passed.
Interpreted otherwise a contract of less than $ 10,000 may be entered into without a board
resolution and with less than two directors. This may also mean that the Company’s Constitution
seemed to refer to contracts for less than $ 10,000 to be executed pursuant to s. 126 of the
Corporation Act. On this basis, Bob acted as an agent of the Company when signing the Contract
and hence the Company is bound by the Contract and meant to settle the invoice of $8,000 for
the supply of the Computers.
Question 1(b)
Sunshine Scooter Art Pty Limited is not bound by the agreement with Plastica Pty Limited
entered on its behalf by Bob.
The Company, Sunshine Scooter Art Pty Limited by virtue of s. 126 and 127 of the Incorporation
Act 2001, may enter into a contract through an authorized agent or by itself respectively. A
director may enter into a contract as an agent of the Company. This needs to however be clearly
stated. Where a Company enters into a contract by virtue of s. 127, it must then have two of its
directors sign the contract and or a director and the Company secretary. Affixing of the seal is
optional. A contract signed by a sole director is therefore unenforceable.
In the case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd[2014] SASCFC 103,
the court held that a contract signed by a sole director where in essence the Company had two
directors to be unenforceable in law. In this case a director executed a contract of for sale of a
property of $ 1.5 Million and struck out the box designating a sole director. It was on this ground
that the court opined that the director did not intend to be bound by s. 126 rather be bound by s.
127. Being bound by s. 127, he did not act as an agent rather he acted as a sole director where
the Company was acting on its behalf. The Contract was thus held to be non-binding.
The Company’s Constitution, which sets out the regulations on execution of Company provides
that an agreement of more than $ 10,000 can only be binding where there has been a resolution
authenticating such an agreement and the same signed by 2 directors. This was however not the
position in the Contract between Bob and Plastica Pty Limited. Bob signed the agreement as a
sole director thereby making the contract unenforceable and non-binding on SSA Pty Limited.

Question 2
Jack, Alice and Francis are in breach of some of the duties imposed to them by the Incorporation
Act 2001 and the Common Law. This is clearly seen by the wrong judgment of having Superdry
Stores Limited guarantee the debts of the Superdry Holdings Limited and Superdry
Manufacturing Limited. It must be taken to account that these move by the 3 directors
aforementioned was a selfish move basically aimed at protecting their interests in the Holdings
and Manufacturing Limited, where they hold considerable share interests. The actions of such
directors are therefore not in the best interest of the Company and are actionable before a
common court and further as a contravention of the statutory duties of directors to the company.
Principally, directors of a Company who are also referred to as the government of the Company
have Statutory and common law and or equitable duties to the Company in carrying out of their
functions. The Statutory duties of the directors have been set out in s. 180- 183 of the
Incorporation Act. These statutory duties have been summarized as the duty of Care and
diligence; the duty to act in good faith; the duty to put their position to proper use and the duty to
make good use of the information gained in their span of being directors5. Any failure to
perform such duties calls for legal penalties or criminal charges against the directors that
contravene the sections setting out those duties.
The duty of care and diligence calls on directors while making any business decision and or
judgment to for the proper purpose, with no material person interest, being certain that the
decision is commercially viable to the Company and that it is to the best interest of the Company.
This is what has been referred to as the ‘Business Judgment rule’. In his writing, in agreement
with the disclaimer in s. 180 of the Incorporation Act, Professor Braxt6 appreciates that this rule
only applies to the duty of care and diligence and not the other statutory duties. We opine that
the 3 directors in passing the resolution to have Superdry Stores Limited Guarantee to the debts
of the two companies was a breach of this duty as it was not made to the best interest of the
Stores Limited rather it was for the interest of the two other companies in which the directors are
the major shareholders. It must be noted that the Stores Limited had engaged in the sale of other
5 The Incorporation Act, 2001 s. 180- s. 183
6 R Baxt, Duties And Responsibilities Of Directors And Officers (Australian Institute of Company Directors, 2016).

products that were doing better that the Superdry products so as to keep afloat hence the
reputation was basically an non-issue in this matter and further the engagement on guaranteeing
the debt was risky to the financial life of the Stores Limited.
The duty to put their position to proper use requires the directors not to use their positions as the
power bearers of the company to make decisions or moves that are advantageous to themselves
at the stake of the Company. It may be clearly seen that the 3 directors sitting in the Stores
Limited and having the right numbers to pass resolutions, seeking to protect their shareholding in
the Holdings and Retail Limited used their powers and numbers to easily pass the resolution
even though it was and or is detrimental to the survival of the Stores Limited. This decision and
or the resolution passed only went through because of the powers the 3 directors had, power that
was wrongly used.
The directors are also required to act in good faith in all their dealings. This is a fiduciary duty
that the directors owe to the Company. It the duty of the directors to ensure that their actions are
inspired by the need to have the shareholders , employees, promoters, investors among the many
other persons’ interests are secured7. To this extent the 3 directors only concentrated on their
interest that were at stake and the need to save the 2 companies that were indebted rather than the
risk that the Stores Limited was to face due to the huge financial guarantee risk they were getting
themselves in for a Company having 30% shareholding but with directors who had the votes.
Under Common law the duties of a director to a company are a number and cut across every
Company. These duties8 and or responsibilities vested upon the directors must be adhered to and
omissions to perform these duties impose common law liabilities upon the directors and the
shareholders of a company may sue for damages in a common law court.9 These common law
duties can be summarized as duty to exercise discretion on matters of delegation; the duty to
avoid any conflict of interest and the duty to act properly within the powers conferred to them. In
so far as breach of the common law duty, as afore mentioned in the duty to act in care and due
diligence and the duty to act in good faith, the 3 directors were inspired by their personal
7 General Duties Of Directors (2017) Aicd.companydirectors.com.au
<http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-
directors>.
8 Common Law Duties (2017) Lawhandbook.sa.gov.au <http://www.lawhandbook.sa.gov.au/ch05s01s03s03.php>.
9 Company Law: The Common Law, Directors Duties And Responsibilities | CPD Seminars (2017) Cpdseminars.ie
<https://www.cpdseminars.ie/articles/the-common-law-directors-duties-and-responsibilities/>.

interests rather than the interest of the Company and the stakeholders of Stores Limited in
passing the Resolution. Guaranteeing the debt of the two Companies indebted to Finance Bank is
a risky financial venture in which proper discretion was not exercised by the Director.
Contravention of the statutory duties by the directors is punishable under S. 1317E as a civil
penalty which is prosecuted or pursued by the Australian Securities and Investments
Commission (ASIC) as a civil matter and by the director of public prosecution as a criminal
matter.
Under the common law, Karen may seek damages from the court from any sums lost to be
compensated. Further, she may seek injunctive orders to halt the enforcement of the Resolution
on grounds that the resolution is against the interest of Superdry Stores Limited and was passed
in bad faith with the directors exercising their power inappropriately.
Reference:
Baxt, R, Duties And Responsibilities Of Directors And Officers (Australian Institute of Company
Directors, 2016)
Common Law Duties (2017) Lawhandbook.sa.gov.au
<http://www.lawhandbook.sa.gov.au/ch05ies s01s03s03.php>.
Company Law: The Common Law, Directors Duties And Responsibilities | CPD
Seminars (2017) Cpdseminars.ie https://www.cpdseminars.ie/articles/the-common-law-directors-
duties-and-responsibilities/
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd[2014] SASCFC 103
Part 19 - How To Execute Legal Documents (2017) Defence.gov.au
http://www.defence.gov.au/estatemanagement/support/SuiteContracts/Manual/Part_19_-
_How_to_execute_legal_documents.htm
Punt v Symons & Co Ltd (1903) 2 Ch 506
The Incorporation Act , 2001

General Duties Of Directors (2017) Aicd.companydirectors.com.au
<http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/
general-duties-of-directors>.