Directors' Duties: Analysis of Corporate Law Issues

This assignment solution delves into the intricacies of directors' duties within the framework of corporate law, analyzing two primary questions. The first question examines the liability of a company (OW) in a contract where a director (Priya) exceeded her authority, considering the knowledge of the third party (Seedy Vineyard Ltd) regarding the limitations. This involves a review of the Corporations Act 2001, specifically sections 125, 128, and 129, along with the case of Sunburst Pty Ltd v Agwater Pty Ltd, to determine the validity of the contract. The second question addresses whether Ted, the company's solicitor and a shareholder, can sue Organic Wines Pty Ltd for breach of contract based on a clause in the company's constitution that appointed him and restricted his termination. This analysis draws upon section 140 of the Corporations Act 2001 and cases like Eley v Positive Government Security Life Assurance Co Ltd, Hickman v Kent or Romney Marsh Sheep-Breeders Association, and Browne v la Trinidad to assess the enforceability of the clause. The second part of the assignment focuses on the duties of directors, particularly regarding share transactions. It explores whether directors (Karim and Miles) properly exercised their powers in refusing to register a share transfer and subsequently purchasing the shares at an undervalue, referencing sections 181 and 182 of the Corporations Act 2001, and cases such as Australian Metropolitan Life Assurance Co Ltd v Ure and Howards Smith Limited v Ampol Petroleum and Others. Finally, it examines whether a director (Miles) was obligated to disclose information to a shareholder (Olive) before purchasing her shares, considering cases like Percival v Wright, Hurley v B.G.H Nominees Pty. Ltd, Coleman v Myers, and Brunninghausen v Glavanics, to determine the extent of a director's fiduciary duty in such transactions.

Running Head: Directors Duties 1
Directors Duties
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Directors Duties 2
Question 1
Part A
Issue
Priya and Seedy Vineyard Ltd entered a contract for $500,000 beyond the limit
provided in Priya’s appointment and OW’s constitution. This is known to Seedy Vineyard
Ltd. Is OW liable in the contract provided they were aware of defects in Priya’s authority and
breach of the company’s constitution?
Law
Corporations Act 2001
S 125
S 128
S 129
Cases
Sunburst Pty Ltd v Agwater Pty Ltd1
Appplication
A company may include a clause restricting the objects and powers of the officers in
the constitution, s 125 of the Corporations Act 2001. However, an act is not invalid merely
because it has gone beyond the restrictions on the objects or powers exercised beyond the
limits as per s 125 (2) of Corporations Act 2001. Even where an officer has acted beyond his
authority and objects the company will still be bound. This might be associated with the
presumptions available to third parties dealing with the company2. A third party may presume
that the officers have complied with the company’s constitution and other internal rules3 and
are authorised to bind the company4.
1 [2005] SASC 335
2 Corporations Act 2001 s 129
3 Corporations Act 2001, s 129 (1)
4 Corporations Act 2001, ss 129 (3) and (4)

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However, these presumptions are limited where the third party has knowledge of
defect in the authority and compliance with the company’s constitution, s 128 (4)5. In
Sunburst Pty Ltd v Agwater Pty Ltd6 it was held that the knowledge or suspicion must be
actual and not constructive. The test is subjective and the company contesting the
presumption bears the burden7.
OW is permitted to restrict its objects and officers authority under s 125 of
Corporations Act 2001. Priya’s authority was restricted, however, this does not invalidate the
contract with Seedy Vineyards. The assumptions provided in the Act8 are available to Seedy
Vineyards provide they meet the conditions provided under s 128.
Conclusion
Seedy Vineyards believe that Priya exceeded her authority and the objects of the
contract were beyond the restrictions in the constitution. They cannot, therefore, rely on the
presumptions based on s 128 (4) Corporations Act 2001. They had actual knowledge and
suspicion of the defects in accordance Sunburst Pty Ltd. OW is not bound by the contract.
Part B
Issue
Ted was the company’s solicitor and participated in drafting the company’s
constitution. He inserted a clause appointing himself as the company’s solicitor and
restricting his termination. He was later allotted shares in the company. The issue is can Ted
sue Organic Wines Pty Ltd for contract breach relying on the clause in the constitution.
Law
Corporations Act 2001
S 140
Cases
5 Bede Harris, ‘Third Party Suspicion of Lack of Authority on the Part of Company Agents: A Comparative
Study and a Suggested Rule’ (2015) 8(2) Journal of Politics and Law 98, 102
6 [2005] SASC 335
7 [2005] SASC 335
8 Corporations Act 2001 s 129

Directors Duties 4
Eley v Positive Government Security Life Assurance Co Ltd9
Hickman v Kent or Romney Marsh Sheep-Breeders Association10
Browne v la Trinidad11
Southern Foundries Ltd v Shirlaw12
Application
The company’s constitution creates a statutory contract governing various parties in
the company, s 140 (1) of Corporations Act 2001. These include contract between
shareholders and the company, shareholders and shareholders, the company and its officers.
The section does not provide protection for other relation13. It is only persons provided under
s 140 of Corporations Act 2001 who have the locus to bring an action under the terms of the
constitution. However, the enforcement of the terms by the members is limited to their
capacity as shareholders14. Eley v Positive Government Security Life Assurance Co Ltd15 had
almost similar facts. In that case there was a clause in the company’s constitution restricting
removal of the company solicitor. The solicitor was removed and he brought an action
against the company under contract relying on the clause. It was held that the statutory clause
governed the relationship of the solicitor and the company as shareholder. The court was also
moved by the fact the clause was never brought to the attention of the original shareholders.
In Hickman v Kent or Romney Marsh Sheep-Breeders Association16 it was stated that a
shareholder cannot sue on the clause of the company constitution except in the capacity as
such shareholder. That is, he cannot sue as employee of the company. That was the holding in
Browne v la Trinidad17 where it stated that a claim under the constitution could only succeed
where it relates to shareholding.
Ted is a shareholder in the company and as such there exists statutory contract
between Ted and the Company by virtue of s 140 of Corporations Act. The claim for breach
9 (1876) 1 Ex D 88
10 [1915] 1 Ch 881
11 (1887) 37 Ch D 1
12 [1940] AC 701
13 Julie Cassidy, Concise Corporation Law (Federation Press, 2006) 95
14 Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press,
2011) 204
15 (1876) 1 Ex D 88
16 [1915] 1 Ch 881
17 (1887) 37 Ch D 1

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will be against the company in his capacity of a dismissed solicitor and not shareholder and
based on Eley, Hickman and Browne cannot succeed. The fact that the clause was inserted by
Ted but never brought to the attention of the original shareholders could aggravate Ted’s
circumstance based on the holding in Eley.
Conclusion
Ted’s claim against the company cannot succeed. Ted’s claim can only succeed where
there was an independent contract similar to the clause inserted in the constitution based on
the holding in Southern Foundries Ltd v Shirlaw18.
Question 2
Part A
Issue
Olive sold her shares Karim and Miles refused to register the transfer. Karim and Mile
as directors had the discretion to register or not register the transfer provided they acted
faithfully and Company’s best interest. Karim and Miles must also exercise their power for a
proper purpose. The issue is did Karim and Miles exercise their powers as directors properly?
Law
Corporations Act 2001
S 181
S 182
Cases
Australian Metropolitan Life Assurance Co Ltd v Ure19
Howards Smith Limited v Ampol Petroleum and Others20
Application
18 [1940] AC 701
19 (1923) 33 CLR 199
20 [1974] AC 821

Directors Duties 6
Sections 181 and 182 of Corporations Act 2001 provide that the directors should act
honestly in the exercise of their duties21. In the exercise of their powers, the directors must
have company’s interest at heart. Section 182, abhors misuse of position by the director. The
section prohibits misuse of position for personal gain or to the detriment of the company. The
courts are slow to interfere with a director’s action provided it can be shown they acted
properly and in the interest of the company. However, where director deviates, courts are
willing to intervene and offer a proper remedy22. Australian Metropolitan Life Assurance Co
Ltd v Ure23 demonstrates court’s slowness to interfere with director’s acts.
In Australian Metropolitan Life Assurance Co Ltd a shareholder bought shares but the
directors refused to register the transfer. The court held that the directors properly exercised
their powers in refusing to register the transfer and action had company’s core interest. The
fact that the shareholder’s husband was a solicitor who had been struck off and the chances
that he could end up in the board of directors influenced the court’s decision. Howards Smith
Limited v Ampol Petroleum and Others24 demonstrates the courts willingness to interfere with
the exercise of director’s power where it is improperly exercised. The court stated that the
costs of individual shares and the person to sale is at the discretion of the individual
shareholders and any action of the directors to the contrary is improper use of their powers.
Karim and Miles had intention of retaining control of the company but did not have
money to purchase Olive’s shares. Olive found a buyer but the directors refused to register
the transfer but purchased the shares at undervalue and registered the transfer. There are no
circumstances such as was in Australian Metropolitan Life Assurance Co Ltd case to
influence the refusal to register the transfer by the directors. Their only intention was to retain
control of the organisation. Based on Howards Smith Limited case and without the factors in
Australian Metropolitan Life Assurance Co Ltd case Olive had the right to decide the cost of
her shares and the buyer.
Conclusion
21 Elizabeth Klein and Jean J Du Plessis, ‘Corporate Donations, the Best Interest of the Company and the Proper
Purpose Doctrine’ [2005] 28(1) University of New South Wales Law Journal 69, 76
22 Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press,
2002) 336
23 (1923) 33 CLR 199
24 [1974] AC 821

Directors Duties 7
Failure to register the transfer amounted to exercising power for an improper purpose
and breach of ss 181 and 182 of Corporations Act 2001. Olive can seek damages or
mandatory order reversing the registration.
Part B
Issue
Mile purchased Olive’s shares and thereafter the company declared dividends higher
than its previous years. The intention to declare such dividend was not known to Olive. Was
Miles supposed to disclose the information to Olive before purchasing her shares?
Law
Cases
Percival v Wright25
Hurley v B.G.H Nominees Pty. Ltd26
Coleman v Myers27
Brunninghausen v Glavanics28
Application
Directors of a company have must always have the interest of the company while
performing their duties. Their main duty is to the company29 and not to individual
shareholders30, according to Percival v Wright31. It was held that the directors of the company
did not owe a duty to shareholders selling their shares to disclose undergoing negotiations to
dispose the company. However, this duty to the company should not be exercised blindly
without considering the interest of the shareholders.
25 [1902] 2 Ch 421
26 (1982) 1 ACLC 387
27 (1977) 2 NZLR 225
28 (1999) 46 NSWLR 538
29 Robert Flannigan, ‘Shareholder Fiduciary Accountability’ (2014) 1 Journal of Business Law 1, 14
30 Beth Nosworthy,’ Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate Beneficiary?’ (2010)
24 Australian Journal of Corporate Law 282, 289
31 [1902] 2 Ch 421

Directors Duties 8
In Hurley v B.G.H Nominees Pty. Ltd32 it was held that there are circumstances where
the directors have fiduciary duty to the company as well as the shareholders. In Coleman v
Myers33 directors of a company incorporated a company which purchased shares from the
company at undervalue. The found that the directors owed the shareholders fiduciary duty of
disclosure. Directors have a duty to shareholders where they are purchasing shares34. In such
circumstance the director is placed in a place of confidence and trust. In Brunninghausen v
Glavanics35 the shareholders of the company were brothers-in-law. It was held that where the
shareholders are dealing on their shares and there is no competing director’s duty to the
company the directors owed a duty to the individual shareholders. In Brunninghausen case
the director had exclusive special knowledge of certain existing circumstances which made
him to be at an advantage compared to the shareholder36.
Olive intended to sale her shares and had found a buyer. However, Miles purchased
the share at undervalue and later the company declared divided higher than it had ever
declared before. Based on Percival case Miles owed Olive no duty but to the company.
However, the duty to Olive will arise where the exceptions to Percival case existed, such as
those determined in Hurley, Coleman and Brunninghausen.
Conclusion
Miles had exclusive special knowledge of the company’s prospects almost similar to
that in Brunninghausen case. That fact and the fact that Miles was the purchaser of the shares
created a duty to Olive based on Coleman case to disclose the prospects of the company to
Olive. Olive, therefore, has claim for breach of fiduciary duty against Miles.
32 (1982) 1 ACLC 387
33 (1977) 2 NZLR 225
34 Beth Nosworthy, Finding the Fiduciary: Recognition of the Director-Shareholder Relationship in Closely
Held Companies (Phd Thesis, Adelaide Law School, 2013) 109
35 (1999) 46 NSWLR 538
36 Stephen Bottomley et al, Contemporary Australian Corporate Law (Cambridge University Press, 2017) 349

Directors Duties 9
References
Books and Journals
Harris, Bede, ‘Third Party Suspicion of Lack of Authority on the Part of Company Agents: A
Comparative Study and a Suggested Rule’ (2015) 8(2) Journal of Politics and Law 98
Cassidy, Julie, Concise Corporation Law (Federation Press, 2006)
Klein, Elizabeth and Jean J Du Plessis, ‘Corporate Donations, the Best Interest of the
Company and the Proper Purpose Doctrine’ [2005] 28(1) University of New South
Wales Law Journal 69
Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia
(Federation Press, 2002)
Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University
Press, 2017)
Flannigan, Robert, ‘Shareholder Fiduciary Accountability’ (2014) 1 Journal of Business Law
1
Nosworthy, Beth, ’Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate
Beneficiary?’ (2010) 24 Australian Journal of Corporate Law 282
Nosworthy, Beth, Finding the Fiduciary: Recognition of the Director-Shareholder
Relationship in Closely Held Companies (Phd Thesis, Adelaide Law School, 2013)
Legislation
Corporations Act 2001
Cases
Sunburst Pty Ltd v Agwater Pty Ltd [2005] SASC 335
Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881
Browne v la Trinidad (1887) 37 Ch D 1

Directors Duties 10
Southern Foundries Ltd v Shirlaw [1940] AC 701
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
Howards Smith Limited v Ampol Petroleum and Others [1974] AC 821
Percival v Wright [1902] 2 Ch 421
Hurley v B.G.H Nominees Pty. Ltd (1982) 1 ACLC 387
Brunninghausen v Glavanics (1977) 2 NZLR 225