Legal Regulation of Business Structures - Semester 2 Assignment

This assignment solution addresses the legal regulation of business structures, focusing on two hypothetical scenarios. The first scenario examines the validity of contracts entered into by a company, Sunshine Scooter Art Pty Ltd, considering the authority of directors under the Corporations Act 2...Read More

Running Head: LEGAL REGULATION OF BUSINESS STRUCTURES
Legal Regulation of Business Structures
Hypothetical Assignment
Name of Student
Name of University

LEGAL REGULATION OF BUSINESS STRUCTURES 2
Answer 1: Sunshine Scooter Art Pty Ltd is a proprietary company of Australia duly registered
with ASIC and has three directors, viz., Jana Jones, Adrian Allport and Bob Golding.
(a) The contract that has been entered into by Bob on behalf of the company with Computer
Supplies Pty Ltd for $8,000 for the delivery of ten computers is a binding contract. The
general rule which is laid down in the Corporations Act 2001 (Cth) is that, except
otherwise contracted between the parties, where a company has more than one directors,
any contract with such company can be executed only if the contract has been signed by
at least two directors of the company1. Further it has also been held by the courts in
various cases that where there are more than one directors in a company, a director of
such company who is acting individually is not authorized to bind the company by virtue
of his position2. A director cannot bind the company by his acts on behalf of the company
unless he is expressly given the authority by the board to do so. But in the instant case the
constitution of the company lays down that a contract of an amount more than $10,000,
which has received approval of the board by a resolution passed and has been executed
by at least two directors, will be binding on the company. Here, the contract which was
entered into by Bob on behalf of the company with Computer Supplies Pty Ltd for
delivery of ten computers was a contract for $8,000, an amount which is less than
$10,000 as was required by the constitution of the company. The constitution of the
company does not makes any provision regarding the contracts of amount smaller than
$10,000, therefore, it is presumed that the directors had authority to act on behalf of the
company for cases otherwise.
Further the Corporations Act also lays down that if a third party enters into a
contract with the company where there are more than one directors, the former has right
to make an assumption that the latter has been authorized to act on behalf of the company
and that all the requirements of the constitution and the law has been complied with3.
Also the third party has the right to make an assumption that the director who is
1 Corporations Act 2001 (Cth) s 127(1)(a).
2 Northside Developments v Registrar General (1990) HCA 32; Brick & Pipe Industries Ltd v Occidental Life
Nominees Pty Ltd (1992) 10 ACLC 253.
3 Corporations Act 2001 (Cth) s 129(1).

LEGAL REGULATION OF BUSINESS STRUCTURES 3
representing the company is duly appointed and authorized by the members of the
company to make such appearance on behalf of the company4. In the instant case also the
company is registered with the ASIC and therefore the Computer Supplies Pty Ltd has
right to make an assumption that Bob was duly authorized to enter into contracts on
behalf of the company.
As per the observations made above it can be concluded that for the contract that
was entered into by Bob on behalf of the company was a valid contract as under Section
129 he is presumed to be authorized by the company to enter into contracts with third
parties and therefore, the Sunshine Scooter Art Pty Ltd is bound by the contract and the
directors are advised to make payment of $8,000 on behalf of the company to the
Computer Supplies Pty Ltd for the supply of ten computers made by the latter to the
former.
(b) The contract that has been entered into by Bob on behalf of the company with Plastica
Pty Ltd for $50,000 is not a binding contract. The reason that can be given for the
conclusion is that firstly, according to the law that has been laid down in the Corporations
Act 2001 (Cth) except in cases where a contrary contract has been entered into by the
parties, a company which has more directors than one and any contract has been entered
into on behalf of such company, such contract can be enforced only if it has been signed
by at least two directors of such company5. Further as per the rules laid down by different
courts if there are more than one director in a company and a director is acting
independently, he has no authority to bind the company by virtue of his position6. A
director can bind the company by his acts only if he has been given an express authority
by the board to do so. Also according to the constitution of the company in the instant
case a contract of an amount more than $10,000 will be executable and binding on the
company only if such contract has received approval of the board by a resolution passed
for the purpose and has been signed by at least two directors of the company. Here, the
contract which was entered into by Bob on behalf of the company with Plastica Pty Ltd
4 Corporations Act 2001 (Cth) s 129(2).
5 Corporations Act 2001 (Cth) s 127(1)(a).
6 Northside Developments v Registrar General (1990) HCA 32; Brick & Pipe Industries Ltd v Occidental Life
Nominees Pty Ltd (1992) 10 ACLC 253.

LEGAL REGULATION OF BUSINESS STRUCTURES 4
for an amount of $50,000 was not made in accordance with the requirement of the
constitution of the company as no resolution was signed by the directors to enter into any
such contract and neither did Bob was given any implied or express authority for making
contracts on behalf of the company. Further, it should be noted that Bob represented
himself as the ‘sole director’ of the company, which he was not. Section 129 of the said
Act entitles a third party who is entering into a contract with the company to make an
assumption with regard to the authority of a director of the said company only in case
where the contract has been signed according to the provision as laid down in section
127. Here, in the instant case the contract has not been entered into by Bob accordingly.
Therefore, on the basis of the observations made above it is concluded that the
contract that was entered into by Bob on behalf of the company with Plastica Pty Ltd was
not a valid contract as Bob made a misrepresentation that he was the sole director of the
company and also the contract was not made in compliance with the constitution of the
company. The contract with the Plastica Pty Ltd was not binding on the company and
therefore neither the company, Sunshine Scooter Art Pty Ltd nor its other two directors,
Jana and Adrian can be made personally liable for the act of Bob as his act was not
authorized, either expressly or impliedly, and therefore he will be personally liable for his
act.

LEGAL REGULATION OF BUSINESS STRUCTURES 5
Answer 2: Superdry Holdings Ltd is the holding company of Superdry Manufacturing Ltd and
Superdry Retail Stores Ltd. The board of directors of the Holdings, viz., Francis, Jack and Alice
hold shares in the company in ratio of 5:3:2. The Holding holds 70% shares in the Manufacturing
while 30% shares in the Stores. These three companies are considered to be group of companies
by the directors. According to law a company is considered to be a subsidiary of another where
the holding company holds at least 50% shares of the subsidiary company7. Here in this case,
Holdings has 70% shares of Manufacturing while only 30% shares of the Stores, therefore,
Manufacturing is a subsidiary of the Holdings but Stores cannot be said to be the subsidiary of
the Holdings as the latter holds less than 50% shares in the former. The Stores is not related to
the Holdings and the Manufacturing as the former is not a subsidiary of the latter companies
although Manufacturing is related to the Holdings8.
Also as per the facts of this case Stores, which has a chain of its retail stores, sells the
products of the Manufacturing at reduced rates and in a recent past has also started selling
products of other brands which have more demand than the Manufacturing’s products.
According to these facts, it can be concluded that the Stores is a separate entity from Holdings
and Manufacturing as when Stores started selling products of other brands, the latter did not stop
them from doing so. This conduct of the latter shows that they do not have a substantial control
over the day-to-day business of the Stores. Further it has also been held by court that a parent
company and a subsidiary company of the former are distinct legal entities. Therefore, they are
not bound by each other’s legal obligations9. From this observation of the court, it can be
suggested that the decision made in the meeting of the Board of Directors of Stores, where the
Stores is required to provide guarantee to the Finance Bank of the debts of Holdings and
Manufacturing, is not bound to give such guarantee as has been held above that a company is not
bound by the legal obligations of the other even if it is a subsidiary company of the other.
7 Corporations Act 2001 (Cth) s 46.
8 Corporations Act 2001 (Cth) s 50.
9 Chandler v Cape Plc (2012) EWCA Civ 525.

LEGAL REGULATION OF BUSINESS STRUCTURES 6
In the instant case, the directors of the Holdings are personally liable for the debts
accruing to the Financial Bank. They cannot make Stores bound by their legal obligation as
Stores is a separate legal entity distinct from the Holdings and the Manufacturing.
Further, the decision made by the Directors in the Board meeting is in contravention of
the director’s duty under law10. The directors of a company are under a legal obligation not to
take advantage of their position or cause disadvantage to the company11. Also the Business
Judgment Rule which is intended to evade needless limitations on appropriate business activities
has also been laid down in the Corporations Act 2001. According to the rule a director should
make a proper business judgment which requires care and diligence on his part while making
such judgment. A judgment is said to be made carefully and diligently when it is made with bona
fide intention for an appropriate purpose and should not have a substantial interest in the issue of
the judgment. Further the judgment shall also be made in the interest of the company12. The basic
objective of the rule is to prevent the directors of the company from exercising their powers
arbitrarily and not to shield them from their liability. It has been held by court that the duty that
has been imposed under section 182 is not made to ensure obedience to the requirements of the
provisions of the law rather to avoid the directors from taking advantage of their authority for
their personal interest13.
The directors cannot delegate their responsibilities to other members of the company14.
The directors of Holdings cannot escape from their liability towards the company and the
Financial Bank by making the Stores the guarantor for the overdraft facility to the Financial
Bank. They are bound by the obligations by the virtue of their position. The directors have no
10 Corporations Act 2001 (Cth) s 182.
11 Queensland Government, Corporations Act 2001 (Cth) (the Corporations Act), (2016) Department of the Premier
and Cabinet. From https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx>.
12 Australian Insitute of Company Directors, General Duties of Directors, (2013)
<http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-
directors>.
13ASIC v Maxwell (2006) NSWSC 1052.
14 Corporate Law Economic Reform Program, Director’s Duties and Corporate Governance: Facilitating
innovation and protecting investors, (1997) Commonwealth of Australia
<https://archive.treasury.gov.au/documents/283/PDF/full.pdf>.

LEGAL REGULATION OF BUSINESS STRUCTURES 7
right to give away their obligations their subsidiary company which is not even their subsidiary
company.
It may be observed that the directors have acted in contravention of their general duties
under section 182 of the Corporation Act which invites the civil penalty under section 1317E.
The court upon being satisfied that the director has acted in contravention of the civil penalty
provision, it will declare that such contravention has taken place. Upon declaration the
Australian Securities and Investments Commission will be entitled to get an order for pecuniary
penalty under section 1317G or an order for disqualification under section 206C.
Therefore it is advised to Karen, the non- executive director of Stores that the three
directors of the Holdings for failing to carry out their general duties and thereby contravening the
provisions of Corporations Act. The directors want to avoid their personal liability as against the
Financial Bank by making the Stores guarantor for their overdue debts and the overdraft
facilities. The Stores is not a part of the Holdings or the Manufacturing rather it does not even
form part of the group of the company as given under section 50 of the Corporations Act 2001.
The Store has a separate legal entity as distinguished from the Holding and the Manufacturing
and therefore it cannot be bound by the decisions of the Holdings.
The duties of the directors as discussed here above are their equitable duties whereby
they have duties of loyalty and to act carefully and diligently while acting on behalf of the
company. Under these duties the directors are required not to act arbitrarily while exercising
their discretion. The contravention of these duties on the part of the directors will invite penalty
to be imposed on such directors.

LEGAL REGULATION OF BUSINESS STRUCTURES 8
Reference List:
ASIC v Maxwell (2006) NSWSC 1052.
Australian Insitute of Company Directors, General Duties of Directors, (2013)
<http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/
general-duties-of-directors>.
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253.
Chandler v Cape Plc (2012) EWCA Civ 525.
Corporations Act 2001 (Cth).
Corporate Law Economic Reform Program, Director’s Duties and Corporate Governance:
Facilitating innovation and protecting investors, (1997) Commonwealth of Australia
<https://archive.treasury.gov.au/documents/283/PDF/full.pdf>.
Northside Developments v Registrar General (1990) HCA 32.
Queensland Government, Corporations Act 2001 (Cth) (the Corporations Act), (2016)
Department of the Premier and Cabinet. From
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx>.