LAWS1010 Legal System And Method I

Question:

Jana Jones and Adrian Allport, two College of Art alumni with plans to create a scooter company with custom-designed artwork.

They have been in discussions with Bob Golding. Bob has previously mass-produced scooters at a number Australian companies.

The three of them meet at a meeting on 31 July and decide to open a business together.

Jana and Adrian start to create their business plan. Sunshine Scooter Art Pty Ltd (ASIC) is registered on the 10th. August with Jana Adrian and Bob as directors.

Bob was eager to get things going so he signed a Contrast on behalf of Sunshine Scooter Art with Computer Supplies Pty Ltd. It entitles him to 10 new computers. They will be delivered on September 1st.

Jana, Adrian, and Talia Clint are busy with their business plans and dreaming up all the possible art designs. Bob is excited for SSA to get involved in mass-producing scooters.

Talia Clint, Plastica Pty Ltd’s sales manager, invites Bob to meet with her on the 15th.

Bob gives his business card to Talia Clint, who lists him as the “Director, Sunshine Scooter Art Pty Ltd” at the meeting.

They reach an agreement with Plastica Pty Ltd for a larger supply contract (50,000 dollars). The instalments will be paid by Plastica Pty Ltd starting on the 1st September.

Bob signs the contract as the “sole Director”

The constitution of SSA stipulates that contracts exceeding $10,000 must be approved by the board and executed in two directors.

Jana and Adrian received the computers along with an invoice from Computer Supplies Pty Ltd of $8,000 as well as a request for payment for the first instalment of Plastica on the 1st September.

Jana & Adrian are stunned by the small amount of capital that they have, and their plans to start small.

Jana, Adrian should be notified as to whether SSA is obligated to the contracts.

Computer Supplies Pty Ltd.

Superdry Holdings Ltd (“Holdings”) represents the parent company for a group of companies which manufacture, distribute, and sell a range wet-weather equipment, including Superdry Manufacturing Ltd (“Manufacturing”) as well as Superdry Retail Stores Ltd (“Stores”).

Superdry Holdings is headed by Jack Roach, Alice Wendall, and Francis Nice.

Alice, Jack and Jack are on the Manufacturing and Retail boards. However, each subsidiary has three independent directors.

These are the details of how shares are distributed in companies:

* Superdry Holdings Ltd.: 50% Francis Nice, 30% Jack Roach and 20% Alice Wendall.

* Superdry Manufacturing Ltd. 70% Shareholdings; 30% dispersed shareholdings

“Mums and Dad investors'”

* Superdry Retail Stores Ltd. 30% Holdings. 70% Shareholdings.

“Mums and Dad investors”)

The financial health of stores is excellent.

Stores can purchase umbrellas and boots from Manufacturing at considerably reduced rates.

Superdry is sold in Stores’ successful chain of retail shops.

However, they started stocking other brands over the years. They often sell better products than Superdry.

Holdings and Manufacturers both are in financial difficulty and are under significant pressure by Finance Bank Ltd. Finance Bank Ltd provides business overdrafts to companies that have significantly exceeded their agreed limits.

Finance Bank has agreed not to bring legal action against Holdings and Manufacturers unless additional security is provided (in addition to the personal guarantee of Alice, Jack and Francis).

In August 2017, the Stores board of directors voted to guarantee the Finance Bank for the Holdings and Manufacturers debts.

According to the minutes, these were the reasons for the decision.

Stores should ensure that Manufacturers are a viable entity that can provide products at reasonable prices.

Superdry Retail Stores may be negatively affected by the failure of any corporate company.

Karen Cripps, non-executive director at Stores, opposed the provision of the guarantee. However, she was defeated.

She believes Jack and Alice are only concerned about their personal liability to Finance Bank for the personal guarantees they made to them. They also worry about their reputations as directors in the company of the group, if Superdry goes bust.

Karen be advised as to whether Jack and Alice have violated their statutory and equity duties to Superdry Stores Ltd.

Answer:

Sunshine Scooter Art Pty Limited agrees to the contract it entered into with Computers Supplies Pty Limited. This contract was signed on its behalf and executed by Bob.

A company is just like any natural person and can enter into contracts under its own name.

As a juristic entity, a company can enter into such contracts directly or through its authorized agent.

The Company is also bound by its constitution, or any binding resolutions it may have passed regarding the execution of contracts.

A Company may authorise an agent to act for it pursuant to s.126(a) of the Incorporation Act.

This agent may execute the agreement as an individual if he/she is a director of the company.

S. 127, the Incorporation Act, allows for an individual company to execute without a seal.

If the Company has more directors than one, an execution can only be enforced if the documents or contracts are executed by two directors.

The Company Constitution also outlines its regulations regarding the execution of contracts.

These regulations provide guidance for shareholders as well the directors regarding their conducts, and how they manage the Company’s mind.

A director’s action against the Constitution is invalid.

The directors have the obligation to act in accordance with the Articles of Association of that Company.

Punt v Symons&Co Ltd (1903) 2Ch 506, the court I emphasized the duty of the Directors to act within the law et the Constitution of the Company. It was held that the directors couldn’t work outside the Articles of Association in order to attain a position that wasn’t provided for by the Articles.

The SSA Pty Limited Agreement provision must be upheld on this basis.

Constitution SSA Pty Limited states that a $ 10,000 contract can only be binding if it is executed by two directors and if a Board Resolution to enter into such a contract is passed.

If the Constitution SSA Pty Limited is not understood, a contract less than $10,000 may be entered into by a board resolution without two directors.

This could mean that the Constitution of Company could have been interpreted to include contracts worth less than $10,000 to be executed under s.126 Corporation Act.

Bob was acting as an agent of Company in signing the Contract. Accordingly, the Company is bound and obligated by the Contract. This includes the payment of $8,000 for supply of Computers.

Sunshine Scooter Art Pty Limited has not been bound by the agreement it entered with Plastica Pty Limited on its behalf.

Sunshine Scooter Art Pty Limited may, by virtue of s.126 & 127 of 2001’s Incorporation Act, enter into a contract by an authorized agent or itself.

A director may sign a contract on behalf of the Company as an agent.

It is important to clearly state this.

A Company must have two directors sign a contract if it is to be deemed a Company.

It is not necessary to attach the seal.

The contract signed by a single director is therefore not enforceable.

Knight Frank Australia Pty Ltd and Paley Properties Pty Ltd[2014] SASCFC103], the court ruled that a contract signed only by one director, even though the Company had two directors, was unenforceable under law.

The case involved a director who executed a contract to sell a $ 1.5 million property and struck out any box that designated a sole director.

This was the ground on which the court held that the director had not intended to be bound or be subject to s.126, but rather by s.127.

Although he was bound by s.127, he didn’t act as an agent but he did so as a sole director when the Company was acting for him.

Accordingly, the Contract was not binding.

The Company Constitution, which outlines the Company’s regulations for execution, states that an agreement worth more than $10,000 can only be binding if there has been a resolution validating it and it was signed by at least two directors.

The Contract between Bob, Plastica Pty Limited did not reflect this.

Bob signed the agreement as a single director, making it unenforceable and non-binding for SSA Pty Limited.

Jack, Alice and Francis breach some of the duties they were obligated to by the Incorporation Act 2002 and the Common Law.

This is clear in Superdry Stores Limited having to guarantee the Superdry Holdings Limited debts.

The actions of the 3 directors mentioned above were selfish and intended to protect their interests in the Holdings and Manufacturing Limited where they have significant share interests.

Directors who act in this way are against the Company’s best interest and are subject to common court action.

The government of a Company is a term that refers to directors. They have Statutory, common law and equitable duties to the Company when they perform their functions.

The Incorporation Act sets out the Statutory Duties of Directors.

The following statutory duties are listed: The duty of Care and diligence, the duty in good faith, the duty not to misuse their position and the obligation to make good the information they have gained during their time as directors.

Directors that fail to comply with these duties could face legal or criminal penalties.

Directors have a duty of care and diligence to ensure that business decisions and/or judgements are made in the Company’s best interests.

This is the so-called ‘Business Judgment’ rule.

Professor Braxt acknowledges in his writing, that this rule only applies for the duty of care, diligence and not the other statutory obligations.

We believe that the decision to allow Superdry Stores Limited to guarantee the debts of two companies by three directors was a violation of this duty. This was because it was not in the best interest for Stores Limited but rather in the interests of two other major shareholders.

Note that Stores Limited had sold other products that were performing better than the Superdry products in order to stay afloat. Further, the Stores Limited’s engagement to guarantee the debt was extremely risky to their financial health.

Directors are required to ensure that their position is properly used. This means they cannot use their positions of power to make decisions or move in favor of themselves and the Company.

It is possible to see that 3 directors sitting in Stores Limited were able to pass resolutions despite not being able to vote.

This resolution and the decision that it passed was made because the three directors had the right powers, power that was misused.

Directors must act in good faith in all transactions.

The Company owes this fiduciary duty to the directors.

The directors have the responsibility to ensure that they act in the best interests of shareholders, employees and promoters.

To this end, the directors only focused on their interests and the need for 2 companies to be saved. They did not consider the large financial guarantee risk Stores Limited was taking due to a Company with 30% shareholding, but who also had votes.

Common law has many duties for directors. These duties apply to every company.

Common law imposes common law liabilities on directors. Shareholders may also sue directors for damages. Directors must comply with the responsibilities and duties that have been entrusted to them.

These common law duties could be summarized as the duty of the directors to exercise discretion in matters of delegation, avoid conflict of interests and act within their powers.

The Resolution was not in violation of the common law duty. As stated in the duty of care and due diligence, and the duty of good faith, the three directors were motivated by their own personal interests and not the Company’s.

Insisting on the repayment of the debts of the two Companies to Finance Bank is an extremely risky venture and the Director didn’t exercise proper discretion.

Directors who contravene statutory duties are punishable by S. 1317E. The Australian Securities and Investments Commission is prosecuted as a civil matter and the director for public prosecution is prosecuted as a criminal matter.

Karen may seek damages in court to recover any amount she has lost.

Injunctive orders may be sought to stop the enforcement and enforce the Resolution. She can also claim damages for any amounts lost by Superdry Stores Limited.

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