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ACC520 Legal Regulation : Sunshine Scooters Art Pvt

Questions:

1.Jana Jones and Adrian Allport and two recent College of Art graduates with plans to set-up a company that produces custom-designed artwork for scooters. They have been engaged in discussions with Bob Golding, who has experience mass-producing scooters for a number of Australian companies. At a meeting on the 31st of July, the three of them decide to go into business together. Jana and Adrian get to work on developing their business plan and on the 10th of August they register Sunshine Scooter Art Pty Ltd with ASIC, with Jana, Adrian and Bob as directors.

However, Bob was incredibly eager to get things up and running so on the 4th of August he signs a contrast on behalf of Sunshine Scooter Art with Computer Supplies Pty Ltd for 10 new computers, to be delivered on the 1st of September. Whilst Jana and Adrian are working on their business plan, and getting excited about all the potential art designs they will develop, Bob is eager for SSA to engage in the mass-production of scooters. As such, on the 15th of August he has a meeting with Talia Clint, the sales manager for Plastica Pty Ltd, a plastics and fibreglass company. At the meeting Bob provides his business card, which lists him as “Director, Sunshine Scooter Art Pty Ltd”. They negotiate a larger supply contract ($50,000) from Plastica Pty Ltd to be paid in instalments, with the first payment due on the 1st of September. When it comes to signing the contract, Bob signs as “sole director”.

The constitution of SSA provides that to be binding on SSA, any contracts for greater than $10,000 must be approved by board resolution and executed by two directors.

On the 1st of September Jana and Adrian receive the delivery of the new computers, along with an invoice from Computer Supplies Pty Ltd for $8,000, as well as the request for payment of the first instalment from Plastica. Given the low amount of capital they have to start with, and their intentions to start things small, Jana and Adrian are shocked and come to you for advice.

Advise Jana and Adrian as to whether SSA is bound to the contracts with:

  1. Computer Supplies Pty Ltd; and
  2. Plastica Pty Ltd.

2.Superdry Holdings Ltd (“Holdings”) is the parent company in a group of companies that manufacture, distribute and sell a range of wet-weather gear, including Superdry Manufacturing Ltd (“Manufacturing”) and Superdry Retail Stores Ltd (“Stores”). The directors of Superdry Holdings are Francis Nice, Jack Roach and Alice Wendall. Francis, Jack and Alice sit on the boards of Manufacturing and Retail, but each of those subsidiaries also have three independent non-executive directors.

Shareholdings in the companies are made up as follows:

  • Superdry Holdings Ltd: 50% Francis Nice; 30% Jack Roach; 20% Alice Wendall.
  • Superdry Manufacturing Ltd: 70% Holdings; 30% widely dispersed shareholdings (i.e. “Mum and Dad investors’)
  • Superdry Retail Stores Ltd: 30% Holdings; 70% widely dispersed shareholdings (i.e. “Mum and Dad investors”)

Stores is doing well financially. This has traditionally been because Stores is able to purchase umbrellas, boots and other wet-weather gear from Manufacturing at significantly reduced rates. Stores runs a successful chain of retail stores that sell the Superdry product range. In recent years, however, they have also started stocking other brands, which often sell better than the Superdry products.

Holdings and Manufacturers are both in financial difficulties and are facing significant pressure from Finance Bank Ltd in relation to business overdraft facilities provided by Finance Bank to those companies, which have now substantially exceeded agreed limits. Finance Bank agrees not to take legal action against Holdings and Manufacturers as long as further security for the debts (in addition to the personal guarantees of Francis, Jack and Alice) can be provided.

At a meeting of the board of directors of Stores in August 2017 it was agreed that Stores would provide a guarantee to Finance Bank of the debts of Holdings and Manufacturers. The minutes reflect as the reasons for this decision that:

  1. It is in the best interests of Stores that Manufacturers continue as a viable entity which can supply products at reasonable rates;
  2. The reputation of Superdry Retail Stores could be adversely affected by a failure of any company within the corporate group.

Karen Cripps, a non-executive director of Stores, disagreed with the provision of the guarantee, but was voted down. She believes that Jack, Alice and Francis are simply worried about their potential liability on the personal guarantees they have had to provide to Finance Bank, and their reputations as directors of the companies of the group if Superdry goes under.

Advise Karen as to whether Jack, Alice and Francis have breached their equitable and statutory duties to Superdry Stores Ltd (including any remedies or penalties that might be applicable).

Answers:

1.a: Advise Jana and Adrian as to whether SSA is bound to the contracts with Computer Supplies Pvt Ltd:

Brief Case Study: 

Sunshine Scooter Art Pvt. Ltd is a newly established company having three whole time directors to manage the business of it namely: Jana Jones, Adrian Allport and Bob Golding. The prime motive of the business was to produce custom designated art-work for scooters. Bob Golding had prior experience of mass production of scooters with a number of Australian companies which enabled him to be a director of the newly constituted Sunshine Scooter Art Pvt. Ltd along with Jana and Adrian who were art graduates of the same college. Jana and Adrian were the original founder of the company and with a joint decision they recruited Bob who could help them in the business as he was well acquainted in the same domain. Bob goes into a contract with Computer Supplies Pvt. Ltd on behalf of Sunshine Scooter Art Pvt. Ltd and purchases 10 computers for office use, even before Sunshine Scooter Art Pvt. Ltd got registered on pen and paper.

Legal provisions which attract this case study:

As Sunshine scooters Art Pvt. Ltd was not registered as a company till 10th of August, so a contract entered before 10th August by anyone on behalf of the said company would not be a va


lid contract because there was no existence of the company in the eyes of law when the contract was entered into. Bob was not even the director of the company when he signed such contract with Computer Supplies Pvt. Ltd. The company Sunshine Scooters Art Pvt. Ltd itself got registered on 10th of August whereas Bob being a director of the company entered into a contract by purchasing computers on 4th of August which in itself is void because non existence of subject-matter. Though the time of delivery of the said computers were 1st September it cannot be a valid contract because the date when the agreement between SSA and CSP was signed to become a contract was way before SSA was even a registered company under ASIC (Australian Securities and Investment Commisson).

Under section 4, a misrepresentation induces the representee to enter a contract providing false representation of facts or law. Types of Misrepresentation are viz;

  • Innocent Misrepresentation
  • Negligent Misrepresentation
  • Fraudulent Misrepresentation

Here, Bob’s statement was misleading and deceptive over the contract. He knew the fact that SSA was not a registered company under ASIC when he entered into such a contract with CSP on behalf of SSA. His intent was to deceive CSP by Fraudulent misrepresentation and acquire financial products from them which satisfies the requirements under this provision of the Corporation Act, 2001. 

Case Summary:

Bob misrepresented in the contract which he entered with CSP. He was silent about the fact that SSA was not a company yet when he went into a contract with CSP on SSA’s behalf just because he was anxious and ready to start things prior for the business. His intent remains the same which was to conceal a fact and misrepresent CSP by entering into a contract with it. The day in which he signed a contract on behalf of SSA with CSP was six days before when SSA actually came into existence as a company. Under the provisons of the contract law the contract is voidable at the option of CSP.

b.: Advise Jana and Adrian as to whether SSA is bound to the contracts with Plastica Pvt. Ltd:

Brief Case Study:

In the second half, we find that Bob again goes into a contract all by himself without the knowledge of the other two directors for purchasing raw materials from Plastica Pvt. Ltd worth $50,000 which are payable on installments. This time he enters into a contract after the company got registered under ASIC though making it a legitimate contract on this ground. While entering into the contract Bob represented himself as the sole director of the company which was a misrepresentation on his part. Furthur, we find from SSA’s constitution that to formally execute a valid contract for an amount of  more than $10,000, it needs to get ratified by a board resolution and then executed by atleast two directors.

legal provisions of misrepresentation:

Under Section 4, it is an offence to misrepresent another party and thereby inducing the other party to enter into such contract.

It is a criminal offence.

Maximum penalty: 

  • Fine can be upto $100,000 (for bodies corporate)
  • Fine can be upto $20,000 (for individuals)

Under Section 29, It is an offence to make false or misleading representations about goods or services under the Australian Consumer Law.

Maximum penalty:

  • Fine can be up to $1,100,000 (for a body corporate)
  • Fine can be up to $220,000 (for individuals

Under Section 1041E, defines ‘False or statements which are misleading’.

At the onset while the sales manager of Plastica had a meeting with Bob, the later represented himself by offering a card which read as the Director of Sunshine Scooters Arts Pvt. Ltd which on the face seemed misrepresentation because in reality there were two more directors of the same company. Later, Bob misrepresented himself to be the ‘sole director’ of SSA while entering into the contract with Plastica Pvt. Ltd. Bob made a false statement that he was the ‘sole director’ which prompted the sales manager of Plastica Pvt. Ltd to enter into such contract. Elements of the above provisions of law are satisfied as to the case study.

Case Summary:

Bob impatiently and wanting to get things rolled of fast for the business took a hasty decision of purchasing the raw materials from Plastica at his sole discretion worth $50,000. The relevant provisions of law which attract this case study renders this contract voidable at the option of Plastica Pvt. Ltd under the Misrepresentation Act, 1967.

2.Advise Karen as to whether Jack, Alice and Francis have breached their equitable and statutory duties to Superdry Stores Ltd (including any remedies or penalties that might be applicable).

Brief Case Study:

Superdry Holdings Ltd. was the parent company and subsidiaries were; Superdry Manufacturing Ltd. and Superdry Retail Stores Ltd. Its prime motive was to manufacture, distribute and sell various types of wet-weather gear products. There were three independent non-executive directors each, for the two subsidiaries. Holding comprised of three directors namely Francis Nice, Jack Roach and Alice Wendall who had 50%, 30% and 20% of share capital respectively. In Superdry Manufacturing and Superdry Retail Stores Ltd. holding had 70% and 30% of the share capital respectively; while remaining 30% and 70% were held by the public respectively. Stores was financially sound and was doing great business. Holdings and Manufacturing started to face financial crisis. Finance Bank Ltd. asked for more securities for the debts that they had procured along with personal guarantee from Francis, Jack and Alice. In board meeting of Stores, directors decided to provide guarantee, as it was in the best interest for Stores that as long as Manufacturer is a legitimate company Stores can purchase good at a very nominal price. Secondly, if the plan to guarantee fails, reputation of Stores will be at a stake. Majority of the directors approved the provisions of such guarantee.

Has Francis, Jack and Alice have breached their equitable and statutory duties to Superdry Stores Ltd?

Directors have a fiduciary relation with the corporation under which they are employed. Under the general law they need to act in good faith and restrict themselves in acting against the interest of the company, they should not use power for any unlawful purpose, they should avoid any conflict of interest that may hamper the corporation, they should adopt discretion that is taking up decisions in such a manner that it proves to be the best interest for the corporation.

They are bound to follow statutory duties as defined under the Corporation Act 2001

Under section 181, it is stated that the directors of the company must act in good faith and to the best of their interest towards the corporation.

Duties of a director has also been defined under Companies Act, 2006

Under section 173, the director should use independent judgment to act in the best of his interest towards the corporation under which he is employed.

Under section 174, duty of care and skill is stated which fundamentally says a reasonable duty of care is to be taken for the best interest of the company by the assigned director of that company.

Nominee directors- These are directors who are usually appointed in a subsidiary company by the parent company. The powers of the nominee director are same as that of a director, and the duties are also the same which they perform to protect the interest of the company. They are independent in taking decisions and are not bound to follow the parent companies directors provided they ensure that they are acting for the benefits of the subsidiary company under which they are appointed as directors.

It was held in Boulting v Actt, ‘nominee directors are not bound to act as per the wishes of the nominator, they have a right to refuse nominator’s directions where they feel they have a clash of interest. It is a clear breach of duty by a director if a director of the subsidiary company acts solely in the interest of the parent company’.

It was held in Charter Bridge Corporation v. Llyods Bank Ltd, ‘each of the subsidiary companies have a separate legal entity and the directors of a particular single company are not entitled to act for other parent and subsidiary company by sacrificing the interest of the subsidiary company under which he is a director’.

Here, we find that Jack, Alice and Francis are worried about their own liability whether to be a guarantor for Superdry as they feel it might hamper their sole reputation if Superdry cannot perform well. Being the director of the holding company they should not think about what would benefit themselves rather under the obligation of director’s duties they must act in such a manner which proves to be beneficial for the corporation and act in good faith. They must remain loyal towards the corporation and promote reasonable standard of care towards the corporation so that the corporation prospers well.

Remedies for such breach of director’s duties:

Since the directors were not acting dishonestly or recklessly there would not be any criminal liability under the statute but under the general law they must provide remedy in the form of equitable damages or statutory compensation in monetary terms or rescind the decision what they have taken and instead act in a way to uphold the interest of the corporation. Jack, Alice and Francis being the core director of Superdry Holding Ltd. must provide personal guarantee for holding and manufacturing to bear the debts that the companies need to roll over in the business.

Case Summary:

A welfare of a company depends upon the way the directors carry out the tasks related to the company and the directors are even responsible for the interest of the shareholders of the company. Directors are fiduciary agents and have a fiduciary relationship with the company and they owe duty to the company that they must act in good faith and be honest towards the company. They must disclose every fact to the company and see to it that for their personal benefit they should not push the company at a stake.  

Bibliography

[1] Competition and consumer Act, 2010[Cth]

[2] Misrepresentation Act, 1947

[3] Bare Act- Corporation Act, 2001 [Australia]

[4] Bare Act- Australian Securities and Investment Commission Act, 2001

[5] Australian Corporations Legislation 2017 edition

[6] Bare Act- Companies Act, 2006

[7] Blackstone’s guide to the Companies Act, 2006

[8] Palmer’s Company Law- Annoted Guide to Company Act, 2006

[9] https://www.lawhandbook.sa.gov.au/ch10s03s03s03.php 

[10]https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s1041e.html

[11] https://e-lawresources.co.uk/Misrepresentation.php

[12] https://e-lawresources.co.uk/Bisset-v-Wilkinson.php

[13] https://e-lawresources.co.uk/Esso-Petroleum-v-Mardon.php

[14] https://www.australiancontractlaw.com/law/avoidance-misleading.html

[15] https://www.lawteacher.net/lecture-notes/misrepresentation-lecture.php

[16] https://www.legislation.gov.au/Details/C2017C00210

[17]https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors

[18]https://www.icaew.com/technical/business-resources/legal-regulatory-tax-governance/directors-duties/the-icaew-guide-to-the-duties-and-responsibilities-of-directors

[19] https://www.out-law.com/page-8207.

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