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LAWS1010 Legal System and Method I: Case Of SSA Pty Ltd

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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. 

Q1:

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

a) Computer Supplies Pty Ltd; and


b) 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. 

Q2:


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).

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 name. Being a juristic person, a company enters into such contracts by itself using its common seal or through an authorized agent. 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 concerned.  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.

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.

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. 

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 directors.  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 Braxt  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 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 secured. 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 duties  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. 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 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 <https://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 https://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 <https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors>.

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