Jana Jones, Adrian Allport, and Adrian Allport are two College of Art recent graduates who plan to start a company that creates custom-designed artworks for scooters.
They are in talks with Bob Golding who has mass-produced scooters for several Australian companies.
They decide to start a business together at a meeting held on the 31st July.
Jana and Adrian begin to develop their business plan. On the 10th August, Sunshine Scooter Art Pty Ltd is registered with ASIC. Jana, Adrian, and Bob are the directors.
Bob was determined to get things moving so he signed a contrast for Sunshine Scooter Art and Computer Supplies Pty Ltd on the 4th August. He requested 10 computers to be delivered by the 1st September.
Jana and Adrian are busy working on their business plan and getting excited about the art designs they have in store. Bob, however, is eager for SSA’s involvement with the mass-production.
On the 15th of august, he meets with Talia Clint (the sales manager at Plastica Pty Ltd), a fibreglass and plastics company.
Bob presents his business card at the meeting, in which he is listed as “Director Sunshine Scooter Art Pty Ltd”.
They negotiate a larger supply agreement ($50,000) with Plastica Pty Ltd. The first payment is due on September 1.
Bob is the “sole director” when it comes to signing a contract.
The constitution of SSA states that any contract for more than $10,000 must be approved and executed by two directors.
Jana and Adrian are presented with the new computers on September 1st. They also receive an invoice for $8,000 from Computer Supplies Pty Ltd, as well as a request for payment for the first installment from Plastica.
Jana and Adrian are surprised at the amount of capital they have and their intention to start small.
Inform Jana and Adrian that SSA is bound by the following contracts:
Computer Supplies Pty Ltd.
Superdry Holdings Ltd (“Holdings”), the parent company of a group that produces, distributes and sells a variety of wet-weather gear including Superdry Manufacturing Ltd (“Manufacturing”), and Superdry Retail Stores Ltd (“Stores”), is the parent company.
Superdry Holdings’ directors are Jack Roach, Alice Wendall and Francis Nice.
While Jack, Alice, and Francis sit on the Manufacturing and Retail boards, each subsidiary also has three independent, non-executive directors.
The following are the shares in companies:
* 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”)
Financially, Stores is doing well.
Stores has always been able to buy umbrellas, boots, and other wet weather gear from Manufacturing at significantly lower rates.
Superdry products are sold by Stores through a chain of successful retail stores.
They have started to stock other brands in recent years. These products often sell better than Superdry’s.
Both Manufacturers and Holdings are in financial trouble and face significant pressure from Finance Bank Ltd regarding business overdrafts provided by Finance Bank Ltd to these companies. These facilities have substantially exceeded the agreed limits.
Finance Bank will not take legal action against Holdings and Manufacturers, provided that additional security can be provided for the debts. This includes the personal guarantees of Alice, Jack and Francis.
A meeting of the Board of Directors of Stores was held in August 2017. It was decided that Stores would guarantee the Finance Bank the debts of Holdings and Manufacturers.
These are the reasons for this decision as reflected in the minutes.
Stores have the best interest of their products that Manufacturers remain a viable entity capable of supplying products at affordable rates.
A failure by any company in the corporate group could negatively impact Superdry Retail Stores’ reputation.
Karen Cripps was a non-executive Director of Stores. She disagreed with the guarantee’s provision, but it was rejected.
She believes Jack, Alice, and Francis are just concerned about the potential liability they may have on the personal guarantees that they provided to Finance Bank and their reputations in the group as directors of the companies if Superdry goes bankrupt.
Karen should be notified as to whether Jack or Alice have violated their statutory and equitable duties to Superdry Stores Ltd. (including any remedies and penalties).
Sunshine Scooter Art Pty Limited has entered into a contract with Computers Supplies Pty Limited. It was executed by Bob.
A company, just like a natural person, is able to enter into contracts in its own name.
A company is a juristic person and can enter into contracts in its own name using either its common seal or through an authorized agent.
Further, the Company is bound by its constitution or binding resolutions that it passed in relation to execution of contracts.
A Company can authorize an agent to represent it under s.126 of the Incorporation Act.
If such an agent is a director, he or she can execute the agreement as the sole agent of Company.
S. 127 of The Incorporation Act allows for the execution of a company without a seal or with a seal.
Execution of a Company with more than one director can only be made if two directors, a director or the Company Secretary execute the document or contract.
Further, the Company’s Constitution sets forth its rules for the execution of contracts.
These regulations are intended to guide shareholders and directors as well as their conducts, including the mind and management of the Company.
Directors who act against the Constitution of the Company are unable to take such action.
Directors have a duty to exercise the powers granted by the Articles of Association of that Company.
Punt v Symons and Co Ltd (1903), 2 Ch 506, the court emphasized the duty of the directors of acting within the law, Constitution of the Company. The court found that directors cannot work outside the Articles of Association to achieve a position not permitted by the Articles.
This is why the SSA Pty Limited Constitution must be upheld in respect of execution.
A contract for $ 10,000 cannot be made binding unless executed by two directors, and if a resolution of the board is passed.
A contract for less than $ 10,000 can be entered into with no board resolution or two directors.
This could also indicate that the Constitution of the Company may have meant that contracts less than $ 10,000 must be executed in accordance with s.126 of the Corporation Act.
This means that Bob signed the Contract as an agent for the Company and the Company is bound to the Contract. The Company was meant to pay the $8,000 invoice for the supply and use of the Computers.
Sunshine Scooter Art Pty Limited does not agree to the agreement with Plastica Pty Limited that was entered into on its behalf.
Sunshine Scooter Art Pty Limited, pursuant to s.126 and 127, the Incorporation Act 2001 may enter into a contract either through an authorized agent, or directly.
As an agent for the Company, a director can enter into a contract.
However, this must be stated clearly.
If a Company signs a contract pursuant to s.127, two directors must sign it or one director and the Company secretary.
The seal can be attached at your discretion.
Therefore, a contract signed by one director is unenforceable.
The court ruled that a contract signed solely by a director of Knight Frank Australia Pty Ltd  SASCFC FC 103 was invalid if the Company had two directors.
A director executed a contract for the sale of property worth $ 1.5 million and struck out the box naming a single director.
The court found that the director didn’t intend to be bound under s.126 but rather s.127.
He was not an agent and acted only as a director when the Company was acting for him.
Accordingly, the Contract was deemed non-binding.
According to the Company’s Constitution, the rules for execution of Company stipulate that any agreement exceeding $ 10,000 cannot be binding unless there is a resolution validating the agreement and it has been signed by two directors.
However, this was not the case in the Contract between Bob Pty Limited.
Bob signed the agreement in his capacity as sole director, rendering the contract unenforceable for SSA Pty Limited.
Jack, Alice, and Francis have breached some of their duties under the Incorporation Act 2001 as well as the Common Law.
This is evident in the incorrect judgment of Superdry Stores Limited guaranteeing the Superdry Holdings Limited’s and Superdry Manufacturing Limited’s debts.
These actions by the three directors were selfish and aimed to protect their shareholdings in Superdry Holdings Limited and Manufacturing Limited.
These directors’ actions are not in the Company’s best interests and can be brought before a common judge. They also have the potential to contravene the company’s statutory duties.
Directors of a Company, also known as the government of the Company, have Statutory and Common Law and/or Equitable duties to the Company in the performance of their functions.
The Incorporation Act s. 180-183 outlines the Statutory duties for directors.
The statutory duties of directors can be summarized as: the duty of Care, diligence; the obligation to act in good faith; and the duty put their position to proper usage and make good use the information they have accumulated during their tenure as directors.
Directors who fail to fulfill these duties can face criminal or legal charges.
Directors are required to exercise care and diligence when making business decisions and/or judgments.
This is known as the “Business Judgment Rule”.
Professor Braxt acknowledged in his writing that the rule applies only to the duty of diligence and care. This disclaimer is found in s. 180.
The resolution to have Superdry Stores Limited guarantee the debts of the companies by the three directors was a breach this duty. It was not in the best interests of Stores Limited, but for the benefit of the two major shareholders.
The Stores Limited had been selling other products to help them keep afloat, so the reputation of Superdry Stores Limited was not an issue. Furthermore, the Stores Limited’s commitment to guarantee the debt was risky for their financial future.
Directors have a duty to properly use their position. They must not use their power as power bearers to make decisions that benefit the Company.
You may see that the three directors who sat in Stores Limited, and had the numbers necessary to pass resolutions, sought to protect their shares in Holdings Limited and Retail Limited. They used their numbers and powers to easily pass the resolution. This was in spite of it being detrimental to the survival and viability of Stores Limited.
The 3 directors were given the power to make this decision. This power was not used correctly.
Directors are required to act in good faith and in all dealings.
Directors owe the Company a fiduciary obligation.
Directors have a duty to ensure that the actions they take are motivated by the need for the protection of shareholders, employees, promoters, and investors.
The 3 directors focused on the interests at stake and saving the 2 indebted companies rather than the financial risk Stores Limited would face because of the enormous financial guarantee risk they were taking for a 30% shareholding Company with directors who held the votes.
Common law imposes a variety of duties on directors to companies. They apply to all Companies.
Directors have common legal responsibilities and must adhere to them. Shareholders of companies may sue for damages if they fail to comply with these duties.
The common law duties include the duty not to delegate, the duty not to create conflict of interests and the duty to use the power they have.
The Resolution was passed in breach of the common duty. This is as far as the directors are concerned.
The Director did not have the proper discretion to guarantee the companies’ debts to Finance Bank. This is a risky venture that could prove costly.
The directors who violate the statutory duties are subject to a penalty under S.1317E. This is a civil penalty that is pursued by the Australian Securities and Investments Commission, ASIC (civil matter) and the director of public prosecution in a criminal matter.
Karen can seek damages from the court for any amounts lost.
She may also seek injunctive relief to stop the enforcement of Resolution. This is because the resolution is against Superdry Stores Limited’s interest and was passed in bad faith by the directors who abused their power in an inappropriate manner.