On the server our Mahara installation is hosted on, the Mahara administrator (which is me) does not have server admin rights. So I tried to change the directorypermissions setting, which is introduced in lib/config-defaults.php
I did not succeed, so I investigated further. In uploadmanager.php the chmod command uses the constant value 0700 for the permissions instead of the config value directorypermissions, so it seems the config value is not working and unused.
In my environment I need to change those default setting 0700, because I'm not the server admin and backups are needed with every version update. I changed the source code of Mahara as a quick&dirty workaround, but in further versions this problem could be avoided.
Mahara 1.3.6, OS Linux, Database MySQL, Firefox 3.6.14
As Mahara 1.4RC is already available, I checked that version, too. It has the same command in uploadmanager.php and thus should have the same problem there.