Audit Negligence and Civil Liability

This assignment examines a case involving R&G Company, an auditing firm, accused of negligence in their audit report. It explores the potential civil liability of R&G under Australian Tort Law, focusing on the concept of 'duty of care'. The analysis considers elements like non-disclosure in audits, presentation of deceptive reports to ASIC, and breach of directorial duties under the Corporations Act 2011. Key legal principles such as foreseeability and reasonableness are discussed in determining potential liability.

Running head: Australian Company Law
Company Law

Australian Company Law 1
Contents
Tutorial.......................................................................................................................................2
Answer 1................................................................................................................................2
Answer 2................................................................................................................................2
Answer 3................................................................................................................................3
Tutorial.......................................................................................................................................4
Answer 1................................................................................................................................4
Answer 2................................................................................................................................4
(i)............................................................................................................................................4
(ii)...........................................................................................................................................4
(iii)..........................................................................................................................................5
Tutorial.......................................................................................................................................5
Answer 1................................................................................................................................5
(a)...........................................................................................................................................5
(b)...........................................................................................................................................6
Bibliography...............................................................................................................................8
Book.......................................................................................................................................8
Cases......................................................................................................................................8
Legislation..............................................................................................................................8

Australian Company Law 2
Tutorial
Answer 1
The corporation act, 2001 state the general rule that the every director of the company
prohibit to trade while insolvency as contemplated under section 588G of an Act. In this case,
Jamie and Paul are personally liable to pay outstanding debts as trade in losses. In the context
of present problem, the reason set out that they breach the duty of care and diligence under
section 180 and also they also step in a contracting with a third party without any
understanding that the performance of the business is also affected if they contract with other
party, consequently breach the duty to owe toward third party. The insolvency shows by the
existing ground of “reasonable suspicious”.
The case referred in the present response to the problem is that 1in which court held that every
director must owe with third party while contracting.
Moreover, the present case also represents the liability of Irene, friend of the director. The
case,2 referred in the response to the problem is that any person other than director of the
company can also be personally liable to pay debts as it influences the opinion of the
directors completely. Such advice results into insolvency of the company.
Answer 2
The appropriate response to the problem is that Percy can enter into an agreement of sale
share agreement under 568(1AA) of corporation act, 20113. The following merits lies in
favor of Percy to execute agreement on selling share:
 The two directors namely Abe and Charles having prejudiced interest.
 Percy is unnoted by several other members of the company.
 The agreement can be executed as Percy is not having sufficient means to survive.
 No adequate payment of dividends made in favor of Percy after tax profits.
1 Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP
[2012] EWCH 1801 (Comm)
2 Deputy Commissioner of Taxation v Clark
[2003] NSWCA 91
3 Tricker, RI Bob, and Robert Ian Tricker, Corporate governance: Principles, Policies,
And Practices. (Oxford University Press, USA, 2015) 632

Australian Company Law 3
The case referred4 state that every shareholder of the company is liable to maintain
obligations and favorable interest in context of company’s shares before any undertaking of
transactions for dividends and profits.
Therefore, the prohibited clause of the company shall not infringe the provisions of share sale
agreement.
Answer 3
The following rights and liabilities of shareholders as per facts of the problem-
 The shareholders are entitled to take decisions about the company affairs in its
meeting by passing a resolution on the majority of the other shareholders. Moreover,
the respective shareholders of the present case were entitled to know every basic
information or knowledge like a dealing of any contract or agreement with third party.
 In this present case, the managing director breached its fundamental duty toward and
its members. Such managing director, Mary is liable to civil penalty as he failed to
take consents of the members of the company.
In case5 , the doctrine of ultra vires discusses in the context of protection of shareholder’s
rights and liabilities in case where director conceal any fact of the contract with third party.
Here in this case, the court held that director who enters into contract without the consent of
constitution of the shareholders shall be liable to civil penalty on ground of its breach of the
case.
Therefore, as per facts of the case, Mary is liable to civil penalty and consideration put by
minor shareholder, Mee-Ling valuation shall be taken into consideration by other respective
parties of the company.
4 Christopher Dixon & EFI Loughton Ltd v Blindley Heath Investments Limited &
Others
[2015] EWCA Civ 1023
5 Ashbury Railway Carriage and Iron Company Ltd v. Riche,
(1875) L.R. 7 H.L. 653

Australian Company Law 4
Tutorial 7
Answer 1
As per facts of the problem, the Company Secretary plays a significant role in a company as
it bound to carry a liability to take care of every minute of the affairs of the company. In the
context of the appropriate response to the problem, Mick had committed a breach of its
fundamental duties. He was obliged to take reasonable steps of care and diligence in the
consultation process.
Chris, managing director is not bound by the malicious conduct of the Mick. However, Chris
is advised to sue Mick for the breach of its fundamental duties.
The case6 cited in the response to the present problem. In the case, court held that Company
Sectary is also liable or obliged to perform its fundamental duties just same as the director of
the company. In the case of defaults in breach, the director is entitled to terminate the services
of such company sectary and also bring a suit for breach of its fundamental duty.
Answer 2
(i)
As per facts of the case, if Tim enters in a contract on behalf of the company then Tim is
liable to consider following elements in reference of company’s liability
 Firstly, Tim is liable to avoid any future conflicts of interest against Lisa as
contemplated in section 175 of the Act.
 Secondly, Tim shall not accept any benefits from third party that is Home bake
Private Limited Company as stated in the Section 176 of the Act.
 Lastly, every director is liable to declare or assert in any proposed transaction of third
party which should be run in parallel with the balance of arrangement of an interest of
the company.
(ii)
A Company may enter into any contract or agreement through the medium of its agency of an
individual who holds either express or implied authority in the company. Such agency
consists of the constitution of directors and company secretary. As per facts of the present
6 Mobileciti Pty Ltd v Vodafone Pty Ltd
[2009] NSWSC 899

Australian Company Law 5
problem, Carol, a company secretary of the company is legally entitled to enter into contract
with third party as he hold the position as director of the company.
The referred case7 for the present problem discusses that the company secretary was legally
entitled to enter into contract with third party on a subject that such company secretary is
indebted on the subjects to observe basic liabilities or fundaments duty towards an interest of
the company.
(iii)
As per facts of the above stated response to the problem, Megan is also entitled to enter into a
company as he acquire a same position like other members of the company. No one has an
authority to prohibit Megan to contract with third party unless such contract is formed against
the best interest of the company.
The case8 referred in the context of appropriate response to the problem, the court held that
any agent of the company can enter into a contract and in case of defaults made by agent then
in such circumstance the company is not liable for the acts of its agent. The third party shall
not sue company directly. However, third party may bring action against such agent in his
individual capacity.
Tutorial 8
Answer 1
(a)
As per facts of the case, the statutory obligations of the R&G Company deal in reference with
director’s duty towards the company. These duties are
 Duty to act in bona fide intention and good faith.
 Duty to perform any act with care and diligence.
 Duty to evade inappropriate practice of material.
 Duty to evade inappropriate practice of position in the company.
In this present problem, the company failed to exercise the fundamental essence of above
stated obligations and perform the breach of contract.
7 Diggle v The London and Blackwall Railway Co
(1850) 3 Ex 442 [155 ER 193]
8 J Wright Enterprise Pty Ltd v Port Ballidu Pty Ltd
[2010] QSC 213

Australian Company Law 6
The case9 referred in this context of the present problem where federal court held that the
statutory duties burdened on the company directors and other officers of the company. The
Corporation Act 2001 states that every director is liable to observe the fundamental duties
towards the company. In default, every director is liable to stand in a fiduciary capacity and
liable to maintain the company interest on the priority.
Therefore, the R& G Company liable to civil as well as criminal penalty as it failed to
disclose the appropriate material and also failed to deliver the adequate format of audit report
based on genuine transactions of the accounts and audits.
(b)
As per facts of the case, the potential civil liability shall be imposed against the R& G
Company according to the Australian Tort Law. The liability shall lies on the basis of ground
that is “performance of negligence in duty of care”. Under Australian Tort Law, the duty of
care considered as a vital element in context to prove legal obligation on an individual. In this
present case, the R&G Company perform the negligence in duty of care. Therefore, every
director of the company is liable to observe the standard of duty of care according to legal
application of the Australian Tort Law and Corporation Act, 2011.
The most popular leading case of10 presents the view that no one can be exempt by its
personal liabilities to observe the standards on duty of care and diligence. The case sets the
universal application that every individual must owe duty of care.
In order to prove the following element of negligence raise against the R& G Company as per
facts of the case are
 Non-disclosure in audit and defect in product
 Presentation of deceptive audit repost to ASIC
 Breach of fundamental statutory compliance of director’s fundamental duties under
corporation act.
Also, the verdict of case11 held that breach of duty of care in reference of negligence also
come under ambit of defaulting conduct in nature of presentation of deceptive statements
that ultimately results into severe financial loss.
In order to determine a breach of the duty of care, the court needs to follow the principles
9 Daniels v Anderson
(1995) 37 NSWLR 438
10 Donoghue v Stevenson
[1932] UKHL 100
11 Hedley Byrne & Co. Ltd. V. Heller and Partners Ltd.
(1964)A.C.465

Australian Company Law 7
1 The “Principle of foreseeability” that is the court must evaluating a risk factor on the basis
of losses taken place by the defaulting party.
2 The “Principle of Reasonableness” that is defendant failed to exercise the application of
reasonable in duty of care.
Therefore, according to present problem, the court shall consider the above stated factors
while deciding the potential civil liability of the R&G Company.

Australian Company Law 8
Bibliography
Book
RI Bob, Tricker, and Robert Ian Tricker, Corporate governance: Principles, policies, and
practices. (Oxford University Press, USA, 2015) 632
Cases
Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP [2012] EWCH 1801 (Comm)
Ashbury Railway Carriage and Iron Company Ltd v. Riche (1875) L.R. 7 H.L. 653
Christopher Dixon & EFI Loughton Ltd v Blindley Heath Investments Limited & Others
[2015] EWCA Civ 1023
Daniels v Anderson (1995) 37 NSWLR 438
Deputy Commissioner of Taxation v Clark [2003] NSWCA 91
Diggle v The London and Blackwall Railway Co (1850) 3 Ex 442 [155 ER 193]
Donoghue v Stevenson [1932] UKHL 100
Hedley Byrne & Co. Ltd. V. Heller and Partners Ltd. (1964) A.C.465
J Wright Enterprise Pty Ltd v Port Ballidu Pty Ltd [2010] QSC 213
Mobileciti Pty Ltd v Vodafone Pty Ltd [2009] NSWSC 899
Legislation
Corporations Act 2001 (Cth)
Australian Tort Law