Commercial Law Case Studies: Breach of Director's Duties

This article discusses three case studies on the breach of director's duties under the Corporation Act 2001. It covers the general and statutory duties of directors, including the duty of care and diligence, duty of good faith, and duty to avoid conflicts of interest. The consequences of breaching these duties are also explored, including civil penalties and disqualification from the position. The case studies provide practical examples of how these duties can be breached and the potential consequences for directors.

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Commercial law

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Case Study 1
Issue:
Whether director of the Uninest breach any of their general as well as statutory duties, and
whether Neals as the consultant only bear any liability towards the Uninest?
Law:
Corporation Act 2001 imposes number of obligations on the directors of the company, and some
of these obligations are compulsory in nature. General and statutory duties of the directors of the
company are stated below:
Section 1801 of the Corporation Act 2001 imposes duty related to the care and diligence on the
directors. As per this section, it is necessary for the directors to act with due care and diligence
while conducting their functions as the director of the company.
Section 1812 of the Act defines the provisions related to the good faith. As per this section,
directors must take actions in good faith, for appropriate purpose, and in the best interest of the
organization. This section also impose obligation on directors to evade the conflict of interest.
Section 1823 of the Act imposes the obligation on directors not to use their position for improper
manner for getting the benefit for themselves or for someone else.
Section 183 of the Act imposes the obligation on directors not to use the information received by
them in the capacity of director for improper manner for getting the benefit for themselves or for
someone else.
Section 9 4of the Act defines the meaning of officers, and as per this section any person can be
considered as the officer who is making or participating in making the decisions of the company.
All above provisions are also applicable on the officers of the company also.
Application:
In the present case, directors of the Uninest breach their obligations stated under section 181,
182, 183, and 184 of the Act.
 Directors fail to act with due care and diligence while performing their duties.
 Directors fail to act in good faith, for proper purpose, and in the best interest of the
company, as they fail to get the takeover bid from Urbanlodge.
1 Corporation Act 2001- Section 180.
2 Corporation Act 2001- Section 181.
3 Corporation Act 2001- Section 182.
4 Corporation Act 2001- Section 9.

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 Directors use their position for improper purpose by approving the resolution related to
loan provided to directors of the company.
 Directors use the information get by them for their own purpose.
This can be understood through case law ASIC V Adler 2002,5 Court decided that directors
failed to perform their duties stated under section 180, 181, 182, and 183 of the Act in the
following manner:
 All three directors of the company that were Adler, Williams and Fodera breach their
director duties under section 180 of the Act.
 Adler contravenes section 181 of the Act, as he fails to act in good faith and in the best
interest of the company.
 Adler also breaches section 182 of the Act in context of adjusting the loan of $ 10 million
from HIHC to PEE.
Facts of ASIC v Adler are similar to the present case, as both the cases include the carelessness
on part of the directors, and in both the cases directors prefer their own advantage instead of the
company advantage.
Neals is considered as the officer of the company and above stated provisions are liable on him
also, and because of this Neals is liable towards the company.
Conclusion:
All the directors and officers of the company are liable towards the Uninest.
Case Study 2
5 Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002).

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Issue:
a) Whether Shane is liable for any breach of the general and statutory duties of the director
of the company?
b) Whether Shane is liable for any penalty in case he breach his director duties stated under
the Act?
Law:
Section 181 of the Act defines the provisions related to the good faith. As per this section,
directors must act in good faith, for proper purpose, and in the best interest of the company. This
section also impose obligation on directors to evade the conflict of interest.
Section 183 of the Act imposes the obligation on directors not to use the information received by
them in the capacity of director for improper manner for getting the benefit for themselves or for
someone else. This section further state, directors of the company must not use the information
received by them in the capacity of the director of the company for the purpose of causing any
damage to the company6.
In other words, if any person gets the information because they hold or not hold the position of
director, officer, or employee of the company then such person is under obligation to not use the
information in wrong manner for taking the benefit for themselves, or for another person, or for
causing damage to the organization. This section also applied on the directors, officers, and
employees who are retired. Information in this context is considered as the insider information
which can be taken as an advantage by any person for getting the advantage by using that
information or by providing that information to any other person.
Section 1317E7 of the Act state, in case Court stated that a person has breach the provision of the
civil penalty, and then Court makes the declaration of the contravention. This section further
states that any breach of directors of officer’s duty will fall under this provision. Once the
declaration has been made, then ASIC can seeks the pecuniary penalty order under section
1317G or disqualification order under section 206C of the Act.
Section 1317G8 of the Act states that, court can make the pecuniary penalty of up to $200,000.
Section 206C9 of the Act state, Court has power to disqualify the director of the organization
from handling the organization functions for any period of time which court thinks fit.
Application:
6 ASIC, Directors - What are my duties as a director?, <
https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-
director/>.
7 Corporation Act 2001- Section 1317E
8 Corporation Act 2001- Section 1317G
9 Corporation Act 2001- Section 206C.

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a) Shane is the director and also the shareholder of the company.
Primo performs the construction work from Land stocks limited, and while working as
the director Shane receives the information that Land stock Limited are going to call for
tenders from different construction companies. In this Shane incorporates new company
for the purpose of getting the tender.
Later, Shane intentionally reduces the price of tender after getting knowledge of the
tender price decided by the Primo constructions. In this, Primo suffers great loss by
losing the contract.
Section 183 of the Act applied in this case, and as per this contract if any person gets the
information because they hold or not hold the position of director, officer, or employee of
the company then such person must not use the information in wrong manner for taking
benefit for themselves, or for any other person, or for causing damage to the organization,
then such person breach the director duty stated under section 183 of the Act. In the
present case also, Shane breach the section 183 by using the information for his own
benefit and for causing damage to the company.
This can be understood through case law ASIC v Vizard [2005] FCA 1037; (2005) 145
FCR 5710. In this case, Court held that Vizard breach section 183 of the Act because he
gains the insider information while holding the position of the non-executive director of
Telstra. Vizard misuses the information for getting the advantage for CTI, Bringham, or
for himself.
Shane also breaches section 180 of the Act by failing to exercise due care and diligence
while performing his duties as the director of the company. Therefore, in this case Shane
is liable for breach of directors duties stated under Section 180 and 183 of the Act.
In this case, director breach section 180 and 183 of the Act because of which he is liable
under section 1317E of the Act, and as per this section if Court is satisfied that a person
has contravened the provision of the civil penalty, and then Court makes the declaration
of the contravention. Later, ASIC can seeks the pecuniary penalty order or
disqualification order under section 206C of the Act. Therefore, Shane can be liable for:
 Pecuniary penalty order under section 1317G up to $200,000.
 Disqualification from the position.
Conclusion:
a) In this case Shane breach the directors duties stated under Section 180 and 183 of the
Act.
b) In this case, director breach section 180 and 183 of the Act because of which he is liable
for pecuniary penalty and disqualification from the position.
10 ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57.

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Case study 3
Scenario A
Issue:
Whether Frank, Diane, Ron, and Kelly breach any of their general or statutory law duties as
directors of the company?
Law:
Section 180 of the Corporation Act 2001 imposes duty related to the care and diligence on the
directors. As per this section, it is necessary for the directors to perform their functions with due
care and diligence while conducting their functions as the director of the company.
Section 181 of the Act defines the provisions related to the good faith. As per this section,
directors must fulfill their obligations in good faith, for proper purpose, and in the best interest of
the company. This section also impose obligation on directors of the company to avoid the
conflict of interest11.
It must be noted that for determining the best interest of the company, Court introduce two-step
test in the case Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 82112. Through this test,
Court determines whether directors of the company acted in proper manner or not.
Section 182 of the Act imposes the obligation on directors not to use their position for improper
manner for getting the benefit for themselves or for someone else. This section mainly impose
obligation on the directors of the company to avoid any conflict of interest with the company.
In ASIC V Adler 2002, in this case Court stated that directors breach their duties stated under
section 180, 181, and 182 of the Act. All three directors of the company that were Adler,
Williams and Fodera breach their director duties under section 180 of the Act because they fail to
take proper care while performing their actions. Adler contravenes section 181 and 182 of the
Act, as he fails to act in good faith and in the best interest of the company. Adler also adjusts the
loan of $ 10 million from HIHC to PEE which shows that he used his position in improper
manner.
Application:
11 AICD, General duties of directors, < https://aicd.companydirectors.com.au/~/media/cd2/resources/director-
resources/director-tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx>.
12 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

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In the present case, all four directors of the company that are Frank, Diane, Rio, and Kelly enter
into the contract by ignoring the report of the experts. In this case, directors breach section 180,
181, and 182 of the Act in following manner:
 All four director’s contravenes section 180 of the Act, because all fails to take proper care
and diligence while performing their actions. Section 180 of the Act states directors must
act with due care and diligence while conducting their functions as the director of the
company. This can be understood through case law AWA Ltd v Daniels t/as Deloitte,
Haskins and Sells, 7 ACSR 75913. In this case, Court discusses the issues related to the
delegated authority and wrong procedures in context of reporting to the board of the
company. This case imposes equivalent obligtaion on both executive and non-executive
directors.
 Section 181 is also breached by the directors of the company, because decision taken by
directors is not taken in good faith and not works in the best interest of the company.
This can be understood through case law Bell Group Ltd (in liq) v Westpac Banking
Corp (No 9) (2008) 225 FLR 114, in which Court held that decision taken by directors of
the company were not justified the criteria of the good faith because actions taken by
director are taken for improper purpose. In other words, decision fails to ensure the
benefit of the organization. In this case, Court implied the objective test for determining
the intention of the parties. In the objective test, Court determines whether any reasonable
person who has same knowledge and experience take any such decision in this case.
 Section 182 is breached because director’s fails to use their position for proper purpose,
as after getting the report of the expert, directors decided to enter into the contract for
their own benefits.
Therefore, it can be said that all four directors of the company that are Frank, Diane, Rio, and
Kelly breach their duties under both general and statutory law.
Conclusion:
By entering into the contract with the airbus, directors of the company that are Frank, Diane, Rio,
and Kelly breach their duties under both general and statutory law.
Scenario B
Issue:
Whether it is possible for the directors of the company to use any statutory defense in these
circumstances?
13 AWA Ltd v Daniels t/as Deloitte, Haskins and Sells, 7 ACSR 759.
14 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1

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Law:
Section 18915 of the Corporation Act 2001 states that in case directors of the company take
decision on the basis of the information or advice which is provided by any professional expert
in terms of those matters which directors think that covered under the core competency of the
expert or professional. This section further states that directors must depend on the advice and
information in good faith, and they are also under obligation to make the individual evaluation
information and advice given by the person.
Reliability of the director on information and advice is reliable or not is determined through the
fact that is whether general and statutory duties are performed by the director of the company or
not (ASIC v Hellicar & Ors [2012] HCA1716).
Application:
In this case, directors take their decision on the basis of the report send by the expert, and that
report stated that directors of the company can enter into the contract. These directors of the
company can use the defense stated under section 189 of the Act which states directors of the
company take decision on the basis of the information or advice which is provided by any
professional expert in terms of those matters which directors think that covered under the core
competency of the expert or professional.
Conclusion:
Directors of the company use the information provided by the expert and take their decision on
that behalf. Therefore, they can use section 189 as a statutory defense.
BIBLIOGRAPHY
Website
15 Corporation Act 2001- Section 189.
16 ASIC v Hellicar & Ors [2012] HCA17

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ASIC, Directors - What are my duties as a director?, <
https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-
my-duties-as-a-director/>.
AICD, General duties of directors, <
https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/
pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx>.
Case laws
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
AWA Ltd v Daniels t/as Deloitte, Haskins and Sells, 7 ACSR 759.
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1.
ASIC v Hellicar & Ors [2012] HCA17.
ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57.
Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002).
Statute
Corporation Act 2001