Corporate Law: Breach of Director Duties and Consequences

Running Head: BUSINESS AND CORPORATION LAW 0
Corporate Law
12/28/2018
Student’s Name

Corporate Law
1
Issue
In the given case, two people being the directors of the company have done certain acts. The
issue of the case is to check whether these two have breached their duties as directors. If yes,
what are the consequences of such a breach?
Rules
A company is an artificial person that can do all the business transactions and can enter into a
contract with third parties similar to a natural person, but the same cannot think similar to a
natural person. This is the reason that some people are there to work on behalf of the to carry the
business activitiess. Such people are known as directors and officers of a company. Neither a
director nor an officer can be held liable for the act of a company. As per the case of Salomon v
A Salomon & Co Ltd [1896] UKHL 1, a company has a separate legal status from the directors
and members.
To control the misuse of the separate legal entity principle, some of the provisions have been
inserted in the law. In Australia, Corporations Act 2001 (Cth) is there which provides provisions
related to various aspects of companies. Section 180 to 183 of the act states the general duties
which every officer, as well as director of an Australian company, needs to consider while
performing their jobs. Directors have a trustworthy relationship with the company and therefore
the duties prescribed under aforementioned sections are also known as fiduciary duties.
Firstly, to discuss the section 180 of the act, this is to mention that the same requires every
officer and director of the corporation to discharges their liabilities with a degree of care and

Corporate Law
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diligence similar to a reasonable person. The position of a director is a very significant one and
therefore the same is required to carry a level of care while acting on behalf of a company. Many
of the times it has been seen that because of the separate legal status of the company, directors
acts negligently and later on the company has to face some serious consequences. To prevent
such issues, section 180 has been developed. Section 181 of the act says it is the obligation of
every director and officer of the company to work for the best interest of the company in addition
to doing the same for a proper purpose. Now the question, which needs to be answered, is the
meaning of best interest. How the same will be defined? The duty has been consider as an
objective factor in the case of ASIC v Adler [2002] NSWSC 171, and the same is deemed to be
breached if no reasonable director has a reason to believe that the particular act is for the best
interest of the organization. According to the decision of the case of Bailey v Mandala Private
Hospital Pty Ltd (1987) 12 ACLR 641, conduct cannot be understood as in the best interest of
the company where personal interests of the directors are involved. In addition to the best
interest, the proper purpose is also equally important term as given in the case of Hogg v
Cramphorn Ltd [1967] Ch 254. As per the facts and decision of the case of Howard Smith v
Ampol Petroleum Ltd [1974] AC 821 and, an act cannot be treated purposeful only because
directors find the same in the best interest of the company and to prove the same purposeful,
there must be valid reasoning.
Section 183 of the act also define some limitations. According to the provisions of section 183 of
the act, neither a director nor any officer of a corporation must use the available information in
an inappropriate manner to develop the personal benefits or to cause detriment to his/her
corporation (Ishak, 2018). In the case of ASIC v Adler, the director marked as liable to use the