Business Law Case Study Duty Breach

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................7
References......................................................................................................................................12

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Answer 1
Issue
1. The issue in this case is to analyze the question that whether the directors duties have
been violated by the directors of Uninest Limited (Uninest) according to the provisions of
the Corporation Act 2001 (Cth) (CA)
2. The issue is this case is also to identify whether any liability would be imposed upon
Neales in relation to the company
Rule
The directors and other officers of a company are required to discharge their duties and exercise
their powers by observing care and diligence as set out by Section 180(1) of the CA. however a
defense is available for the directors known as the business judgment rule as set out is Section
180(2) of the CA1.
When a business judgment is made by the directors, it has to be done for a proper purpose and in
good faith. The decision must also not have any material personal interest as a subject matter of
the decision, while making the decision the directors have an obligation to inform themselves
about the matter of the decision to degree which is reasonably appropriate. The directors must
believe rationally that the decision judgment is taken for the best interest of the corporation.
However, whether such skill and care has been applied or whether the defense of business
judgment rule can be taken is based on the application of the objective test. The objective test is
provides that in order to determine compliance with the Section a reasonable imaginary director
1 Corporation Act 2001 (Cth) at Section 180

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is placed in the position of the existing directors. The actions which the imaginary director would
take in the same situation are set as a bench mark to analyze whether the duty has been complied
with by the existing directors or not.
The directors are imposed with a duty to act in the best interest of the company and for a proper
purpose and in good faith in relation to the company as per the provisions of Section 181 of the
CA. The duty is also found in the common law and equitable obligations of the directors2.
The directors are imposed with the duty to not use their position in a detrimental way to the
organization as per the provisions of Section 182 of the CA. The directors by the virtue of their
position have the power to make any decision in relation to the organization and therefore the
organization is at the risk of being exploited by the decision making of the directors. It is
essential to impose a legal duty on the directors not to misuse their role in the company. While
managing a company there are situation where a conflict of interest may occur. However such
conflicts have to be avoided by the directors of the organization and when any conflict of interest
position takes place the directors have to opt towards selecting the profit of the company other
than personal interest of the profit of any their party related to them3.
The same duty is provided in Section 183 of the CA where the information gained through the
organization is not to be misused by the directors for personal profits causing loss to the
organization4.
Under Section 191 of the CA the directors are also required to make all disclosures related to a
conflict of interest position and any personal interest to the board5.
2 Corporation Act 2001 (Cth) at Section 181
3 Corporation Act 2001 (Cth) at Section 182
4 Corporation Act 2001 (Cth) at Section 183
5 Corporation Act 2001 (Cth) at Section 191

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In the case of Shafron v Australian Securities and Investments Commission6 it was ruled by
the court that a company secretary of a company who also acted as a general counsel had
contravened Section 180(1) of the CA by not been able to provide proper advice to the board of
the organization in matters she was an expert. It was further ruled in the case that it is irrelevant
on what capacity she has been appointed and when she had the decision making powers in
relation to the organization she is liable for the breach of the duty.
The directors can take a defense that they relied upon the advice provided by an expert to make
a decision. However such defense would only be applicable when the directors would be able to
show that they have to a reasonable extent informed themselves about the subject matter of the
decisions and had reasons to believe that the advice provided by the expert is correct and
appropriate7.
In the case of ASIC v Cassimatis8 the court held the directors of the organization liable to the
violation of Section 180(1) of the CA as they had not appointed proper skill and diligence
towards carrying out the operations of the organization in its best interest which would have been
done by a reasonable director in the same position.
In the case of Howard Smith Ltd v Ampol Petroleum Ltd9 a twostep test had been provided by
the court. According to the test it has to be analysed that why the power of the director was given
and why was it actually used for.
6 [2012] HCA 18
7 Schulman, S. H., Moscow, C., & Lesser, M. R. (2016). Michigan Corporation Law & Practice.
Wolters Kluwer.
8 (No 8) [2016] FCA 1023
9 [1974] AC 821

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In the case of Mills v Mills10 provided a test through which the actual purpose of the powers are
determined where there are more powers which is known as the “but for” test.
The directors can make a claim for a relief for any contraventions of duty under Section 1318 of
the CA11.
Application
According to the facts set out by the case study it had been provided that UrbanLodge is trying to
make a takeover bid against Uninest. They have made an offer to purchase the shares at $12
where the actual value of the shares are $10. The Uninest board is aware off the fact that if a
successful takeover bid is made the UrbanLodge would replace the entire management of the
company. In order to ensure that a successful takeover bid is not initiated by the UrbanLodge
Neales who works as a consultant for the company comes up with a strategy. According to the
strategy a $30 million interest free loan has been agreed to be provided to Gilligan who is one of
the directors of the company.
The actions taken by the directors are contrary to the interest of the organization. The directors
have violated Section 180(1) of the CA as they have not included deployed proper skill and
diligence in the decision making. This can be analyzed through the application of the objective
test as stated in Section 180(1) and used in the ASIC v Cassimatis case. A reasonable director if
placed in the position of the directors of --- would not for the interest of the company provide an
interest free loan to one of the directors as it would have an adverse effect on the management of
the company. In addition it has been provided that the company is not financially stable and
therefore in these times enhanced corporate governance is needed and such situation would have
10 (1938) 60 CLR 150
11 Corporation Act 2001 (Cth) at Section 1318

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been easily identified by any reasonable director. Therefore the business judgment rule defense is
also not applicable in the situation.
The directors have been provided powers to manage the organization effectively however they
are not doing so and as a result have violated the test under Howard Smith Ltd v Ampol
Petroleum Ltd case. The “but for test” also in the same way would provide that the directors
have violated their duties to act towards a proper purpose and in the best interest of the company.
The directors have also violated the duty provided to them under the provisions of Section 182
and 183 of the CA to not misuse position and information of the organization to make personal
gains. This is because the only reason why such decisions have been taken was to secure their
position as the mangers of the company against the takeover bid of Urbanlodge. They have used
the position as well as the information gained through the organization to give effect to the loan
deal which is also against the provisions of share buyback provided through Section 254B of the
CA.
No defense would be applicable under such Section and thy would be liable to be prosecuted
under the civil penalty provisions with respect to Section 1317E and 206C of the CA as were
aware of the unethical decision taken by Neales and did not inform themselves about the
decision . under the provisions of Section 184 they may also be criminally prosecuted under
Section 6.1 of the criminal code in case their act is found to be reckless and negligent.
In the given situation as Neales is the consultant of the company and have provided with
unlawful advice to the board of directors she is also liable to be prosecuted under the breach of
duties as it was done in the above discussed case of Shafron v ASIC. This is because she had
significant decision making power in relation to the organization.

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Conclusions
Therefore from the above discussed analysis it can be provided that the directors have violated
their duties and Neales is also responsible for such violations.
Answer 2
Issue
1. The issue in this case is to determine whether any of the directors duties gave been
violated by Shane
2. It also has to be analyzed that what penalties and remedy are applicable if violation of
directors duties are identified
Rule
The directors and other officers of a company are required to discharge their duties and exercise
their powers by observing care and diligence as set out by Section 180(1) of the CA. however a
defense is available for the directors known as the business judgment rule as set out is Section
180(2) of the CA12.
When a business judgment is made by the directors, it has to be done for a proper purpose and in
good faith. The decision must also not have any material personal interest as a subject matter of
the decision, while making the decision the directors have an obligation to inform themselves
about the matter of the decision to degree which is reasonably appropriate. The directors must
believe rationally that the decision judgment is taken for the best interest of the corporation.
12 Corporation Act 2001 (Cth) at Section 180

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However, whether such skill and care has been applied or whether the defense of business
judgment rule can be taken is based on the application of the objective test. The objective test is
provides that in order to determine compliance with the Section a reasonable imaginary director
is placed in the position of the existing directors. The actions which the imaginary director would
take in the same situation are set as a bench mark to analyze whether the duty has been complied
with by the existing directors or not13.
The directors are imposed with the duty to not use their position in a detrimental way to the
organization as per the provisions of Section 182 of the CA. The directors by the virtue of their
position have the power to make any decision in relation to the organization and therefore the
organization is at the risk of being exploited by the decision making of the directors. It is
essential to impose a legal duty on the directors not to misuse their role in the company. While
managing a company there are situation where a conflict of interest may occur. However such
conflicts have to be avoided by the directors of the organization and when any conflict of interest
position takes place the directors have to opt towards selecting the profit of the company other
than personal interest of the profit of any their party related to them14.
The same duty is provided in Section 183 of the CA where the information gained through the
organization is not to be misused by the directors for personal profits causing loss to the
organization15.
13 Stout, L. A., Robé, J. P., Ireland, P., Deakin, S., Greenfield, K., Johnston, A., ... & Dine, J.
(2016). The Modern Corporation Statement on Company Law.
14 Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
15 Corporation Act 2001 (Cth) at Section 183

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In the case of RBC Investor Services Australia Nominees Pty Limited v Brickworks
Limited16 the question before the court was to determine whether the directors had violated
Section 182 and 183 of the CA and not given priority to the interest of the organization against
personal interest.
An overlapping fiduciary duty is also present in the directors of the organization to act in the best
interest of the organization. This signifies that when the directors of the organization make a
decision it has to be ensured that the decision is in favor of the organization overall17.
In case director’s duties are violated the directors are liable for civil penalty provisions under
Section 1317E of the CA which can range up to $200000. They may also be suspended from
managing a corporation up to a period of five years under Section 206C of the CA.
In the case of ASIC v Lindberg18 the court held that the director has violated Section 180(1) of
the CA by being complacent towards the management of the organization and had been imposed
with a suspension of two years from managing corporations and a fine of $100,000 under Section
1317E and 206C of the CA.
Under Section 191 of the CA the directors are also required to make all disclosures related to a
conflict of interest position and any personal interest to the board.
Application
In the given situation it has been stated that Shane is the director of Primo who performs
construction work for a company called Landstock Limited (‘Landstock’). Shane has the
16 [2017] FCA 756
17 Lieberman, J., Siedel, G., Warner, D., & Mayer, D. (2016). Business law and the legal
environment.
18 [2012] VSC 332

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information that Landstock is going to provide tender for a new construction project. Shane has
himself formed a company which is known as iConstruct. Upon such knowledge about the tender
he has also made a tender for the construction project provided by Landstock. He had the
knowledge about the price of tender made by primo and thus provided a tender which had a
lower price and was accepted by Landstock. He also did not disclose that he was the director of
Iconstruct to the board of Primo.
In the given situation through the application of the objective test it can be provided that Section
180(1) of the CA have been violated and no reasonable director would breach a legal position
while taking a decision for the company (Section 182-183). Shane has also violated the duty to
act in the best interest of primo in good faith and proper purpose as he is competing with the
company which is not in its best interest. Section 182 and 183 of the CA have also been violated
by Shane as he has used his position and information gained through primo about the render
made by them and set a lower price for the tender made by his own company. He did not give
priority to the interest of primo and gave importance to his own personal interest through the act
and therefore violated the duties which arise through the equitable and common law concept of
conflict of interest. In addition Section 191 of the CA has been violated by Shane by not
disclosing his interest in Iconstruct to the board of Primo.
Civil penalty provisions would be applicable in this situation in Shane as he has violated Section
180-183 of the CA. he would be liable to a penalty which may be up to $200000, he can be
removed from being the director of primo through the passing of a special resolution. He may
also be suspended from managing the affairs of any company for a period of five year.
Conclusion

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Directors duties under the CA have been violated by Shane and he is liable under the civil
penalty provisions
Answer 3
Issue
1. The issue in this case is to determine the legal position of Frank and Diane where they
acted against the advice of the expert.
2. The issue in this case is to determine any statutory defenses available to the directors of
Dronebotics Limited (‘Dronebotics’) where they acted against the advice of the expert.
Rules
The directors and other officers of a company are required to discharge their duties and exercise
their powers by observing care and diligence as set out by Section 180(1) of the CA. however a
defense is available for the directors known as the business judgment rule as set out is Section
180(2) of the CA19.
When a business judgment is made by the directors, it has to be done for a proper purpose and in
good faith. The decision must also not have any material personal interest as a subject matter of
the decision, while making the decision the directors have an obligation to inform themselves
about the matter of the decision to degree which is reasonably appropriate. The directors must
believe rationally that the decision judgment is taken for the best interest of the corporation.
However, whether such skill and care has been applied or whether the defense of business
judgment rule can be taken is based on the application of the objective test. The objective test is
19 Corporation Act 2001 (Cth) at Section 180

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provides that in order to determine compliance with the Section a reasonable imaginary director
is placed in the position of the existing directors. The actions which the imaginary director would
take in the same situation are set as a bench mark to analyze whether the duty has been complied
with by the existing directors or not.
Under section 189 of the CA the directors have the right to rely on an advice which they
considered to be reasonable and correct in relation to the operations of the company.
However such reliance cannot be always justified as it was done in the case of ASIC v Healey20
where the court rejected the appropriateness on relying on advice given by external auditors. It
was ruled by the court that reliance can only be established where an informed decision has been
made by the directors.
The provisions in relation to the business judgment rule had been discussed in the case of
Australian Securities and Investments Commission v Rich21. In this case it had been ruled by the
court that the business judgment rule court that the business judgment rule can only be relied
upon by the court if any other reasonable director would have taken the same decision.
Application
In relation to the first issue it can be stated that the executive directors of Dronebotics have
clearly violated the provisions set out in section 180(1) of the CA. This is because the directors
are not deploying due care and diligence while managing the affairs of the company as any
reasonable director would not have gone against the report of an expert. The directors are only
doing so in order to satisfy their ego and stubborn nature. They also can however rely on the
business judgment rule if they are able to pass the test provided in section 180(2) of the act
20 (2011) FCA 717
21 (2009) 236 FLR 1

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which allows the directors to take risk where they indulge in informed decision making in good
faith.
In relation to the second issue where the directors business proposal has been approved by the
external experts and the product has turned out the be failure the directors of the company can
rely on the defense provided under section 189 of the CA. the directors can also rely on the
ruling made in the Healey case where it was ruled that in case a informed decision is made the
defense under section 189 is applicable.
Conclusion
In scenario A the directors have violated section 180(1) of the CA and in scenario B the directors
can rely on the defense under section 189.

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References
Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
ASIC v Cassimatis (No 8) [2016] FCA 1023
ASIC v Healey (2011) FCA 717
ASIC v Lindberg - [2012] VSC 332
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Corporation Act 2001 (Cth)
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Lieberman, J., Siedel, G., Warner, D., & Mayer, D. (2016). Business law and the legal
environment.
Mills v Mills (1938) 60 CLR 150
RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756
Schulman, S. H., Moscow, C., & Lesser, M. R. (2016). Michigan Corporation Law & Practice.
Wolters Kluwer.
Shafron v Australian Securities and Investments Commission [2012] HCA 18
Stout, L. A., Robé, J. P., Ireland, P., Deakin, S., Greenfield, K., Johnston, A., ... & Dine, J.
(2016). The Modern Corporation Statement on Company Law.