Fiduciary Duties of Directors and Shareholders

This assignment consists of two cases involving breaches of duties by directors and shareholders. In the first case, Mary, as a director of Heritage Pty Ltd, failed to perform her fiduciary duties and forged Peter's signature on a document. As a result, Peter can bring a statutory derivative action against the company with permission from the court. The criteria for granting leave are met, including that the board is not willing to take legal action, the company has been harmed, and Roger Rogerson had personal interest in the transaction. In the second case, Roger Rogerson, as a director of Sparkles Ltd, breached his fiduciary duties by selling a rare sapphire to his nephew at a significantly undervalued price. Peter, as a shareholder, can bring a statutory derivative action against the company with permission from the court.

Business laws: case studies

Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................5
References..................................................................................................................................8

Answer 1
Issue
One issue in the case study that is to be considered is that Mary’s contract of the three
armoured vans had been done without the approval of the other directors, peter and Paul.
Moreover, Mary withdraws from the No Worries Storage assets of the company by producing
a withdrawal form with a forged signature of peter. Heritage Pty Ltd has been accused of a
breach of contract by Canberra Van Rentals & Sales Pty Ltd. one issue is the consequence of
this. Another issue entails the consequence of Heritage’s attempt to recover the price of the
diamonds taken by Mary from the No Worries Storage Pty Ltd.
Laws
According to section 127, Corporations Act 2001, without the use of a corporate seal, there
are ways of executing a document by the company (Legislation.gov.au. 2017). The document
has to be signed by either two directors of the company or a director and a company
secretary. In the case of a proprietary company, the sole director who is also the company
secretary needs to sign the document. Under section 128 of the Corporations Act 2001, an
individual possesses the entitlement to make assumptions of section 129 regarding the
dealings with a company (Sealy & Worthington, 2013). The company does not possess the
entitlement to assert in proceedings that any assumption is not correct. An individual also
possesses the entitlement to make the assumptions under section 129 while dealing with
another individual who has either acquired title or property from the company
(Legislation.gov.au. 2017). The company and the individual both do not possess the
entitlement to assert in proceedings regarding the dealings that any of the assumptions is
incorrect. The assumptions are allowed to be made even in the case of an officer or a
company acting fraudulently. The assumptions can also be made when an officer or an agent
forges a document in relation with the dealings. On the other hand, an individual does not
have the entitlement to make an assumption under section 129 if it was known to the
individual or the individual was suspicious that the assumption is incorrect. The section 129
includes many assumptions. One assumption that can be made is that the secretary of the
company acts in compliance with the company’s constitution or replaceable rules.

Furthermore, an individual can make the assumption from the information that is provided by
the company that can be accessible to the public by ASIC that a director or a secretary has
been appointed fairly and duly (Allen & Kraakman, 2016). Another assumption is that the
director or the secretary possesses the authority to exercise power or perform the duty. The
same rule applies for an officer or an agent. An individual can also assume that the officers or
the director of the company perform their duties properly. Moreover, a person can assume
that while executing a document, the document has been signed by concerned individuals in
case the company does not have a common seal. The person can also be able to assume that
any person who has signed in the document as a director or a company secretary play those
roles in the company. The document also needs to be a genuine copy. An assumption can also
be made that the officer or agent who has the authority to issue a document can affirm that
the document is genuine. Under section 128(3) of the Corporations Act, section 129
assumptions are valid even when a forgery has been committed by a representative of the
company. Even if the representative has forged someone’s signature while making
transactions with a third party, the third party is supposed to assume that the signature is
genuine. A director of a company has some fiduciary duties.These include acting in the best
interest of the company, exercising power for an appropriate purpose, not restraining
discretion, avoiding conflicts of interest (DeMott, 2006).
Application
The constitution of the company stated that any contract that entailed over $ 50 000 needs the
prior approval of the directors. Mary clearly violated the constitution by making a contract of
buying three armoured vans at a cost of $ 100 000 each. According to the section 127 of the
Corporations Act 2001, a company without a common seal can execute a document with the
signature of either two directors of the company or a director and a company secretary. In this
particular case, Mary made the contract without the signature of other directors, Peter or Paul.
In the case of the No Worries Storage Ltd., Mary has also committed a forgery of Peter’s
signature and produced a document without the signature of two directors. Heritage has
decided not to take any responsibility of the payment of the armoured vans. Under the
assumption of section 129, a representative of a company needs to comply with the
constitution of the company. In this case, Mary failed to act in compliance with the
constitution of the company. According to the section 129, the director or secretary of a
company also needs to perform their duties properly (Knepper et al., 2016). Mary has also
failed to perform her duties as a director. Though Mary had forged Peter’s signature, the No

Worries Storage Pty Ltd. can assume that the signature is genuine under the section 128(3).
Mary has also failed to maintain her fiduciary duties by not acting in the best interest of the
company and by using her power as a director to fulfil personal interests.
Conclusion
In this particular case, the Heritage Pty Ltd has to take responsibility of Mary’s actions. Mary
has been unable to fulfill her fiduciary duties as a director and has committed forgery. She
has also breached the constitution of her own company as well as the constitution of No
Worries Storage Ltd. In her absence, her company will have to take the responsibility of her
actions.
Answer 2
Issue
Peter Jones is a shareholder of the company, Sparkles Ltd. Despite making a contract
regarding the supply of stationary items from Peter for three years, the company breaches its
contract and takes its supplies from Office Pax Ltd. Roger Rogerson, a director of the
company has entered into a contract of selling a rare sapphire at much lower values. But the
board of directors has decided not to take any legal actions against Roger.
Laws
In usual circumstances, when the company is harmed, the board or its delegates are capable
of initiating legal actions on behalf of the company against the person who has caused
harmed to the company. The wrongdoer may be a third party or someone inside the company.
However, an ordinary shareholder is not entitled to take legal actions on behalf of the
company as the company is governed by the board not the shareholders. In most cases, the
company takes actions against an individual who has caused harm to the company (Pearce,
2011). However, it can be the case that the company has been caused harm, not the
shareholders. Despite being given the opportunity to take actions, the board of the company
has refused to take legal actions. According to the section 236 of the Corporations Act 2001,
the shareholders are capable of bringing a statutory derivative action on behalf of the
company provided they take permission from the court (Davies, 2010). The members, former
members, an officer, a former officer or an individual who has the entitlement to be
registered as a member do have the authority to seek permission from the court. An instance

where it is necessary to bring a statutory derivative is when a director seizes the property of
the company and the board refuses to take legal actions against him. As it digresses from the
normal convention of a board taking legal actions against a wrongdoer on behalf of the
company, it is essential to get leave of court to bring the statutory derivative action.
According to section 237 of the Corporations Act 2001, there is certain criterion that is used
by the court to decide whether to give the leave or not (Dignam & Hicks, 2011).One criterion
is that it must be confirmed that the company is not willing to take actions and bring the
proceedings. The applicant for the leave needs to act in good faith. Moreover, it must be in
the best interest of the company that the applicant gets leave (Eisenberg, 2006). The issue
must be serious. Furthermore, the applicant must have given a notice of 14 days to the
company. The most essential criterion of these is whether it is done in the best interest of the
company or not. This company has to be harmed (Gevurtz, 2010). But under s 237(3), it is
not appropriate to grant leave when all the directors of the company acted in good faith and
had proper purpose. It would not be in the best interest of the company if the directors did not
have any material personal interest regarding the decision. It would also not be appropriate if
the directors were informed enough about the subject matter. It is also applicable in the case
when the directors logically believed that the decision not to take any legal action served the
best interests of the company.
Application
In Cook v Deeks [1916] 1 AC 554, there were four directors in a railway company. Each of
them was 25% shareholders. It was known to the three of the directors that a certain contract
would benefit the company. However, they went on to create their own company in order to
enter into the contract. After that, the one director who was not part of the contract took legal
action. The court decided that the three directors took advantage of the opportunity that
would have been beneficial for the company and ordered the three directors to surrender the
profit.
This particular case also deviates from the convention where a company takes legal actions
against a wrongdoer. In this case, the company breaches its contract with peter in the first
place. In the case, the company, Sparkles Ltd., has been caused harm by one of its directors,
Roger Rogerson. He entered into a contract in which he sold a rare sapphire to his nephew for
$5000. The actual price of the stone is worth $100000. Despite being warned by Peter, the

board of the company has refused to take any actions against Roger. Under the section 236 of
the Corporations Act 2001, peter as a shareholder will be able to bring a statutory derivative
action against the company with permission from the court. It is most likely that the leave of
court will be granted as the criteria mentioned in the section 237 are applicable in the case. In
this particular case, it is clear that the board is not willing to take any legal actions against
Roger. As the company has been harmed in this case, seeking a leave would be done in the
best interests of the company. The director, Roger Rogerson, did have personal interest in the
transaction that he made with his nephew. The decision that he took make the company enter
into the contracts was not based on any rational thought. Thus, the case fulfils the criteria of
the section 237.
Conclusion
In this case, peter should be able to bring a statutory derivative action against the company
for not taking legal actions against Roger Rogerson despite the harm caused by him to the
company.

References
Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
Davies, P. L. (2010). Introduction to company law. Oxford University Press.
DeMott, D. A. (2006). Breach of fiduciary duty: on justifiable expectations of loyalty and
their consequences. Ariz. L. Rev., 48, 925.
Dignam, A. J., & Hicks, A. (2011). Hicks & Goo's cases and materials on company law.
Oxford University Press, USA.
Eisenberg, M. A. (2006). The duty of good faith in corporate law. Del. J. Corp. L., 31, 1.
Gevurtz, F. (2010). Gevurtz's Corporation Law, 2d (Hornbook Series). West Academic.
Knepper, W. E., Bailey, D. A., Bowman, K. B., Eblin, R. L., & Lane, R. S. (2016). Duty of
Loyalty (Vol. 1). Liability of Corporate Officers and Directors.
Legislation.gov.au. (2017). Corporations Act 2001. [online] Available at:
https://www.legislation.gov.au/Details/C2017C00210 [Accessed 19 Sep. 2017].
Legislation.gov.au. (2017). Federal Register of Legislation - Australian Government. [online]
Available at: https://www.legislation.gov.au/Series/C2004A00818 [Accessed 19 Sep.
2017].
Pearce, J. A. (2011). The Duties of Directors and Officers Within the Fuzzy Zone of
Insolvency. Am. Bankr. Inst. L. Rev., 19, 361.
Sealy, L., & Worthington, S. (2013). Sealy & Worthington's Cases and Materials in
Company Law. Oxford University Press.
Wetherly, P., & Otter, D. (Eds.). (2014). The business environment: themes and issues in a
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