Liability of Drago as a Director

This article discusses the liability of Drago as a director for breaching his duties in the context of Commercial & Corporations Law. It explores the relevant rules and provides an analysis of the application of these rules to the given scenario.

0Running head: COMMERCIAL & CORPORATION LAW
Commercial and Corporations Law
Name of the Student
Name of the University
Author Note

COMMERCIAL & CORPORATIONS LAW
Issue 1
To determine whether the duties of a director has been contravened by Drago, Clubber
and Rocky.
Rule
The directors of a corporation are formed as agents of the company and hence, their overall
role of a company can be stated to be fiduciary in nature. The case of United Petroleum
Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 3471 tends to imply that in case the
director has been employed as the overall caretaker of the business then, they are required to get
into dealings which are beneficial for the long run of the firm. The given statement can be
supported by the case Commonwealth Bank of Australia v Friedrich 1991 ACSR 1152. This case
tends to reflect that the director is responsible for the overall welfare of the firm both by the
virtue of the common law as well as Corporations Act 2001 (Cth)3 (CA)`s provisions. The law
tends to determine that, it remains the duty of a director to ensure that they are successfully able
to conduct their duties and take decisions in favour of the company and in addition to this, they
will be required to ensure that they refrain from the activities which tend to deviate them from
their duty or may lead to the impairment of the firm. This statement can be backed by the case
example of Jubliee Mines NL v Riley (2009) 253 ALR 673; 69 ACSR 6594.
1 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347
2 Commonwealth Bank of Australia v Friedrich 1991 ACSR 115
3 The Corporations Act 2001 (Cth)
4 Jubliee Mines NL v Riley (2009) 253 ALR 673; 69 ACSR 659.

COMMERCIAL & CORPORATIONS LAW
The different directors of a company will be required to undertake a duty so as to ensure
that their conduct is in line of the functions which they are required to carry out and in order to
see to it that, they put their overall discretion in the right manner. Their actions need to reflect
due diligence in the workplace. The section 180(1) of the CA5, tends to provide this particular
duty of a director and the given duty has also been reflected in the case study of R v Byrnes and
Hopwood (1995) 183 CLR 5016. It has been mentioned that if a director wants to enable the
duties, then he will be required to act in accordance with the conscience as applied for a
reasonable individual under a normal circumstance. The particular statement can be supported by
the case study of the United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC
3477.
Another aspect which can be considered to be considerably important can be referred to
as the existence of good faith with respect to the actions of the different directors. As per the
duty of the good faith, it is important for a director to undertake an act in a manner which will
bring about efficient results for both the company and the employees and all their actions must
be backed by proper reasoning which will ensure that, the overall results of the operations can be
achieved. This has been provided in the 181th section of the Corporation Act8. The statement has
also been supported by the case Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982]
HCA 449
5 The Corporations Act 2001 (Cth), s. 180(1)
6 R v Byrnes and Hopwood (1995) 183 CLR 501
7 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347
8The Corporations Act 2001 (Cth), s. 181
9Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44

COMMERCIAL & CORPORATIONS LAW
In addition to this, it can also considered to be very important that the directors are liable
to the firm and required to act under an obligation to restrain from engaging in any act with the
primary motive of a personal gain without any advantage to the firm. The case of Australian
Securities and Investments Commission v Project Management (Aust) Pty Ltd [2019] FCA 4710
serves as a good example of this rule.
Application
It can be largely understood that, the DEF ltd was a mining and exploration based
company in the Northern Territory and as the directors of the firm, Drago, Clubber and Rocky
had certain responsibilities towards the firm. Rocky held the position of the Chief Executive
Officer and Clubber was the chairman of the firm. Additionally, Drago held the position of the
Chief Financial officer of the organization. Hence, as mentioned previously, they need to be held
reliable for their overall activities and all their actions need to be beneficial for the firm, and
under no means they should be fair in nature. The statement can be largely supported by the case
of United Petroleum Australia Pty Ltd v Herbert Smith Freehills11.
Hence, after some initiation of the different operational activities of the firm and the sites
drilling, a geological survey had been carried out which had resulted in the testing of the mines
and it was disclosed from this that, the mines were not commercial and had little to no level of
gold deposits as present. Hence, in line of this it could be rightfully constituted from the
10 Australian Securities and Investments Commission v Project Management (Aust) Pty Ltd [2019] FCA 47
11 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347

COMMERCIAL & CORPORATIONS LAW
perspective of a director that the venture might lead to a loss for the firm and hence, the directors
are required to refrain from continuing such an activity. However, Rocky wanted to continue
with the venture as he was optimistic about it and already a sum of $5000000 had been spent on
it by the firm. The directors had considered to halt the activity and pay the remaining amount to
the shareholders and hence, this could be considered to be the correct action. However, Drago
and Clubber were not sure about it but finally accepted the will of Rocky and continued with the
exploration to avoid any confrontation. Therefore, this can be outlined as a contravention of the
different director duties as Rocky needed to have some proper cause for his actions and being
rational individuals Drago and Clubber were required to stop him as they were sure about the
consequences. In line of this, it can be mentioned that, the continued mining as well as related
activities will exhaust the capital resources of the firm and in line of this, the directors
contravened the different duties under the sections, 180(1), 181 and 192 of the Corporation Act12.
Conclusion
Hence, the duties of director have been contravened by Drago, Clubber and Rocky.
12 The Corporations Act 2001 (Cth), s. 180(1), 181 & 192

COMMERCIAL & CORPORATIONS LAW
Issue 2
To determine whether Clubber, Rocky and Drago have any option of undertaking any
resort under the defence of their actions stating that they may not have contravened their duties
as the director of the firm.
Rule
As understood previously, the different directors of a firm are required to ensure that they are
successfully able to abide by the different duties of the firm as aa director and in case the incur
any contraventions then in such a case, they will lose their virtue as a director. However, as
mentioned by the law, if the director engages in the breach of their duties under the common law
or under the Act then, they can be stated to have incurred a liability and those directors who have
undertaken an act and have violated the duties would be required to have the option to undertake
defence as per the Section 1317 and the 180(2) section under CA13.
The different defences as available to the director under this rule can be stated to be the
judgement rule. The defence has been mentioned in the section 180(2) of the CA14 and requires
that the different directors tend to reflect on their activity which will be required to have the
impact of violation under this act. They will be required to show that the activity which was
undertaken by them has been taken in lieu of good faith. Moreover, the director will also be
required to establish that he has no personal interest in such an activity and that none of his
duties have been taken in personal interest and that he has been able to abide by his laws in good
faith. He needs to show that the actions taken by him are in rational form of mind and reasonable
13 The Corporations Act 2001 (Cth), s. 180(2) & 1317S
14 The Corporations Act 2001 (Cth), s. 180(2)

COMMERCIAL & CORPORATIONS LAW
in nature. The section also mentions that, the directors would be required to ensure that, they are
seeking the act in the overall benefit of the firm and thereby acted rationally.
Hence, it can be mentioned that the different directors who have contravened their duty under
the particular Act needs to seek defence under the Section 1317 of the Act and as per the
accordance of the act15, the courts have the power or the discretion to render the directors the
status on non-liability under the duties contravention as per the act. It is the sole duty of the court
to ensure that the actions undertaken by them are just in nature. When the particular section will
be applied, the director would be required to ensure that the act has been processed out with
honesty and it was the best alternative available. The similar scenario was reflected in the case
study ASIC v Narain [2008] FCAFC 12016.
Application
Hence, when the rule is applied to the case, it can be rightfully understood that Drago,
Rocky and Clubber can be understood to be the directors of the firm whereby Rocky is the CEO
of the firm, Clubber is the chairman and Drago is the CFO of the company. Hence, being the
directors of the firm they are required to ensure that they guarantee their actions while they are
conducting business and their operations should be such that it benefits the overall operations of
the firm. After the beginning of the company`s different exploration activities were done and it
was understood that the different sites of the firm had been drilled, the survey conducted
reflected that, the particular mines were understood to bet uncommercial in nature and the gold
level is very low. Therefore, the directors can be accused of acting against the firm, and they are
15 The Corporations Act 2001 (Cth), s. 180(2) & 1317S
16 ASIC v Narain [2008] FCAFC 120

COMMERCIAL & CORPORATIONS LAW
refrained from acting in such operations. However, Rocky insisted that they would continue with
the operations as a considerable amount had been spent and in lieu of avoiding a confrontation
with him, the other directors allowed the same. Therefore, this lead to an overall contravention of
the director duties and hence, Rocky should have been backed by proper actions and reasons to
ensure the same. Even Drago and Clubber did not take any actions irrespective of knowing that it
would have had dire consequences for the firm. Hence, in line of this, it can be rightfully
understood that the firm was governed by Rocky’s stubborn desires and was construed by his
will. For this reasons, no defences are available for them.
Conclusion
Therefore, it can be mentioned that Drago, Clubber and Rocky are not availed to the
option of undertaking any kind of resort under the defence which help them for their
contravention of the duties as the director of the firm.

COMMERCIAL & CORPORATIONS LAW
Issue 3
To gain an understanding of whether Drago should be held liable for the breach of duties
being a director for attaining the positioning of the CFO of the organization.
Rule
The rule defines under the Section 9 of the Corporation Act of 200117, which states that it
is crucial for all the directors of the firm to ensure that they are successfully employed to the
capacity of the director and those who have been employed in this manner will be required to
ensure that, they undertake any initiatives which refrain from carrying out the essence of their
duties. Under the law, as a director holds a CFO, position he will automatically become the
acting director. Hence, as a director he would be required to give instructions to others and will
be under the obligation to abide by the same. This cannot be considered as a professional advice
however and the officer of the firm would be required to ensure that conducting as a director,
they should be understood to be the director.
Application
In the given scenario, as Drago holds the positon of the CFO of the firm then, he needs to
be acting as a director and would be required to attend the meeting and make the decision
making process. In line of this, it has been explicitly mentioned that he is the director which
makes him more liable to act as a director and render his duties under the Section 9 of the
particular act. Therefore, he will be required to complete his overall duties and needs to be held
liable for the breach of his overall duties being a director.
Conclusion
Hence, Drago would be held under law for the breach of the duties as a director for being the
CFO of the firm.
17The Corporations Act 2001 (Cth), s. 9

COMMERCIAL & CORPORATIONS LAW

COMMERCIAL & CORPORATIONS LAW
References
ASIC v Narain [2008] FCAFC 120
Australian Securities and Investments Commission v Project Management (Aust) Pty Ltd [2019]
FCA 47
Commonwealth Bank of Australia v Friedrich 1991 ACSR 115
Jubliee Mines NL v Riley (2009) 253 ALR 673; 69 ACSR 659.
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44
R v Byrnes and Hopwood (1995) 183 CLR 501
The Corporations Act 2001 (Cth)
United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347