Company Law and Director Duties

This assignment delves into a legal case involving ASIC's action against Alan, focusing on company law and directors' duties. It examines the case based on provided articles, books, reports, cases, legislation, and other resources. The analysis covers concepts like separate legal entity, contract law, directors' responsibilities, and potential liabilities, drawing insights from relevant precedents and legal frameworks.

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Contents
Part A...............................................................................................................................................3
(i)..................................................................................................................................................3
(ii)................................................................................................................................................4
(iii)...............................................................................................................................................5
(iv)................................................................................................................................................6
Part B...............................................................................................................................................7
Part C...............................................................................................................................................8
Part D...............................................................................................................................................9
Part E.............................................................................................................................................10
Bibliography..................................................................................................................................13
A. Articles/ Books/ Reports.....................................................................................................13
B. Cases...................................................................................................................................13
C. Legislations.........................................................................................................................14
D. Others..................................................................................................................................14

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Part A
(i)
The key issue in this case is regarding the parties who can be made liable for the unpaid
debts of the company, in case of possible winding up of the company.
The companies have been given a separate legal entity status, due to which, for their
liabilities, the shareholders of the company cannot be made liable. However, the shareholders of
a company can be made liable in certain cases. When the company is limited by shares, the
members are not required to pay anything other than the outstanding amount, i.e., the unpaid
amount of shares, for the debts of the company. Further, the outstanding sum regarding the
shares is deemed as the debt of the company1. Based on this section, Eric Sanders, Donald
Trump and Inventions Pty Ltd would be liable for the unpaid capital on their respective
shareholdings, i.e., for the remaining 0.99 dollar per share.
The liability for the obligations is also upon such individuals, who have been named in
the shareholder agreement and the constitution of the company2. The directors of the company
can also be held liable for the debts of the company, when it can be established that there is a
breach of duties held by the directors, pursuant to different sections of the Corporations Act,
20013. So, a director can be held liable in case the directors incurred debts when the company
1 Daniel Moore and Tom McLachlan, UK: Unpaid Share Capital In The Context Of Tax-Avoidance Schemes:
Shareholder Liability In Corporate Insolvencies (26 January 2015)
<http://www.mondaq.com/uk/x/368922/Insolvency+Bankruptcy/Unpaid+Share+Capital+In+The+Context+Of+Tax
Avoidance+Schemes+Shareholder+Liability+In+Corporate+Insolvencies>
2 Legal Vision, What are the Rights and Liabilities of a Shareholder in a Company? (18 March 2015)
<https://legalvision.com.au/rights-liabilities-shareholder-company/>
3 Corporations Act, 2001 (Cth)

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was insolvent pursuant to section 588H of this act4. However, such situation is not present here,
so, these two clauses would not be applicable here.
Hence, in this case, Eric Sanders, Donald Trump and Inventions Pty Ltd can be made
liable for the unpaid debts of the company, in case the company is to be wound up.
(ii)
The key issue in this case revolves around the possibility of removing Hilary as the
managing director of the company.
When a person is made a director in the company, the process of removing the director
has to be given careful consideration. When the company is incorporated under a constitution,
the rules for company’s governance are covered under this constitution. Constitution is basically
a contract which takes place between the shareholders who regulate the company’s management,
along with the responsibilities and roles of the officers and directors of the company. In order to
remove a director, there is a need to pass a resolution in the general meeting of the company. A
proper notice has to be given for the general meeting, clearly stating that one of the agenda is to
remove the director at the meeting. There is a need to obtain 50% of people in control, along
with 1 share of company, who have voting rights, to pass the resolution for the removal of the
director5. So, for removing Hilary, there is a need to convene a general meeting and get a
resolution passed by people having 50% of power plus one share.
Hence, by following the procedure laid down here, Hilary can be removed from being the
managing director of the company.
4 Corporations Act 2001, s588H
5 Streten Masons Lawyers, What is the process for removing a director of a company? (20 September 2015)
<https://smslaw.com.au/what-is-the-process-for-removing-a-director-of-a-company/>

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(iii)
The key issue in this case revolves around the breach of director duties on part of Hilary
by asking Collin to issue shares to a company, in which she is a director.
The directors owe certain duties under the common law and under the statutory law,
which have to be strictly followed. Under the common law, the directors have the duty to avoid a
conflict of interest6. And accordingly, they have to make full disclosure in such cases where they
have a material interest in the transaction being undertaken. When such is not done, the
transaction can be made voidable at the choice of the company and the board of directors can
decide if they want to initiate legal proceedings for making the transaction void7. Aberdeen
Railway Co v Blaikie Bros8 provided that the directors should not put themselves in a situation
where there is a conflict of their interest with that of company. Based on Phipps v Boardman9,
such situation will arise when there is a real possibility of conflict.
Under the Corporations Act, the directors have the duty to work in the best interest of the
company and take the decisions which show care and diligence and this duty is covered under
section 18010. Section 181 imposes a duty of good faith on the directors11 and section 182
imposes a restriction on making an improper use of the position in the company12.
6 Helen Anderson, Directors' Personal Liability for Corporate Fault: A Comparative Analysis (Kluwer Law
International, 2008)
7 PwC, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies
in Australia (2008) <http://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/
GuideDirectors_Apr08.pdf>
8 (1854) 1 Macq 461 at 471
9 [1967] 2 AC 46 at 124
10 Corporations Act 2001, s 180
11 Corporations Act 2001, s 181
12 Corporations Act 2001, s 182

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In this case, Hilary misused her position and persuaded Colin to issue shares to
Inventions, where she was a director and shareholder. This was not in the best interest of the
company, as this would put Hilary in a controlling position in the company. This was a
conflicting position which had to be avoided based on Aberdeen and gave rise to a real
possibility of conflict based on Phipps due to controlling position of Hilary after this share
transfer. Hence, Hilary breached her director duties covered under common law and the statutory
law.
To conclude, by asking Collin to issue shares to a company, Hilary contravened her
director duties.
(iv)
The key issue in this case revolves around the possibility of removing Hilary from
Carborundum’s chief engineer position.
As had been explained in part (ii) of this discussion, the constitution is a contract, which
has to be strictly adhered. So, the terms which are provided in the constitution, become a rule for
the company13. In this case, the constitution through Clause 5 clearly provides that to change the
position of Hilary as being a chief engineer, there is a need to obtain 80% approval at the general
meeting. So, the notice of the general meeting has to provide that this is an agenda of the
meeting. And by obtaining an 80% approval at the meeting, Hilary can be removed from the
position of chief engineer.
Hence, Hilary can be removed from the position as Clause 5 of the constitution of the
company clearly provides so, by obtaining 80% approval at the general meeting.
13 Julie Cassidy, Concise Corporations Law (The Federation Press, 5th ed, 2006)

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Part B
The key issue in this case revolves around the possible steps which can be taken by
Donald against the changes which Inventions seek to make in the constitution of Carborundum.
Under the Corporations Act, the constitution of a company can be modified or repealed
by passing a special resolution, whereby 75% of the votes put in by the shareholders are needed
to pass the resolution. When the people who are opposing such changes in the constitution are in
minority, the provisions regarding the minority shareholding come into play14. As per section 232
of the Corporations Act, an order can be made by the court pursuant to section 233 in such cases
where the conduct of the affairs of the company; or the proposed or actual omission or act on
behalf of the company or by the company or; the proposed resolution or the resolution of the
members or a class of members of the company is either against the interest of the members in
entirety, or is oppressive/ unfairly discriminates or is prejudicial against the members15.
Upon establishing the prejudicial conduct, the court can make an order16 to amend or
repeal the constitution of the company; regulate the conduct of the affairs of the company for
future; for the company to discontinue, defend, prosecute or institute thee specified proceedings;
restrain a person from doing a particular act, and the like17.
In the given case study, for Inventions to amend the constitution, there is a need to obtain
75% of the votes put in by the shareholders. Donald has 12,000 shares out of 50,000 shares,
which makes him the owner of 24% of the shares. So, if he has to move against the possible
14 Legal Vision, How to amend a company constitution (16 September 2013) <https://legalvision.com.au/how-to-
amend-a-company-constitution/>
15 Corporations Act 2001, s 232
16 Corporations Act 2001, s 233
17 Victorian Law Reform Commission, 3. The oppression remedy in the Corporations Act (20 July 2017)
<http://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act>

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passing of the resolution at the board meeting, he needs to make a claim under section 232 of the
Corporations Act. For each of the points he would have to provide the reasons to the court,
which have been given in the case study. After showing that the company brand would be
impacted, where the company can be placed under compulsory acquisition and where the
business of the company would change, he can show that the decision is neither in his favor nor
in the favor of the company. So, he can ask the court to pass the order pursuant to section 233 of
this act. By doing so, the court would order the company to not delete Clause 3 from the
constitution of the company. The court can also disallow the name of the company to be changed
and also passing the order to stop the clause to allow the shares be compulsorily acquired by the
Inventions. The court can also pass order to regulate the affairs of the company, stop this
resolution from being placed in the general meeting and restrain Inventions from asking the
shareholders to pass this resolution.
Hence, by opting for the minority shareholder provisions, Donald can stop Inventions
from making changes to the constitution.
Part C
The key issue in this case revolves around the contract being bounding upon the new
company.
As has been stated earlier, the company has the status of a separate legal entity, due to
which the company can enter into the contract18. This status was granted through the case of
Salomon & Co Ltd19, where the plaintiff was personally held liable for the debts undertaken by
18 Ozzy Ronny Parthalan, Separate Legal Entity (Vadpress, 2012)
19 [1897] AC 22

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him on behalf of the company. The company is run by different people but continues to have a
separate status from the ones running it. In this case, upon being incorporated from July 02nd,
2017, the company obtained its separate legal entity status. And for conducting the affairs on
behalf of the company, there is a need for specific permission from the Board of company. This
permission was never obtained by Hilary and so, the contract which she entered into, would not
be binding due to separate legal entity status of Mineral.
To conclude, the contract is not binding on Mineral.
Part D
The key issue in this case revolves around liability of Eric for the misrepresentation and
the ability of defending himself for the case initiated by Silver.
When a false statement is made, just to induce the other party into entering in some
contract, a misrepresentation is made. In such cases, the aggrieved party has the option of
voiding the contract at their option20. It is crucial that the statement which has been made is a
statement of fact. In Bisset v Wilkinson21, the statement made by the defendant was a statement of
opinion and not of fact, so the plaintiff was not able to make a successful case of
misrepresentation. However, where the person making the statement is in the position of
knowing the truth behind the statement, a case of misrepresentation would stand, as was seen in
Smith v Land & House Property Corp22, where the court held that the statement made for the
tenant being most desirable was a statement of fact.
20 Neil Andrews, Contract Law (Cambridge University Press, 2nd ed, 2015)
21 [1927] AC 177
22 (1884) 28 Ch D 7

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In this case, Eric made a claim regarding the silver deposits on his farm and led to the
contract been entered for the sale of land at the purchase price fixed between him and Silver. As
the companies have separate legal entity status, they can enter into contract with their directors.
Eric can claim a defense on the basis of Bisset v Wilkinson that this was a statement of opinion.
However, the position of Eric was such that he had to know that silver deposit was not present on
his form based on Smith v Land & House Property Corp. And the false statement would mean
that Eric indulged in misrepresentation, which would make him liable for damages to Silver.
Hence, Eric would not be able to defend himself owing to the misrepresentation
undertaken by him and Silver would be able to get the sale contract rescinded or claim damages
for the misrepresentation of Eric.
Part E
The key issue in this case revolves around the civil and criminal remedies which can be
imposed on Alan by the ASIC or Carborundum.
As has been stated earlier, the directors of the company have certain duties, under
common and statutory law. One of the duties under the common law relates to the duty of not
abusing the corporate opportunities. The court stated in Chan v Zacharia23 that the directors had
to avoid such situations where their personal interests conflict with the interests of the company.
And it is not relevant if the company would have exploited such situation or not, as was seen in
Regal (Hastings) Ltd v Gulliver24.
23 (1984) 154 CLR 178
24 [1967] 2 AC 134

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Section 180, 181, 182, and 183 puts a civil obligation on directors and relate to the duty
of care and diligence25, the duty of good faith26, the duty to not use their position27 in an improper
manner and the duty to not use the information28 of the company in an improper manner. Any
use of information of the company which is used personally by the director to gain a benefit for
them, which causes detriment to the company, would breach the director duty covered under
section 18329. In R v Byrnes30, section 182 was said to have been breached as it caused damage to
the company owing to the misuse of position as the company director.
When these sections are contravened, the civil penalties covered under section 1317E
become applicable on the directors. Under this section, the court gets the power to make a
declaration of contravention31. And once this is done, ASIC gets the power to apply for a
pecuniary penalty32 order pursuant to section 1317G of the act or can apply for the
disqualification order33, pursuant to section 206C of this act. Section 184 leads to the attraction of
criminal liabilities for the directors when they do something intentionally dishonest or recklessly
and also fail to use their powers and fulfill their duties in a manner which is in the best interest of
the company and for the proper purpose34.
In this case study, by setting up the Bendrill, Ben breached his director duties which he
owed by being a director of Carborundum, on the basis of R v Byrnes. Ben was under an
obligation to avoid conflict of interest position on the basis of Chan v Zacharia, but he ignored to
25 Corporations Act 2001, s 180
26 Corporations Act 2001, s 181
27 Corporations Act 2001, s 182
28 Corporations Act 2001, s 183
29 Robert Baxt, Duties and Responsibilities of Directors and Officers (AICD, 18th ed, 2005)
30 (1995) 130 ALR 529
31 Corporations Act 2001, s 1317E
32 Corporations Act 2001, s 1317G
33 Corporations Act 2001, s 206C
34 Corporations Act 2001, s 184

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do so, and used the material confidential information of the company and got the clients of
Carborundum taken to his new company Bendrill. This breached the duties placed on him under
the statutory and common law. And based on the remaining three cases quoted above, he would
be held liable for breaching his director duties. Where the breach of section 180, 181, 182, and
183 would give rise to civil liability, breach of section 184 would attract criminal liability. And
as he made a profit by misusing the information of Carborundum, he would be held liable.
Due to these reasons, Alan can make an application to the ASIC to initiate both civil and
criminal proceedings against Ben as he breached the director duties by being a director of
Carborundum. This would allow the ASIC to initiate legal proceedings against Alan. However, a
case cannot be made against the newly formed company Bendrill. This is again due to the case of
a company being a separate legal entity and for the acts of the director, a company cannot be
made liable, till the time the need for lifting the corporate veil is established. Had the new
company being solely run by Ben and was being used just as a front of Ben, only then the
corporate veil could have been lifted in this case. However, as no such information is given, the
new company cannot be made liable.
To conclude, there are high chances of a case being made against Ben by ASIC on
application of Alan and by Carborundum.

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Bibliography
A. Articles/ Books/ Reports
Anderson H, Directors' Personal Liability for Corporate Fault: A Comparative Analysis
(Kluwer Law International, 2008)
Andrews N, Contract Law (Cambridge University Press, 2nd ed, 2015)
Baxt R, Duties and Responsibilities of Directors and Officers (AICD, 18th ed, 2005)
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Parthalan OR, Separate Legal Entity (Vadpress, 2012)
B. Cases
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 at 471
ASIC v Adler and 4 Ors
ASIC v Stephen William Vizard [2005] FCA 1037
Bisset v Wilkinson [1927] AC 177
Chan v Zacharia (1984) 154 CLR 178
Phipps v Boardman [1967] 2 AC 46 at 124
R v Byrnes (1995) 130 ALR 529
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

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Salomon & Co Ltd [1897] AC 22
Smith v Land & House Property Corp (1884) 28 Ch D 7
C. Legislations
Corporations Act, 2001 (Cth)
D. Others
Legal Vision, How to amend a company constitution (16 September 2013)
<https://legalvision.com.au/how-to-amend-a-company-constitution/>
Legal Vision, What are the Rights and Liabilities of a Shareholder in a Company? (18 March
2015) <https://legalvision.com.au/rights-liabilities-shareholder-company/>
Moore D, and McLachlan T, UK: Unpaid Share Capital In The Context Of Tax-Avoidance
Schemes: Shareholder Liability In Corporate Insolvencies (26 January 2015)
<http://www.mondaq.com/uk/x/368922/Insolvency+Bankruptcy/Unpaid+Share+Capital+In+The
+Context+Of+TaxAvoidance+Schemes+Shareholder+Liability+In+Corporate+Insolvencies>
PwC, A guide to directors’ duties and responsibilities for non-listed public companies and
proprietary companies in Australia (2008)
<http://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/
GuideDirectors_Apr08.pdf>
Streten Masons Lawyers, What is the process for removing a director of a company? (20
September 2015) <https://smslaw.com.au/what-is-the-process-for-removing-a-director-of-a-
company/>

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Victorian Law Reform Commission, 3. The oppression remedy in the Corporations Act (20 July
2017) <http://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act>