Breach of Directors' Duties

This legal assignment examines a case study involving the directors of a fictional company, AB. The directors are accused of breaching their statutory and equitable duties by issuing shares to benefit personally while the company was insolvent. The analysis explores relevant sections of the Corporations Act 2001, including sections 588G, 180(1), 181, 182, 183, 206C, and 1317E. It also considers equitable duties like acting in good faith and avoiding conflicts of interest. The assignment concludes by assessing the potential legal consequences for the directors.

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

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LAW OF BUSINESS
Question 1
Constitution
Constitution of a company or its replaceable rules set out the guidelines which the directors and
officers of the company have to follow towards carrying on their powers in relation to the
company1. The constitution also sets out the terms of relationship of the company with any third
party as well as the relationship between the members of the company. In this question the
validity of powers provided to the constitution of a company have been discussed. In addition
how and when can the constitution of a company be amended by members have also been
discussed in order to determine the issues identified in the question. The first issue which has
been identified in this question is that whether Max has the right to enforce the clause which was
present in the constitution of Chocolate Cleaning Products Pty Ltd (“CCP”). The second issue
which has been identified in relation to the question is that whether the directors of CCP can
successfully change the constitution in the light of its previous clauses. The issues would be
determined after identification of relevant provisions related to constitution as provided by the
Corporation Act 2001 and then applying such laws on the facts of the case.
The corporation act and constitution
Section 124 of the CA state that the powers of a company in relation to its operation can be
restricted to the constitution. However a transaction cannot be declared as invalid because it is
not within the scope of the constitution2.
1 Hiller, Janine S. "The benefit corporation and corporate social responsibility." Journal of Business Ethics 118.2
(2013): 287-301.
2 Corporation Act 2001 (Cth) at Section 124

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According to Section 136 of the CA the constitution of the company can be repealed on modified
by the company. A special resolution is required to repeal or modify the constitution which
means that the majority of two third of voting members is required. It may be provided by the
constitution of the company that a special resolution required to amend the constitution will not
have any effect unless an additional requirement which has been provided in the constitution
with respect to such modification or repealing has been acted in accordance with. In addition if it
is not provided otherwise by the constitution the additional requirement can be repealed or
modified by the company as provided in the previous subsection only if there is compliance with
the additional requirement3.
Section 232 of the act deals with oppressive remedy with respect to the member of a company. It
has been stated by section 232 of the CA that the court can make any order which it thinks to be
appropriate in addition the provisions provided in section 2334. An order in relation to Section
233 under section 232 can be made by the court if it is owned by the court at the directors of the
company and carrying on the affairs of the company or up present or future omission or act with
respect to the company or a present or future resolution of class of members all members of the
company which is not in the best interest of the members of the company or a member of a
company or is unfairly discriminatory the judicial and operative to a member or members
whether in any other capacity or that capacity5.
In the case of Hickman v Kent or Romney March Sheep-Breeders Association6 it had been
provided by the court that a statutory contact is formed between the members, officer and
directors of the company through its constitution and such rules can be enforced against the
3 Corporation Act 2001 (Cth) at Section 136
4 Corporation Act 2001 (Cth) at Section 232
5 Corporation Act 2001 (Cth) at Section 233
6 [1915] 1 Ch 881

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members of the company. In the case of Forbes v NSW Trotting Club Ltd7it had been ruled by
the court that the rules of the constitution can be enforced by its member.
Section 140 of the CA states that a contractual relationship exists between the members of the
company the constitution of the company
In the case of Gambotto v WCP Ltd8it had been provided by the court that where the change in
the constitution is related to expropriation the shareholders in majority would have to establish
that the act was fair in all situation and was towards a proper purpose.
Determining the issue
Analyzing first issue
In his case it has been expressly provided by the constitution of dash that Max can only be
removed from the position of as a solicitor of the company if he has been involved in an act of
negligence. However it has been provided that the directors of the company have passed a
special resolution in order to terminate the position of Max as the solicitor. In such situation
according to the rues discussed above Max has the right to enforce the rules of constitution on
the company. The same had been done in the case of Hickman v Kent or Romney March Sheep-
Breeders Associationas discussed above. Max can also obtain an order under section 233 of the
CA with respect to section 232 as the conduct of the majority shareholders is prima faice
oppressive to the interest of Som. In addition there is a contractual relation between Max and the
7[1977] 2 NSWLR 515
8(1995) ACLC 342

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other members which if breached have legal consequences of contract law as per section 140 the
CA
Analyzing second issue
In relation to the second issue it is expressly provided in section 136 of the CA that the
constitution can be changed only if a further condition for changing has been complied with and
the same goes in relation to change the further condition. Here the further condition to remove
Max as the solicitor is that Max commits negligence which has not been done in this case. Thus
as per the provisions of S 136 the constitution cannot be modified in relation to the proportion.
In addition as per the case of Gambotto v WCP Ltd in relation to expropriation changes to
constitution the directors have to prove proper purpose which would be difficult in this case.
Conclusion
According to the above discussion it can be stated evidently that Max can enforce the clause of
the constitution on the company and the constitution cannot be modified even through a special
resolution in this case as per section 136 (3).
Question 2
Duties of directors
The directors of the company are its supreme controllers of the operations of the
company. Therefore the corporation law of Australia along with common law have imposed
some duties and responsibilities on the directors to consider while managing the company9. It has
been made mandatory for the directors to abide by the duties or else they may be subjected to
9 Corporation law 2nd edition, Jason Harris publication: LexisNexis butterworths Australia 2011

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fines and suspension and can also personally liable. The issue which has been identified in the
given scenario is that (1) have the directors violated their duty if good faith and proper purpose
(2) have the directors misused there position and information and created conflict of interest
Directors’ duties and the Corporation Act
The CA is the primary legislation in Australia which deals with the duties of directors towards
their organizations at both commonwealth and state and territories level. There are various
equitable duties of directors as well while are consistent with the duties set out in the CA10. in
relation to this case the duties in relation to section 180(1), 181-183 and 588G of the CA has
been discussed along with equitable duties. The section also discussed penalties under section
1317E, 206C and remedies as per section 232 and 233 of the CA. The defence provided in
section 180(2) related to the common law business judgment rule has also been discussed to
analyze whether the directors of Aussie Boats Ltd (“AB”) have violated their duties or not.
Section 180 (1) – Directors directed to apply proper diligence and Care while taking decision in
relation to the company’s affair. Actions of directors under the section are determined
objectively through lacing a reasonable director in similar position as the original director. If it
can be established that reasonable director would take the decision the original direct is said to
have complied with s 180(1).
Section 180(2)- if a reasonable director can take a decision taken by the original director the in
relation to the risk associated with the business the decision can be exempted from the breach of
duty as a business judgment11
10 Knepper, William E., et al. Duty of Loyalty. Vol. 1. Liability of Corporate Officers and Directors, 2016.
11 Corporation Act 2001 (Cth) at Section 180

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Section 181 – the directors direct to base their actions towards the purpose of the organization
through Bona fide intentions12.
Section 182- the directors directed not to use their position contrary to company’s interest and
for personal gain13.
Section 183- the directors directed not to use information accessed via the company contrary to
company’s interest and for personal gain14.
Section 184- Violation of section 180-183 in a reckless manner (Criminal sanctions)15
Setion 588G- directors of an organization directed not to carry on the trading activities of the
organization in case they suspect that the organization is about to become bankrupt or may get
insolvent because if the transaction or they know such situation is bound to arise.
Section 206C- the court the disqualify the director to manage the organization16
Section 1317E – court may impose pecuniary penalties for serious breaches of duties by
directors17.
Cases on directors’ duties
In (ASIC) v Cassimatis18 Directors held to violate section 180(1) as a reasonable director would
not have done so
12 Corporation Act 2001 (Cth) at Section 181
13 Corporation Act 2001 (Cth) at Section 182
14 Corporation Act 2001 (Cth) at Section 183
15 Corporation Act 2001 (Cth) at Section 184.
16 Corporation Act 2001 (Cth) at Section 206C
17Corporation Act 2001 (Cth) at Section 1317E
18 (No. 8) [2016] FCA 1023.

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In ASIC v Lindberg19 Director imposed with pecuniary penalties of $100000 as well as
suspension from management for a year period.
Determining the issue
1st legal issue
In this case it is clear that the AB are on the verge of becoming insolvent. They do not
have the funds to expand their business to the international markets. Their competitors have
purchased 35% of their shares and are planning a takeover bid. The competitors are also known
to change the executive directors after the takeover. In the given situation AB have issued more
shares. This can be regarded as the violation of section 588G in relation to insolvent trading. In
addition section 180(1) has also been violated as a reasonable director would not indulge in the
breach of section 588G. Section 181 have also been breached as the directors are not acting in
good faith and a proper purpose.
2nd legal issue
The directors have violated section 182 by using their position to pass such resolution as
well as section 183 by using the information of company towards personal benefits. The
directors have also violated the equitable duties of acting in good faith and proper purpose and
not using position or information in case of conflict of interest to make personal gains.
The directors have indulge in an oppressive conduct in relation to Banjo has thus he can initiate
proceeding under s 232 of the CA for an order under s 233. In addition the directors can be
suspended from managing the corporation as per section 206C by the court and imposed with
pecuniary penalties under section 1317E as done in the Lindberg case.
19 [2012] VSC 332 - 91 ACSR 640.

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Conclusion
Therefore it can be concluded that the directors of AB have breached the statutory as well
as equitable duties of directors by issuing the shares in order to achieve personal interest as well
as trading when the company was insolvent.

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