Liability for Breach of Duties in Corporate Law

This article discusses the liabilities of directors and officers for breaching their duties in corporate law. It explores the relevant sections of the Corporations Act 2001 and the consequences of such breaches. The case of Lillian and Gumpta is used as an example to illustrate the application of these laws.

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Contents
Issue.................................................................................................................................................2
Rules................................................................................................................................................2
Application......................................................................................................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Issue
To check that whether Lilian and Gumpta are liable to breach the duties that they were required
to perform in the capacity of director of different companies. Further, if they breach such duties
then what are the possible consequences of this breach?
Rules
Being a corporate entity, a company has different legal status from its members and directors.
The separate legal status of a company has been declared in the decision of the case of Salomon v
A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. In this case, it has been given that a
company is a separate legal personality and its director, member, and the officer cannot be held
liable for any act that a company does in its own name (Pathak, 2013). Nevertheless, this is to
remember that a company cannot do all these activities by itself, as the same is not a natural
person. Management of a company consists of directors and officers and the same do the
business activities on the name of the company but are not personally liable.
When directors and officer come to know about the fact that they are not going to be held liable
for the acts of companies, they have started misusing the separate legal status of a company.
Following are some of the lead cases where directors of the corporations breached their duties:-
 ASIC v Cassimatis (No 8) [2016] FCA 1023
 ASIC v Adler [2002] NSWSC 171

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 Gerard Cassegrain & Co Pty Ltd (in liquidation) v Cassegrain [2013] NSWCA 455
 Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2
 Fodare Pty Ltd V Shearn, Supreme Court of New South Wales, 25 May 2011
 Metropolitan Fire Systems Ltd v Miller (1997) 23 ACSR 699
To prevent such misuses, the concept of corporate governance evolved. Every nation has
different legislation and a set of rules to govern the behavior of corporations. In the case of
Australia, Corporations Act 2001 (Cth) is there to ensure good governance in the corporations.
This legislation defines some duties that every managerial personnel is bound to follow. A
director has a fiduciary relationship with the company. Section 180-183 of the act states the
statutory duties of a director. Because of the fiduciary relationship of director and a company, the
duties mentioned under subjective sections are commonly known as fiduciary duties. In addition
to these duties, common law also prescribes some obligations for the directors of a company.
Moving the focus towards the discussion of some of the statutory duties of directors, first, it is
necessary to discuss the section 180 of the act. This section requires every director/officer to
perform his/her duties with a level of diligence and care in a manner that a responsible and
reasonable person would follow being on the position of a director of the corporation (Wolters
Clover, 2018). Subsection 2 of this section states that while taking the decisions on behalf of the
company, directors need to ensure that the decisions are for a proper purpose and personal
interest of directors are not involved. Further, they must have a rational belief of the fact that
decisions taken by them are in the best interest of the corporation. The requirements stipulated
under this subsection commonly known as best judgment rule.

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Section 181 of the act also focuses on the best judgment rule and says that directors/other
officers of a company must perform their duties for a genuine purpose and in the positive faith of
the company. The section also requires that while acting on behalf of the company, such people
must act for the best interest. In the decision of the case of, Bailey v Mandala Private Hospital
Pty Ltd (1987) 12 ACLR 641 it has been held that whenever a director held any personal interest
and do not disclose the same then for those transactions, duties of the director under section 181
of the act will deem to be breached. Here, the term “best interest” is necessary to understand.
This is to mention that an act will not be deemed in the best interest just because a director thinks
so. Further, an act will not be deemed to be “for the proper purpose” if an officer or director has
reason to believe that the same was in the best interests of the company as provided in the case of
Howard Smith v Ampol Petroleum Ltd [1974] AC 821. It means best interest and proper purpose
are two different terms and both of them will not be influenced by the personal opinions of a
director or an officer, but the court will check the same.
As mentioned earlier that a company is an artificial person and these are other officials and
directors of the company who manage the affairs of the same, this is common that these people
have significant information related to the business of the company. In such a situation, there are
possibilities that these people can misuse such information for their personal benefits. To prevent
such situation, section 183 is there. This section says that while performing the prescribed duties,
neither an officer nor any director of the company must use the business information in an
inappropriate manner to gain personal advantages. The case of ASIC v Adler is the lead case
where a person named Adler misused the business information being a common director and
shareholder in group companies. According to the explanation, the duty prescribed under section
183 of the act goes continuous even after the retirement or resignation of a director and officer.

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Section 180-183 of the act prescribed the fiduciary duties, which are more often similar to the
duties mentioned under common law. In addition to these sections, some other sections also state
the obligations and duties of the directors and provide a standard manner of working in a
particular situation. Section 588G is one of such section that consists the provisions in respect to,
insolvent trading by the director of the company. This section prevents a director by doing any
commercial transaction in the cases where the company is insolvent. Under the section 588G,
some pre-requisites are mentioned which are need to be there in order to make a person liable for
insolvent trading. Firstly, a person needs to be a director at the time of incurring the debt.
Secondly, the company on behalf of which, the director is acting must be an insolvent at the time
of entering into the transaction. Thirdly, a director who has done the insolvent trading might
have knowledge of the insolvency of the company or there might be some reasons to believe
about the insolvent status of the same. At last, at the time of incurring the debt, this section must
have enforced. If all the conditions are satisfied then a director will be held liable for the
insolvent trading.
The court would not believe on the saying of a director that the same did not have reason to
know about the insolvency of the company, but the court will check the circumstance. Section
588H of the act consist the defenses that a director can take i skip the liabilities that arise out of
an allegation of insolvent trading. This section provides some situations existence of which will
prove that a director was unaware of the insolvent financial situation of a company. According to
subsection, 4 of section 588H, a person deemed be unaware of the insolvency of a company if
the same has not taken part in the business activities due to illness or any other good reasons.
Corporations Act 2001 does not only prescribed the duties of directors and officers of a company
but also states the penalties of such breaches. In case of breach of any duties under section 180-

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183 of the act, a civil penalty can be levied as per section 1317J of the act. By the virtues of
subsection 1 of section 1317 of the act, ASIC has the power to apply for
 declaration of contravention
 pecuniary penalty order or
 a compensation order.
According to section 184 of the act, if a director breaches the duty to act in the good faith, best
interest, for a proper purpose or misuse the information or position being a director then the same
will be responsible for the criminal liabilities as well (Austlii.edu.au, 2018). Further, the
company, as well as ASIC, may ask for the recovery of damages and in order to do so may apply
for compensation order under section 1317H.
In case of breach of section 588G, a director can be held responsible for
 Civil penalties
 Criminal proceedings (if dishonesty is involved)
In addition to this, the court may instruct the director to repay the amount to the company that
the same has earned by breaching his/her duties.
Application
In the case provided, Lillian is the director of All Mine Pty Ltd. She realized that the company
did not have as many computers as were required. In order to fulfill the business requirements,
she ordered computers worth $100,000.00 from Greedyas Pty Ltd. At the time of ordering these

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computers, the financial condition of All Mine Pty Ltd was not good and the same was about to
insolvent. The managing director of Greedyas Pty Ltd., Mr. Gumpta was aware with the fact that
All Mine Pty Ltd is not doing good, yet the same has accepted the order made by Lillian, as he
was required to meet the target. In this transaction, both Lillian and Gumpta have breached their
duties under various sections of Corporations Act 2001. Lillian firstly breached her duties under
section 180 and 181 of the company. She did not act as a reasonable person and did not act in the
best interest of the company. She might have reason to believe that ordering computers can be in
the best interest of the company but she might have used her business judgment rule. Applying
the provisions of Howard Smith v Ampol Petroleum Ltd, the act of Lillian was also not for the
proper purpose of the company. Further, she will also be held liable for the breach of section
588G of the act as all the pre-requisites of insolvent trading allegations were there. She was a
director of the company, could check the insolvent status of the company and at the time of
entering into a transaction with Greedyas Pty Ltd, All Mine Pty Ltd was near to the state of
insolvency. Further, Lillian has incurred the debt after the enforcement of section 588G of the
act. Here, this is to mention that Lillian cannot use the defense of not taking part in business
activities as mentioned under section 588H (4) of the act. The reason behind the same is that she
was not out of the affairs of the company due to illness or any other good reason (it is assumed as
nothing is give in the provided case) If to talk about Gumpta, he also breached the duties under
section 180 and 181 of the company. He was aware that All Mine Pty Ltd will not be able to pay
the bill of computers yet he sold the computers. He neither did perform in the best interest of the
company nor acted as a reasonable person by taking due care and diligence.
Another transaction that has been done by Lillian and Gumpta in the provided case is to purchase
the shares of a third company. Gumpta, being the managing director of Greedyas Pty Ltd was

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aware with the prospective merger of this company with another company titled Cheap As Pty
Ltd. He was aware that after this merger share prices will get high and for this reason, he
purchased the shares in the company and also suggested the same to Lillian as he had a
friendship with her. Lillian and Gumpta both purchased the shares of the company and made the
profits. Here, applying the provisions of Adler v Adler, Gumpta misused the business information
of the company for his personal benefits and hence breached the provisions of section 183 of the
act.
In order to check the liabilities of Lillian and Gumpta, this is to mention that both of them will be
responsible for breach for civil liabilities under S. 1317J as they have breached their general
duties as prescribed under section 180 and 181 (183 too in case of Gumpta). They can also be
held liable for the criminal proceedings by the virtue of section 184 of the act.
Further, Lillian will also liable for civil liabilities under section 1317G for the breach of section
588G, but will not be held liable for criminal proceedings as no dishonesty was involved.
Conclusion
In the presented case, Lillian and Gumpta owed some general duties (under section 180,181 and
183) of the act towards the companies that they have breached. In conjunction with the general
duties, Lillian also breached the duties under section 588G of the act and no defense will be
available to her.

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References
A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
ASIC v Adler [2002] NSWSC 171
ASIC v Cassimatis (No 8) [2016] FCA 1023
Bailey v Mandala Private Hospital Pty Ltd (1987) 12 ACLR 641
Businessdictionary.com. (2018) Corporations Act 2001 - Sect 184 [online] Available from:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s184.html [Accessed on
03/01/2019]
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2
Corporations Act 2001 (Cth)
Fodare Pty Ltd V Shearn, Supreme Court of New South Wales, 25 May 2011
Gerard Cassegrain & Co Pty Ltd (in liquidation) v Cassegrain [2013] NSWCA 455
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Metropolitan Fire Systems Ltd v Miller (1997) 23 ACSR 699
Pathak, A. (2013) Legal Aspects of Business. India: Tata McGraw-Hill Education.
Wolters Clover. (2018) Corporations Act 2001, Section 181 Good Faith — Civil Obligations.
[online] Available from:

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https://iknow.cch.com.au/document/atagUio485897sl14504551/corporations-act-2001-section-
181-good-faith-civil-obligations [Accessed on 03/01/2019]