Corporate Law Case Studies: Breach of Director's Duties under Corporation Act 2001

This article discusses case studies on breach of director's duties under Corporation Act 2001. It covers general and fundamental duties of directors, penalties for breach, and relevant case laws such as ASIC v Cassimatis and ASIC v Adler. The article also explores the wide scope of section 181 of the Act and the objective test applied by courts to determine breach of duties.

Running Head: Law 1
Corporate Law

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Case study 1
Issue:
Whether Uninest directors fail to fulfill any of their general law duties and also their duties stated
under the Corporation Act 2001? These sections also discuss the liability of Neals in this
context?
Rule:
Corporation Act 2001 introduces different general and fundamental duties of the directors of the
organization, and some of these general duties are stated below:
 Director is under obligation to use their controls and obligations with care and diligence
that any other sensible person would perform.
 Directors of the organization are also under obligation to act in good faith and in the best
interest of the company and for a proper purpose.
 It is the duty of director not to use their authority in indecorous manner which means for
getting any advantage for themselves and for any third person, or to cause any damage to
the organization1.
Section 180 of the Corporation Act 2001 defines the provisions related to director’s duty to act
with care and diligence. Clause 1 of this section states that any director or any other officer of the
company must perform their functions and use their powers with due care and diligence that any
reasonable person would perform if they were being as the director or officer of the company in
similar situations, and occupied the office hold by director or any other officer and had similar
responsibilities in the corporation.
Clause 2 of this section defines the Business judgment rule, and as per this clause any director or
officer of the organization who take the business decision must comply with the requirements
stated under clause 1, and also their corresponding responsibilities stated under the common
law if they:
1 ASIC, Directors - What are my duties as a director?,
<http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-
director/#1>.

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 Take the decision related to the business in moral confidence and for a correct purpose.
 They must not have any material personal interest in the main matter of the business
judgment they make.
 Directors must believe rationally that the business judgment made by them serves the
best interest to the company2.
Directors and officers of the organization must ensure that the decision take by them is in the
company’s interest and this believes is considered as rational believe only if any reasonable
person in similar situation holds such believe.
Section 182 of the Act states the provisions related to the use of positions by the directors and
other officers of the company. This section stated that director, secretary, and other officer of the
company must not use their authority in the incorrect way for gettting advantage for themselves
or any other person, or cause damage to the company.
This can be understood through case law Australian Securities and Investment Commission
(ASIC) v Cassimatis (No. 8) [2016] FCA 10233. In this case Federal court held that directors of
the financial services company failed to fulfill their duties imposed on them by the Corporation
Act 2001, because reasonable director in the company was reasonably aware that if they allowed
the transaction than it contravenes the provisions of the Act and result in severe consequences for
the company.
It must be noted that these provisions are also applicable on the officer of the company, and term
officer include directors, secretaries, executive officers, and any person who is involved in taking
the decisions which distress the entire, or a considerable part, of the business of the corporation.
Application:
In the present case directors of the Uninest breach both general and fundamental duties imposed
on them by the Corporation Act 2001. They breach section 180 of the Act because any
reasonable director in the similar situation would not accept the advice provided by Neals. They
also fail to make proper business judgment because directors clearly have material personal
2 Corporation Act 2001- 180
3 Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023.

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interest in the failure of takeover bid. Therefore, they fail to make business judgment in decent
confidence and also for correct purpose.
There is one more case law Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002)4. In
this case Court held that Adler breached his duties as director of the company because any
reasonable director in similar situation would not cause the payment of $10m by HIHC to PEE
for the purpose of purchasing HIH shares. Court further stated that Adler also failed to make
proper business judgment because Adler clearly had material personal interest as he had
substantial shareholding in HIH. Therefore, Adler fails to made business judgment in good faith
and also for proper purpose5.
In this case, Neal is the officer of the company as he is the person who is involved in making or
participating in taking the decisions which disturb the entire, or a considerable part, of the
business of the corporation. Therefore, above stated provisions also applied on Neal as he fails to
fulfill his duties under section 180 of the Act.
Conclusion:
Directors of the Uninest and Neal (as officer) fail to fulfill in the good faith and in the best
interest of the company therefore, they breach section 180 of the Act.
4 Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002).
5 Cerlin Mulhorn, Directors Duties and ASIC v Adler, (2002). < http://www.tved.net.au/index.cfm?
SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://www.tved.net.au/PublicPapers/
June_2002,_Lawyers_Education_Channel,_Directors_Duties_and_ASIC_v_Adler.html>.

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Case Study 2
Issue:
Part A: Whether Shane breaches any general or fundamental duty as a director of the company?
Part B: what penalties would apply on Shane if he breach above stated duties as director of the
company?
Law:
Common law impose duty on director to not use the information of the organization which they
get while holding the office as director for gaining any advantage for their own or for any third
person, or to cause any damage to the organization.
Section 183 of the Corporation Act 2001 defines the necessities related to the use of information.
As per this section, if any person who gets the information in context of holding the position of
director, employee, or organization of the company must not use that information in improper
manner for the purpose of getting benefit for their own or for any other person, or cause any
damage to the organization.
Clause 2 of this section states if any person who is in the contravention of clause 1 also
contravenes this subsection6.
Section 184 of the Corporation Act 2001 states that director or other officer of the company
commits an offense if they are reckless and intentionally dishonest, and if they fail to perform
their functions and use their powers and discharging their duties in good faith and in the best
interest of the company, or for proper purpose7.
Clause 3 of this section states provisions related to the use of information. This clause stated that
any person, who obtains information because such person holds the position of director, officer,
and employee in the company, commits the criminal offense if they use such information in
dishonest manner for the purpose of gaining direct or indirect advantage for themselves or cause
any damage to the corporation. Person also commits criminal offense if they use the information
6 Corporation Act 2001- section 183.
7 Corporation Act 2001- Section 184.

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in reckless manner because of which any other person gain direct or indirect advantage or cause
damage to the company.
This can be understood through case law ASIC v Southcorp Wines 203 ALR 6278. In this case,
Court held that director contravened the rules related to continuous disclosure by communicating
the information to analysts before giving it to the ASIC9.
There is one more case law ASIC v Vizard 145 FCR 57: 219 ALR 714.10 In this case, director
breach section 183 by indulged in the insider trading. Director obtained such information that
was not publically available and uses that information for their own purposes for the purpose of
purchasing shares in other companies.
It must be noted that, if directors breach their statutory and general duties imposed by
Corporation Act 2001 then corporation act impose penalties on directors up to $200,000. In some
cases,, directors of the company may also disqualified from the office.
Section 1317E of the Corporation Act 2001 states that a person has contravened the civil penalty
provision, and then such person must make the declaration related to the contravention.
Subsequently, ASIC seek a pecuniary penalty order under Section 1317G and also the
disqualification order under section 206C11.
Section 1317G of the Act states the provisions related to the pecuniary penalty orders. Clause 1
of this section states that Court has power to order the person to pay the Commonwealth a
pecuniary penalty of up to $200,000 if declaration of contravention is made against such person
under section 1317E of the Act (contravention must be of corporation/scheme civil penalty
provision), and the contravention adversely affect the interest of the Corporation and company’s
capability to pay debts to its creditors, or is serious12.
8 ASIC v Southcorp Wines 203 ALR 627.
9 Cartr Newell, Consideration of Corporations Act - Fiduciary duties, duties of fidelity, and account for profits,
(2002). < http://www.carternewell.com/page/Publications/Archive/Consideration_of_Corporations_Act_-
_Fiduciary_duties_duties_of_fidelity_and_account_for_profits/>.
10 ASIC v Vizard 145 FCR 57: 219 ALR 714.
11 Corporation Act 2001- Section 1317E.
12 Corporation Act 2001- 1317G.

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Section 206 of the Act gives power to the court to disqualify the person from managing the
corporation13.
Application:
In the present case, Shane breach the provisions of section 183 and 184(3) of the Act because
they get the information related to tender price while holding the office of director in the
organization and he use that information for his own benefit and this also cause damage to the
company. Therefore, Shane breach section 183 which states if any person gets information in
context of holding the position of director, employee, or organization of the company must not
use that information in improper manner for the purpose of gaining advantage for themselves or
for any other person, or cause any damage to the organization.
For breach duty under section 183 and 184(3) Shane is liable under section 1317E of the Act.
Section 1317 G stated that Court has power to order the person to pay the Commonwealth a
pecuniary penalty of up to $200,000 if declaration of contravention is made against such person
under section 1317E of the Act. Provisions of section 206 also applied on Shane under which
court has power to disqualify the Shane from managing the corporation.
Conclusion:
Shane breach both general and fundamental duties as directors of the company and he is liable
under section 1317E and 206C of the Act.
Case Study 3
Scenario A
13 Corporation Act 2001- 206C.

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Issue:
Whether Frank, Diane, Ron and/or Kelly breached any of their general or fundamental duties
imposed on them by Corporation Act 2001?
Law:
Section 181 of the Corporation Act 2001 states, director or other officer of the company must
perform their duties in good faith and in the best interest of the company, or for proper purpose14.
It must be noted that scope of this section is very wide, and this can be understood through case
law Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 115. In this case,
Court stated that actions taken by directors of the company was not taken in good faith or for
proper purpose for ensuring company’s benefit. Test applied by Court in this case is objective,
and under this case Court stated whether any comparable person who possess same knowledge
and skills as the director or officer of the company take similar actions or not.
There is one more case law Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 82116 in
which Court introduce two-step test for the purpose of determining whether a director had acted
in improper manner.
In case law Australian Securities & Investments Commission v Adler (2002) 168 FLR 253,
Court provides one more leading decision. In this case, court stated that directors of the company
also breach their duties under section 181 of the Act by allowed the company to purchase high-
risk assets at that time when the company wants to reduce its risk17.
Application:
In this case all the directors breach their statutory duty under section 181 of the act because they
fail to act in good faith and in the company’s best interest. Directors enter into contract for which
their robots are not prepared. Objective test can be applied in this case, and on the basis of this
test it is clear that no reasonable person will take similar actions in this situation. Therefore,
14 Corporation Act 2001- Section 181.
15 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1.
16 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
17 Thomson reuters. Duties and powers, (2014) <
https://legal.thomsonreuters.com.au/browse/law-annuals/pdf/corporations-legislation-2014-key-section-
annotation-example-thomson-reuters.pdf>.

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directors breach their duty under section 181 of the Act as they fail to act in good faith and also
fail to ensure best interest for the company.
Conclusion:
After considering the above facts it can be said that Directors breach their duty under section 181
of the Act.
Scenario B
Issue:
Whether directors have any statutory defense which they can raise in this situation?
Law:
Section 18918 of the Act stated, if director of the company rely on any information or
professional advice given by the professional adviser or expert in context of those matters which
director’s believes fall under the core competence of that person, or the reliance was made in
good faith, and after making the independent assessment of the information and advice provided
by professional/expert.
Reasonableness of director’s reliance is determined by considering whether director performed
his duty under this part or an equivalent general law duty. Director’s reliance on the information
is considered as reasonable reliance unless contrary is proved. This can be understood through
case law ASIC v Hellicar & Ors [2012] HCA1719.
Application:
In the present case, all four directors of the company rely on the report published by expert and
on the basis of that report they enter in the contract with the Corp Grain. In this they can use the
defense stated under section 189 of the Act because they rely on the information or advice given
by the professional adviser or expert in context of those matters which director’s believe fall
18 Corporation Act 2001- Section 189.
19 ASIC v Hellicar & Ors [2012] HCA17.

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under the core competence of that person, or the reliance was made in good faith, and after
making the independent assessment of the information.
Conclusion:
Therefore, directors can use the statutory defense provided under section 189 of the Corporation
Act 2001.
BIBLIOGRAPHY
Case law
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA
1023.

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Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002).
ASIC v Southcorp Wines 203 ALR 627.
ASIC v Vizard 145 FCR 57: 219 ALR 714.
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
ASIC v Hellicar & Ors [2012] HCA17.
Website
Thomson reuters. Duties and powers, (2014) < https://legal.thomsonreuters.com.au/browse/law-
annuals/pdf/corporations-legislation-2014-key-section-annotation-example-thomson-
reuters.pdf>.
Cerlin Mulhorn, Directors Duties and ASIC v Adler, (2002). <
http://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://
www.tved.net.au/PublicPapers/
June_2002,_Lawyers_Education_Channel,_Directors_Duties_and_ASIC_v_Adler.html>.
ASIC, Directors - What are my duties as a director?,
<http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-
my-duties-as-a-director/#1>.
Cartr Newell, Consideration of Corporations Act - Fiduciary duties, duties of fidelity, and
account for profits, (2000) <
http://www.carternewell.com/page/Publications/Archive/Consideration_of_Corporations_Act_-
_Fiduciary_duties_duties_of_fidelity_and_account_for_profits/>.
Statute
Corporation Act 2001.