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

Running Head: Law 1
Corporate Law

Law 2
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>.