Corporations Law: Breach of Director’s Duty and Court Decision Analysis

This article discusses the breach of director’s duty in the context of Corporations Law and analyzes a court decision. It explores the relevant sections of the Corporations Act and the implications for directors and auditors. The case involves a company's loss due to negligence and the allocation of liability between the directors and auditors.

Running head: CORPORATIONS LAW
CORPORATIONS LAW
Name of Student
Name of University
Author Note

2CORPORATIONS LAW
Table of Contents
Case Introduction.............................................................................................................................3
Breach of Director’s Duty...............................................................................................................4
Analysis of the Court Decision........................................................................................................5
Relevance and Impact of the Decision............................................................................................7

3CORPORATIONS LAW
Case Introduction
In this case the plaintiff is an Australian company, named AWA dealing with
manufacture, import and export of electronic and electrical products. The company imported
supplies from Japan and other countries in large quantities. There was difficulty in conduct of
business for the company due to deregulations of the Australian financial markets and severe
fluctuation in the international currency markets. In placing contracts and delivery of the
products there had been a time lag of 6 months or more which in addition with currency
fluctuation could potentially affect the profitability of a contract. The company to avoid the
potential risk had only option to purchase foreign currencies in contracts for import of goods.
The company’s entire overseas purchase with one of its major suppliers, Department of Supply,
was covered against fluctuations in foreign countries under a number of contracts against the
purchase of overseas components. In the year 1985-86 the company stopped purchasing foreign
currency contracts and started to invest in managed hedging. The activity was successful to the
point that in the financial year 1986-87 25% of the company’s total profit was anticipated from
managed hedging. In 1985 a Foreign Exchange Manager had been appointed by the company
who showed a profit of over 400% in just eight months. It was later discovered that only
contracts showing profits were disclosed by the manager and the contracts with losses were
either kept undisclosed or the losses were concealed by either rolling over the contracts at
historic rates or by paying those losses by means of unauthorized borrowing of funds from a
number of banks. During this period two audits were carried out by Daniels both of which were
not able to show any deficiency in the company’s accounting structure. The audits were not
statutory audits that entail certain consequences and obligations as in neither case audit

4CORPORATIONS LAW
engagement was entered into.1 As a result of the failure of auditors AWA lost almost $49.8
million.
Breach of Director’s Duty
In the cases AWA Ltd v Daniels2 and Daniels v Anderson3 the director’s breach of duty
were discussed with provisions relating to sections 180, 181, 184 and 588G of the Corporations
Act 2001 (Cth).
Section 180 of the Corporation’s Act states care and diligence of the directors towards the
company. The section states that a director is obliged to exercise their powers and discharge their
duties with care and diligence.
Under the section 181 of the act the directors are bound to exercise their powers and
discharge their duties towards the company in good faith and in the best interest of the company.
Section 184 of the act states that a director failing to abide by section 181 due to
recklessness or intentional dishonesty would be liable to face criminal charges.
Insolvent trading can be defined as the company’s inability to pay its debts when due
payable. The director is held liable to make sure that the company is solvent before incurring
further debts. The director is held to be in breach of statutory duty under the act and is liable to
compensate for the unpaid debts if the company goes into liquidation4. Section 588G of the act
provides for the director’s duties to prevent insolvent trading by the company. The section is
1 CCH iKnow, "CCH Iknow | Australian Tax & Accounting", Iknow.Cch.Com.Au (Webpage, 2019)
https://iknow.cch.com.au/document/atagUio383725sl10504468/awa-ltd-v-daniels-t-a-deloitte-haskins-sells-ors
2 AWA v Daniels (t/a Deloitte Haskins & Sells) & Ors (1992) 7 ACSR 759
3 Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438
4 Rapsey Griffiths, "Insolvent Trading - Rapsey Griffiths", Rapsey Griffiths (Webpage, 2019)
https://rapseygriffiths.com.au/corporate-insolvency/insolvent-trading/

5CORPORATIONS LAW
applicable if at the time when the company incurs a debt a person is a director in the company,
the company is either insolvent or is likely to be insolvent by incurring the debt and at the time
there are reasonable grounds for a company to be insolvent.
In the current case it was held in relation to the Corporations Act that the directors of the
company were responsible for monitoring the managements of the company. The directors are
further liable to have general understanding of the company’s business and the effects change in
economy might have in it. The directors depending on the circumstances are required to rely on
expert opinions in situations requiring special knowledge. In the appeal case Daniels v Anderson
the court of appeal stated that a director’s duty is not subjective or limited by director’s
knowledge or experience towards a situation. It was further held that to determine the scope of a
director’s duty the special qualifications of the director are relevant5.
Analysis of the Court Decision
The judgment in this case shares the liability between the directors of the company and
the auditors. In the interim judgment it was found that the auditors were guilty of negligence in
duty under the general law and further failed to fulfill the obligations mentioned in the section
285 of the Companies Code 1981. It was observed in the case that a statutory duty created by the
section does not give rise to any cause of action because it is only a regulatory provision. This
issue was discussed in the case O’Connor v S P Bray Limited6. In the case it was stated the cause
of action of a breach of statutory provision depends solely on the legislative intent to protect a
person and not on the statute that imposes a duty on the defendant.
5 FC Lawyers, "What Are The Duties Of A Director Of A Company In Australia?", FC Lawyers (Webpage, 2019)
https://fclawyers.com.au/corporate-structuring/duties-of-a-director-company-australia/
6 O’Connor v SP Bray Limited (1936-1937) 56 CLR 464, 478

6CORPORATIONS LAW
The court in this case further discussed in detail sections 267, 285(4), 237, 542 and 535
of the code. Section 267 of the code imposes on the company to maintain proper accounting
records. Under the section 285 an auditor is obliged to state the presence of proper accounting
records by the company in his report. Section 267 requires a company to accurately ascertain its
financial positions. It is prohibited for an auditor from contracting out of breach of liability under
the section 237. Section 542 procedures for liabilities for breach of duty. The power to grant
relief for any breach of duty by an auditor is provided in the section 535 of the act.
It was argued by AWA that contributory negligence created absolute defense to claims
arising from statutory duty breach before the Statutory Duties (Contributory Negligence) Act
1945. It was held in the case Bourke v Butterfield and Lewis Limited7 that for a personal injury
arising from the breach of a statutory duty contributory negligence was not a defense to action
for damages. A view opposite to it was held in the case Caswell v Powell Duffryn Associated
Collieries Ltd8. In this case it was concluded that if negligence is proved then the action for
breach of statutory duty could not succeed.
The Daniels argued that contributory negligence for actions arising from breach of
statutory duty remained in accordance to law as laid down in the case Piro v W Foster &
Company Limited9. In the case Pacific Acceptance Corporation Ltd v Forsyth & Ors10 it was held
that in claims for breach of statutory duty by auditors contributory negligence was not available.
It was further argued by Daniels that the company’s loss was its own fault and a cross-claim was
requested for the recovery of indemnity against the directors John Hooke, Sir Peter Finley, David
Anderson and Alexander Campbell.
7 Bourke v Butterfield and Lewis Limited (1926) 38 CLR 354
8 Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152
9 Piro v W Foster & Company Limited (1943) 68 CLR 313
10 Pacific Acceptance Corporation Ltd v Forsyth & Ors (1970) 92 WN (NSW) 29, 125

7CORPORATIONS LAW
The court held Daniels responsible for the company’s loss. Daniels requested for an
appeal where one of the directors of AWA, John Hooke, was held responsible for negligence. It
was further held by the court of appeal that a director’s duty of care is not subjective or limited
by knowledge and experience of the director. In addition to determine the scope of duty of care it
was held that special qualifications of the director might be considered relevant. The court of
appeal further made judgment in accordance with the section 181 and 184 of the Corporations
Act 2001 (Cth).
Relevance and Impact of the Decision
The decision of the court in regard to this case has been important to directors, auditors
and all other professionals who provide accounting services to clients. In this case a defense for
contributory negligence was successful and the liability of damages was shared between the
company and the external auditor whereas in previous cases for the negligence of the external
auditors a full damage was awarded to the plaintiff11. Director’s duties in relation to care,
diligence and skill were discussed in detail. The duty of care arising under the general law
referred to in section 180 of the corporate act was interpreted in the case. The court held that the
directors must maintain a minimum standard of care skill and diligence. These minimum skills
require a director to- acquire a basic understanding of the fundamental concepts of the business
of the company, be under an obligation to be informed about the company’s activities, conduct
general monitoring of company’s business, although not required by law to make audit of the
books of the company yet the directors are required to be familiar with the financial statements.
11 Deegan, Sue, Denis Pratt, and Barry Hicks. "Implications of the AWA decision for external auditors, internal
auditors and management." Australian Accounting Review 4.7 (1994): 47-59.