Liability of Directors under Corporations Act 2001

This article discusses the liability of directors under Corporations Act 2001 for breach of their duties. It explains the duty to act with care and diligence, duty to act in good faith, duty to avoid improper use of position and information, and the application of business judgment rule. It also discusses the consequences of not carrying out activities within objectives and the statutory presumptions under section 128 and 129 of the Act. The article provides relevant case laws and references for further reading.

Question one
Issue: The issues presented in question include the fact is, the directors of First Class Racing Ltd.
have fulfilled their duties towards the company. These duties are imposed on the directors by
common law and also by the Corporations Act, 2001.
Rule: According to the corporations’ law, a breach of duty by the director is not only detrimental
for the company itself, but the directors may also be held in civil or criminally liable under the
law. Therefore, section 180 provides the duty of the directors to act with care and diligence, s181
requires the directors to act in good faith, s182 requires that the directors should avoid improper
use of their position and according to s183, the director should avoid improper use of
information received by them as a result of their position in the company (Heydon, 2006).
According to the duty to act with care and diligence, the directors of the corporation should use
their powers and perform their duties by exercising proper care and diligence that can be
expected from any other reasonable person if such person: (i) were a director of the company and
(ii) held the same office and had similar obligations in the company as the director in question.
However, s180(2) contains the business judgment rule. Therefore, it provides protection to the
directors to make the business judgment that is applicable if the directors have fulfilled their duty
of care and diligence, and it can be established that the judgment was made by the directors in
good faith and for proper purpose (Getzler, 2002).
Application: In this case, the directors of the company, Bill, Simon and Robin had passed a
resolution at the board meeting, according to which the company was going to buy a race horse
for $5 million and the company was going to award the development of software contract to
another company ITZW Pty Ltd.. The other directors of the company found that the resource

belonged to the father-in-law of Bill was forced to sell the horse as a result of impending divorce.
This fact was not disclosed to the directors. Similarly, the cause was not valued or checked by a
vet. ITWZ Pty Ltd belonged to the brother of Simon, who was in need of work. The other two
directors, Bill and Robin had approved the contract without asking any questions.
At the same time, Bill got a chance to invest in another online betting company if he could raise
further funds for the company. As a result, Bill organized further $500,000 for the the company.
In return, he got 50,000 shares of the company worth AUD $5.36 each. Bill also failed to inform
the other directors of the company regarding this conflicts of interest and the personal gain made
by him.
Conclusion: in the present case, the directors of First Class Racing Ltd. are liable for the breach
of their duties imposed by the Corporations Act. Company can recover the loss suffered by it
from Bill, Simon and Robin.

Question two
Issue: The issue in this case is related with the liability of the company regarding the contracts
created by Janet. Another issue is related with the consequences for the company while it is not
carried on the activities within its objectives.
Rule: Section 128 provides that assumptions mentioned in s129 can be made by outsiders.
According to s129, it can be assumed by any person dealing with the company that the
Constitution and the replaceable rules of the company have been complied with, while dealing
with outsiders.
According to s127 of the Act, certain ways have been prescribed for the company to validly
execute a document. Therefore, a document may be executed by the company wanting to section
127, with or without the seal of the company.
The most common execution of document in accordance with section 127 is the integration of
document without the fixing the common scene of the company. It can be done validly in case
the document has been signed by (i) two directors of the corporation; (ii) , a director and
company secretary; or (iii) in case of a proprietary company having the sole director, by such
sole director (Burnett, 2001). At the same time, section 126 allows an individual to executive
contract on behalf of the corporation if such person is acting under the express or implied
authority provided by the corporation (Baxt, 1999). Any person acting according to the express
or implied authority of the corporation can enter into a contract on behalf of the corporation in
the same way as if the content was created by a natural person.

Application: Issues may arise in case the third-party wants to hold the company liable under a
contract that was made on behalf of the company by a director or officer of the company
regarding the
(i) Extent of the actual or implied authority enjoyed by such officer of the corporation;
(ii) Application of the principles of ostensible authority; and
(iii) The indoor management rule.
There are certain circumstances where the third-party may be able to rely on statutory
presumptions mentioned in section 128 and 129 of the Act.
Conclusion:
(a) In the present case, the company is liable to pay to the external suppliers as the contract
created by Janet can be enforced is the company.
(b) If the company is not carrying on activities within its objectives, the statutory assumptions
mentioned in Ss 128 and 129 cannot be made by the other party.

References
Baxt, 1999, Afterman & Baxt's Cases and Materials on Corporations and Associations, 8th ed
Australia: Butterworths
Burnett B, 2001, Australian Corporations Law, Australia: CCH
Getzler J, 2002, “Duty of Care” in Birks P and Pretto A (eds), Breach of Trust (Hart Publishing,
Oxford
Heydon J.D., 2006, “Are the Duties of Company Directors to Exercise Care and Skill
Fiduciary?” in Degeling S and Edelman J (eds), Equity in Commercial Law, Thomson, Sydney