Directors Duties under Corporation Act 2001 (Cth) - Case Study 2

This paper discusses the breach of directors duties by Shane, the director of Primo Construction Limited (Primo) under the Corporation Act 2001 (Cth) in relation to Case Study 2. The paper identifies the legal issue, discusses the legal framework in the light of case laws and legislations and applies the law to the facts for deriving a conclusion.

Running head: BUSINESS LAW
Business law
Name of the Student
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Author Note

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Introduction
Every director who has been appointed to manage the affairs of a corporation registered
in Australia falls under the governing of the Corporation Act 2001 (Cth) as to how they should
be carrying out their functions for the organization. The legislation provides for both guidelines
for the directors and the consequences in case they have not been followed. When it comes to the
duties of directors there are five general duties which have been imposed by the legislation on
the directors. These duties are primarily contained in section 180-183 and 191. The duties
provided through these sections state that the directors must act in a diligent and careful manner,
the actions has to be for the best interest of the company, the directors should not misuse
information and position of the company and they have to disclose any situation where they may
have a personal interest to the board of directors. There are other duties as well such as reporting
and insolvent trading which are not relevant for the purpose of the selected case study. In relation
to the case study 2 this paper discusses the relevant facts of the situation, identifies the legal
issue, discusses the legal framework in the light of case laws and legislations and applies the law
to the facts for deriving a conclusion.
Facts
The facts of the case study are as follows:
 Shane is the director of Primo Construction Limited (Primo)
 Primo used to do construction work for Landstock
 Landstock was about to call for a tended which Shane had knowledge about
 Shane formed his own company for the purpose of taking advantage of the tender

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 Shane made a low quote on the tender of his company as he was aware about the price
which had been provide by Primo in relation to the tender.
 The formation of the new company was not conveyed to the board of directors of the
company Primo
 As the price provided by Shane’s company Iconstruct has been lower than the price
provided by Landstock the tender has been provided to Iconstruct and if this was not the
case the tender would have been provided to Primo.
Issue
The issue which has been identified in the situation is that whether Shane has been in breach of
any directors duties which have been imposed on him via the rules of the Corporation Act 2001
(Cth). The issue can be resolved by the application of law pertaining to the duties of directors
and remedies provided by the Corporation Act 2001 (Cth).
The relevant law
Section 180- It has been provided through the provisions this section that it is the duty of a
directors to act with
1. Diligence
2. Care
While they discharge their obligations towards the company and make decisions on behalf of the
company
In a way which a reasonable person would do
Where such person has been appointed in the position of the director in question

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When the circumstances of the company are same as they were in relation to the director on
question
In the case of Australian Securities and Investment Commission v Sino Australia Oil and Gas
Limited (in liq) [2016] FCA 934 it had been ruled by the court that the director had violated the
provisions of the section as he had the intention of transferring the funds of the company to
another country which would have defrauded the creditors and shareholders of their investment.
The court in this case held that the directors had the duty of understanding the nature of the
document for the money transfer even if he did not known English as it is his duty to indulge in
informed decision making. The court in this case had barred the director to manage any company
within Australia for a period of 20 years along with financial penalties for his actions.
In the case of ASIC v Cassimatis (No 8) [2016] FCA 1023, it had court had provided that where
the directors have harmed the reputation of the company owned by them they had not complied
with the provisions of section 180 of the legislation.
The defence which can be put to use by any director where they have been alleged to have
violated the provisions of section 180(1) is that which is provided under the provisions of section
180(2) of the Act. The defence is also known as the business judgement rule. The rule states that
the director would be taken to have complied with the provisions of section180(1) if they have
taken a business decision which does not have a nature which would not make any reasonable
director to take the decision, the decision is made in an informed manner and the directors have
no personal interest in the decision. The application of this rule had been done in the case of
ASIC v Rich.

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The next duty which is imposed on the directors is that of section 181 of the Act. In this duty it
has been stated that the directors have to ensure the best interest of the company and their actions
have to be in observation of good faith and directed towards a proper purpose. The best interest
of a company is subjected to the circumstances which the company is in. However there has to
be good faith in the decision making and the purpose of the decision which has been made has to
be proper. Thus it can be stated that when working for the company it is the duty to act for the
interest of the company rather than personal interest. The directors cannot create a conflict of
interest situation and if it arises, such position has to be notified to the board.
The provisions of this section had been discussed in the case of ASIC v Adler. In this case it had
been stated by the court that the section will be taken to have breached even if the director feel
that they are doing their duties actually for the best interest of the company where any other
reasonable director will think that it is a totally unacceptable approach. This may take place
where the directors have a conflict of interest in personal capacity and in the interest of the
company. In this case the defendant director was held to have violated the duty under section 181
as the transaction which had been indulged into by the director was for pursing personal interest
rather than the interest of the organization.
The rules under section 182 also provide guidelines which have to be observed by the directors
in order to comply with their legal position. The section provides that directors and other
officers of a company are restricted from improperly use their position and power to gain
personal benefit or benefit for any other person other than the company. The case of ASIC v
Adler also discussed provisions related to section 182 of the Act. The court provided that the
defendant director has violated the provisions of the section as he arranged a loan to acquire
shares for personal interest. This action led to the cause of significant losses to the company.

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The court provided that there had been improper use of position by the defendant director
causing losses to his present company.
In addition it has been stated via the provisions of section 183 of the CA, that any director,
employee or officer of the company is restricted from improperly using information and data of
the organization to gain personal benefit or benefit for any other person other than the company.
In the case of Amcor Ltd and Ords v Trevor Mark Barnes and Ors [2012] VSC 94 it had been
stated by the court that there had been a breach of section 183 of the Act as the directors had
improperly used information which had been obtained by them as they were the directors of the
company and not have been used otherwise.
In section 191 the CA requires the directors to pass information to the board that they
have any form for person interest in transaction for which they have to make a business decision
on behalf of the company. In case such information is not disclosed to the board the section is
violated.
The breach of directors duties which have been indentified above are subjected to the
civil penalty provisions as provided for in each section of the duties. The civil penalty provisions
are contained in section 1317E of the Act. This section provides that if the ASIC is able to get a
declaration of contravention form the court in relation to the directors’ duties they can imposes
financial penalties on the directors and also get a suspension order which would bar the directors
to manage any company for a specific period under section 206C.
In court had imposed both financial penalty and management ban in the case of
Australian Securities & Investments Commission v Lindberg [2012] VSC 332 where the director

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had been found to have violated the statutory duties of directors. The financial pecuniary penalty
was $100000 and the management ban was for a period of two years.
Under the provisions of section 1317H a claim can be made against the guilty director for
a compensation order. The court may order such director to provide compensation to company
with respect to the damages suffered if the director had violated the civil penalty provision and
the damage which has been caused to the company is because of the contravention of the
provision. The amount of compensation is specified by the order. The compensation also
includes profit made by a person because of the contravention.
Application
Shane is the director of Primo Construction Limited (Primo). Thus he would be treated as a
director under the provisions of section 9 of the CA and the duties of directors would be
applicable on him. As he is a director it is his duty with respect to Primo to act with Diligence
and Care while he discharges his obligations towards the company and make decisions on behalf
of the company in a way which a reasonable person would do where such person has been
appointed in the position of the director in question and when the circumstances of the company
are same as they were in relation to the director on question. A reasonable person would not do
an act of pursuing personal interest and causing loss to the company. Shane has thus evidently
not acted in a diligent and careful manner which has violated the provisions of section 180(1) of
the Act just like in the case of ASIC v Sino. The defence of section 180(2) would also not be
applicable in the situation as the provisions provide that the director would be taken to have
complied with the provisions of section180 (1) if they have taken a business decision which does
not have a nature which would not make any reasonable director to take the decision, the

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decision is made in an informed manner and the directors have no personal interest in the
decision. However no director would act like Shane and the decision of share contained personal
interest as well.
Primo used to do construction work for Landstock. Landstock was about to call for a tended
which Shane had knowledge about. Shane formed his own company for the purpose of taking
advantage of the tender. Shane made a low quote on the tender of his company as he was aware
about the price which had been provide by Primo in relation to the tender. The formation of the
new company was not conveyed to the board of directors of the company Primo. As the price
provided by Shane’s company Iconstruct has been lower than the price provided by Landstock
the tender has been provided to Iconstruct and if this was not the case the tender would have
been provided to Primo. In this situation it is evident that the way in which Shane has acted is not
in the best interest of the company and thus it is a violation of section 181. The directors have to
ensure the best interest of the company and their actions have to be in observation of good faith
and directed towards a proper purpose. There has to be good faith in the decision making and the
purpose of the decision which has been made has to be proper. When working for the company it
is the duty to act for the interest of the company rather than personal interest. The directors
cannot create a conflict of interest situation and if it arises such position has to be notified to the
board. There has been a conflict of interest here as the personal interest of Shane is affecting the
interest of primo and in this situation Shane has not conveyed the same to the board and thus
have acted in bad faith and improper purpose and thus have violated the provisions of section
181.
The provisions of section 182 and 183 also have been violated by Shane. This is because section
182 provides that directors and other officers of a company are restricted from improperly using

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their position and power to gain personal benefit or benefit for any other person other than the
company. In addition section 183 provides that any director, employee or officer of the company
is restricted from improperly using information and data of the organization to gain personal
benefit or benefit for any other person other than the company. However Shane has violated
these provisions as he has used the company information of the tender price and his position to
gain such information and case losses to the company. The provisions of section 191 of the Act
has also been violated by Shane as he have failed to pass information to the board that he has
person interest in transaction for which he has to make a business decision on behalf of the
company. Thus as the duties have been breached the Civil penalty provisions have been invoked
by Shane.
Under the Civil penalty provisions the ASIC can impose financial penalties on the
directors and also get a suspension order which would bar the directors to manage any company
for a specific period under section 206C. Thus Shane would be subjected to financial penalties as
well as he would be barred from managing an organization in the future for a limited period. In
addition the court may pass a compensation order against Shane which would make him
compensate primo for the loss caused to them. This is because the loss has been caused only
because of the contravention of the duties committed by Shane.
Conclusion
Thus from the above discussion it can be concluded that Shane has violated the
provisions of section 180-183 and 191 of the Act. This makes him violate the civil penalty
provisions under section 1317E and would also have to pay compensation to Primo for the losses
under section 1317H.

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References
Amcor Ltd and Ords v Trevor Mark Barnes and Ors [2012] VSC 94
ASIC v Adler and 4 Ors [2002] NSWSC 171
ASIC v Cassimatis (No 8) [2016] FCA 1023
Australian Securities & Investments Commission v Lindberg [2012] VSC 332
Australian Securities and Investments Commission v Rich [2003] NSWSC 186. Her Honour
also cited Australian Securities and Investments Commission v Macdonald (No 11) [2009]
NSWSC 287 (the James Hardie case).
Australian Securities and Investments Commission, in the matter of Sino Australia Oil and Gas
Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934 (Justice Jennifer
Davies).
Corporation Act 2001 (Cth)