Director's Duties in DEF Ltd Assignment

Director's Duties

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Have Rocky, Drago and Clubber breached any directors' duties?..........................................3
2. Do they have an arguable defence?.........................................................................................4
3. Advise whether the same standard will be applied to Drago, as the company's chief
financial officer?.........................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
A company is an artificial person who appoints individuals called directors. They carry
activities on behalf of the body corporate. Corporation Act, 2001 has been enacted in Australia to
govern every matter of companies and its directors (Marshall, S., & Ramsay, I., 2012). A director
has duties, rights and responsibilities provided by this act. They are legally bound to exercise
duties for acting in everyday work as well as important matters. The report is based on a case of
three directors who have raised fund for their primary business activities. Along with this, there
are some questions pertaining to that case study which explains breach in directors duties,
arguable defence and application of similar standard of a director who is also a Chief Financial
Officer (CFO).
MAIN BODY
In the given case, DEF Ltd. Was formed by three directors named Rocky, Drago and
Clubber in the year 2011. It is also listed on Australian Stock Exchange. It raised a fund of
$20million from investors for conducting drilling activities on a number of sites. After sample of
the sites was given for a geological test, it was found that the level of gold deposits is too low
which rendered it uncommercial to proceed. An amount of $5million was already spent on this.
There came a dilemma in front of three director about whether to continue with drilling activities
or not to which Clubber and Drago argued to stop all such activities and return rest of the money
to shareholders (Hill, J. G., & Conaglen, M., 2017). On the other hand, Rocky was adamant to
halt the activities and had an optimistic view it. Clubber and Drago agreed with Rocky's decision
and resumed the work which was completed in the year 2018. All the capital raised for drilling
activities has been exhausted. On considering the above case scenario the following questions
raised are as follows:
1. Have Rocky, Drago and Clubber breached any directors' duties?
Companies appoint directors to manage its activities. They have a fiduciary relationship
with the corporation which states that every director should act for the benefit of the entity.
There should be transparency, honesty and accountability in every decisions made by them.
Corporation Act, 2001 has been implemented for regulating Australian body corporates. It
comprises different sections describing provisions for areas and activities. It also provides duties
that are required that are mandatory for every director to discharge. On examining the above

case, it has been conclude that Rocky, Drago and Clubber have breached the various duties
which are as follows:
 Duty to act in good faith and in best interests of the company (s181): Under this duty,
a director should act for the benefit whole organization. His personal interests should be
neglected or avoided. Drago and Clubber were in the opinion of putting all the drilling
activities to an end, but failed act carefully and got agreed with Rocky. Both of them
should have stood strong on their suggestion when they realised that continuation these
activities will give no profit (Duties of a director under Corporation Act, 2001, 2019).
 Duty to act with care and diligence (s180): A director should exercise reasonable care
and diligence in for using his powers and discharging duties. All the decisions should be
made independently and in the best interests of the corporate. All the three directors have
failed to discharge this duty because, when they found from the test results that there is
no adequate amount of gold for which funds was raised and used. Then, they should have
made the decision to stop any further drilling activities and return the money back to
shareholders.
Case of Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8)
[2016] can be considered for understanding the importance of directors' duties (ASIC v
Cassimatis, 2016).
Hence, the above two duties have been breached by all three directors which will attract
penalties which may extend to $200,000 as given in Corporation Act, 2001.
2. Do they have an arguable defence?
Arguable defence refers to apply a remedy which can save an individual from legal
proceedings and penalties. Every person who has been held in a legal case and whose trial has
begun gets chance to produce evidence along with statements for proving their point right. This
is done with a view to have a decision in the favour. In the above case of DEF Ltd., the statement
that can be given by Drago and Clubber is that they provided their advice to not to carry drilling
activities. This suggestion was made on looking the test results. According to them, it was a
warning that gold deposit is not available in the same quantity which was targetted by the
company. On the contrary Rocky can put his argument that, he was optimistic about mining
activities to find gold (Belcher, A., 2014).

Both of the above arguments can not be considered valid as in either case, all three
directors have breached their duties. They were supposed to act with diligently and carefully
about whether to invest more fund in these activities or not. When outcomes of test provided that
continuation of drilling activities will be failed to give desired results and company will suffer
from loss, then all such activities should have been stopped then and there only. Furthermore, all
three of them have the liabilities to fulfil the obligations that will be arise in future about
repayment the amount so raised.
3. Advise whether the same standard will be applied to Drago, as the company's chief financial
officer?
Chief Financial Officer (CFO) is at higher position in a company responsible with
managing financial activities. Some of the duties of CFO are trace the cash flow, planning for
financial aspects and examining financial position of the company. In the case of DEF Ltd.,
Drago is one of the three directors as well as CFO of DEF Ltd. Being CFO, he has
responsibilities to manage the funds and utilise it optimally. In addition to this, the procurement
of finance is one of his duties as CFO. In nutshell, all the activities related to finance must be
carried by him. He is holding two positions at the same time which makes it mandatory to act
within rights and powers which have been given to him (Redmond, P., 2012).
Drago along with Clubber, in the case mentioned above, has advised Rocky to stop
drilling activities as it will not create any fruitful outcomes instead drain rest $15million fund
which could be used in something more productive. However, Rocky convinced both of the to
continue. The analysis of this situation explains that Drago can not have arguable defence. There
are reasons such as a CFO has the authority to allot finance after considering feasibility of
proposal. In this case, Drago has cleary shown negligence on his part where he passed the funds
to carry the activities even when there were warnings. Being a director he should have disclosed
this to the investors as they have invested their funds. The other reason being, he was very well
aware about financial position of the company which was negative.
In this case, Drago has breached his director's duties and as a CFO he gave approval to
utilise funds even when he has clear information about the possible results. The liability is
double in Drago's case. The penalty that will be charged is of director's as well as an employee.

CONCLUSION
From the above report, it has been concluded that directors are the agents of the company
who have a fiduciary relationship whereby every action should be carried in utmost good faith.
Furthermore, decisions should be made in the interests of the company which will help it
increasing profitability. Corporation Act, 2001 has provided duties which should be discharged
properly. Any breach in any of the duties will amount to breach and for which defaulting director
will be penalised. Along with this, the contribution of funds in a company should be utilised in
an appropriate way so that it continue to have positive results to make its financial position
strong.

REFERENCES
Books & Journals:
Marshall, S., & Ramsay, I. (2012). Stakeholders and directors' duties: Law, theory and
evidence. UNSWLJ. 35. 291.
Hill, J. G., & Conaglen, M. (2017). Directors’ Duties and Legal Safe Harbours: A Comparative
Analysis. Research Handbook on Fiduciary Law, DG Smith, AS Gold, eds, Edward
Elgar, UK.
Redmond, P. (2012). Directors' duties and corporate social responsiveness. UNSWLJ. 35. 317.
Belcher, A. (2014). Directors' Decisions and the Law: Promoting Success. Routledge.
Online:
Duties of a director under Corporation Act, 2001. 2019. [Online]. Available through:
<https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/
handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx>.
ASIC v Cassimatis. 2016.[Online]. Available through:
<https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-
breaching-duties-following-corporation>.