Directors Duties under Common and Statutory Law: A Case Study of Modern Design Pty Ltd

LAW2001 Corporations Law
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Issue
The pivotal issue is to provide Tim advice with regards to the various issues currently being
faced by Modern Design Pty Ltd including potential duty breach by directors with reference
to both statutory and common law.
Rule
It is noteworthy that directors have a key role in the administration and success of the
company. Owing to the key role that directors play, there are several duties that are bestowed
on them in accordance to both common law and also the statutory law.
Directors Duties Under Common Law
The shareholders are the real owners of a company but in order to run the company, directors
are appointed. As a result, it is evident that an agency relationship arises whereby the
shareholders are the principal while the directors are the agents. On account of the
underlying agency relationship, fiduciary duties arise which the directors as agents have to
fulfil that are essentially directed towards the principal. The duties arising on account of this
relationship are enumerated as follows.
 The directors need to discharge their duties in good faith and must aim to further the
shareholders’ interest and thus aim for shareholder wealth maximisation. This arises
on account of the underlying agency relationship where the agents need to exercise
the authority so as to further the principal’s interest. As a result, directors must act
with honesty and should not take actions which are detrimental to company or
shareholders (Harvey, 2009).
 The directors need to carry out their designated task with utmost care and due
diligence. The implication is that since the directors through their actions or inaction
can potentially harm the shareholders by destroying company’s value, hence they
must take appropriate care so that their conduct and decision making is not negligent
(Gibson and Fraser, 2014).
 The directors also need to stay clear of any situation where conflict of interest is
involved since this may prove to be an impediment for the director to safeguard the
interest of the company and the shareholders. The directors in such situation can be
driven by their own interests that may be supreme to that of company’s and hence
such situations need to be avoided (Pathinayake, 2014).

 Also, it is expected that the directors would use their discretion and hence take
independent and informed decision in relation to management of the company.
Besides, the directors yield a lot of power which is expected to be used for the
appropriate power for which it is bestowed. Improper use of power or authority would
lead to breach of the common duty of directors towards shareholders and company
(Lindgren, 2011).
Statutory Duties
The appropriate statute related to duties of directors is Corporations Act 2001. The duties of
directors that are highlighted are summarised as follows.
 Section 180 – As per s. 180(1), the authority provided to directors by the shareholders
should be exhibited with appropriate care and due diligence. The level of care
required should be defined as the care that a reasonable person as director would take
in the given situation. The violation of s. 180(1) by any director leads to contravention
under s.1317E Corporations Act 2001 which leads to civil penalty in the form of fines
upto $200,000 as per s. 1317G (Harris, 2014).
The directors in their defence for breach of s. 180(1) can deploy the business
judgement rule mentioned as s. 180(2). As per this rule, no liability for the director
would arise if the judgement under question had been made with requisite knowledge,
good faith and driven by the interest of shareholders (Pathinayake, 2014).
 Section 181 – As per s. 181, the exercise of authority provided to directors should be
for the appropriate purpose and in good faith. This duty if breached would lead to
civil penalty in line with s.1317E which has been explained above (Cassidy, 2013).
 Section 182 – As per s. 182, the usage of their position must not for gaining material
advantages for themselves or their associates. The directors should not assume any
judgement which harms the interest of the company. This duty if breached would lead
to civil penalty in line with s.1317E which has been explained above (Ciro and
Symes, 2014).