Duties and Consequences of Breach of Directors' Duties

This article discusses the duties of directors and the consequences of breaching them. It explains the legal purpose for exercising powers and related party transactions. It also provides suggestions to avoid breach of duties by directors. The article further elaborates on the responsibilities of a director and the breach of responsibilities by Mr Edward Harold Pye. Lastly, it talks about the misuse of funds by the director and the punishments that may be imposed on the directors.

Reply to I Gede Dendy Pratama Putra
The duties of directors can be classified as:
Fiduciary duties, Management duties, to avoid conflict of interest, to exercise
independent judgment, Contractual or constitutional duties (Andrew, 2016)
The director is expected to exercise diligence while performing his duties and act in good faith
and for the best interest of the company. He should refrain from accepting benefits from third
parties using his position. Director must not intentionally misuse their position. They are not to
gain an undue advantage (Watts, 2009).
A director is given the power to:
• Manage or direct the business of the company.
• Make decisions on behalf of the company.
The power is given to them for the purpose of:
• Reducing the risk of fraud
• Removing the chance of mismanagement (Mortimore, 2013)
As a director of ERH Transport Services Pty Ltd, Mr Edward Harold Pye was expected to:
• Use his position appropriately.
• Prioritise the interest of the company.
• Act in a way that a reasonable director would have acted in his position.
• Exercise his powers for the actual purpose for which he used those powers.

Actual purpose for exercising powers:
• Section 181 of the Corporations Act 2001, requires a director to discharge their duties
and exercise their powers for a proper purpose.
• Section 182 of the Act obliges a director to use their position properly.
• Illustration: ‘A’ is the director of the company named ‘B’. While making a decision for
the company, he should not entertain his own interest, which he knows to be against the
interest of the company.
• Section 181 of the Corporations Act 2001, requires a director to discharge their duties
and exercise their powers for a proper purpose.
• Section 182 of the Act obliges a director to use their position properly.
• Illustration: ‘A’ is the director of the company named ‘B’. While making a decision for
the company, he should not entertain his own interest, which he knows to be against the
interest of the company.
Whether the act of Pye falls within the range of legal purpose
• Edward Harold Pye failed to exercise his power for the best interest of the company.
• He tried to gain an advantage by using position.
• He used his position improperly, to transfer money.
• The misappropriation of funds were within knowledge to cause a disadvantage to the
company.

• This activities of Edward Harold Pye is outside the legal purpose for exercising powers.
References
ANDREW. KEAY, L. L. B. (2016). DIRECTORS'DUTIES. JORDAN PUBLISHING
Limited.
Corporations Act 2001
Mortimore, S. (2013). Company directors: duties, liabilities, and remedies. Oxford
University Press.
Watts, P. G. (2009). Directors' powers and duties (p. 260). Wellington: LexisNexis.
Reply to Manjula Mihirangi Premarathne Arachchi Appuhamilage
Breach of directors duties:
Failure to perform the duties of directors shall be amount to be a breach of duty.
According to Section 180(2) of the Corporations Act 2001, director making a business
judgement for his self-interest shall commit a breach of his duties. Breach is committed when
director uses his position to gain advantages.
Duties of director for a company:
A director is required to take decisions on behalf of the company. Their decisions must be
justified and free from any conflicts. The duties are given to them manage the operations of the
company. A breach of duty occurs, when there is conflict of interest between their obligation

towards the company and their self-interests and the director has a duty to be performed but fails
to do so.
Suggestions for the company to avoid breach of duties by directors:
In this case, to avoid the breach of duties by Edward Harold Pye, he should have:
• Disclosed the conflicts of interests to the company.
• In Fitzsimmons v R, the Court instructed a minimum disclosure of the interest, if it is
against the interest of the company.
• The fully informed consent of the members of the company is compelled when the
conflict of interests arises.
• Section 191 of the Corporations Act should be mandated for a company to avoid this kind
of breach.
• A director of a company having a personal interest in a subject matter of the company
should give a notice of the interest.
• At the time of appointment, the directors should be informed of consequences of the
breach of their duties.
• A duty to take positive action in addition to make disclosure shall reside, as per the
judgment of The Bell Group Ltd v Westpac Banking Corporation (No 9).
Related party transactions:
Related party transaction refers to provide financial benefit to a related party. Related party
transaction can be provided by a public company or registered managed investment schemes
(Asic.gov.au, 2018). The related parties can be a director, their spouse or their relatives. Related

parties can influence the decision making of the directors. This type of transactions includes
conflict of interests.
Connections between transferring funds by Mr Pye and related party transaction:
• The transactions done by Mr. Edward Harold Pye cannot be recognised as related party
transaction.
• Related party transaction requires transparency and disclosure of interest..
• According to Chapter 2E, Mr Pye was required to obtain approval of members before
providing the finacial benefit.
• Mr Pye did not oblige to the requirements to make related party transactions.
References:
Asic.gov.au. (2018). [online] Available at: https://download.asic.gov.au/media/1239851/rg76-
published-11-may-2011.pdf [Accessed 24 Oct. 2018]
Corporations Act 2001.
Reply to Ludouchka Pandanikum
Duties of directors:
Section 198A of the Corporations Act 2001 enables a company to appoint director for
managing the business. Directors have certain duties while acting on their position. The duties
has been reinforced by Section 181, 182 and 183 of the Act. A directors shall be deemed to have
committed the breach of his duties when he fails to or refuses to perform their duty, then he shall

be liable for breach of duty. In ASIC v Cassimatis, the court found that a director shall be
responsible for not performing his duties. The consequences for breach shall amount to remedies
and penalties.
Consequences for breach of duties by Mr Pye:
The Corporations Act 2001, provides a civil penalty under Part 9.4B where a breach of duty has
resulted into loss for the company. Section 206C disqualifies the person from managing the
corporation. A director shall be liable for criminal offences who was intentionally dishonest in
exercising his powers to gain an advantage (Asic.gov.au. 2018). For the loss incurred by the
breach of duties by Mr Edward Harold Pye, he shall be liable for:
• His personal assets for compensating the loss or damage of the company.
• A penalty of a maximum amount of $200,000 or a imprisonment up to five years or both.
• A civil penalty of up to $200,000.
References:
Asic.gov.au (2018). [online] Asic.gov.au. Available at:
https://asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-
articles/when-are-directors-liable-for-breaches-by-the-company/ [Accessed 24 Oct.
2018].
Asic.gov.au. (2018). Retrieved from https://asic.gov.au/for-business/your-business/tools-and-
resources-for-business-names-and-companies/asic-guide-for-small-business-directors/
directors-liabilities-when-things-go-wrong/#losses [Accessed 24 Oct. 2018].

Reply to Yujie Wang
The responsibilities of a director:
A director must oblige with the responsibilities set out under the Corporations Act 2001,
which are:
• To act for the best interest of the company.
• To use the position for the proper purpose.
• To exercise due diligence and care.
• To avoid any conflicts of personal and the company’s interest.
• To act in good faith (Asic.gov.au, 2018).
Breach of responsibilities by Mr Edward Harold Pye:
Mr Edward Harold Pye Made the two transaction one on his account and another to the account
of someone else. In this respect had breached:
• The duty to act for the best interest of the company, as he did not make disclosure of his
interest.
• Duty to exercise power for the proper purpose, as he tried to gain improper advantage
using his position.
• To avoid conflict between the interest of the company and his personal interest.

References:
Asic.gov.au. (2018). Retrieved from https://asic.gov.au/for-business/your-business/tools-and-
resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-
key-responsibilities/
Reply to Zexuan Xu
When the funds of the company are used by the director for his personal gain, instead of
using it for the advantage of the business, it is the misuse of the funds by the director
(Moneysmart.gov.au. 2018). Mr Pye did not make any disclosure to the members before
transferring the funds. He misused the funds of the company and made money in the accounts of
his own and another people.
ASIC shall investigate an allegation of fraud by the company director
(Mccabecurwood.com.au, 2018). Punishments may be imposed on the directors in the form of
penalties and remedies, which may include:
• Declaration of misuse of funds by Mr Pye
• Pecuniary penalties.
• Imprisonment.
• Disqualifying from managing the company.
• Injunctions from holding the Australian Financial Services License

References
Mccabecurwood.com.au. (2018). Retrieved from https://mccabecurwood.com.au/consequences-
breaching-directors-duties-face-storm-passes/
Moneysmart.gov.au. (2018). Retrieved from
https://www.moneysmart.gov.au/investing/investment-warnings/company-director-fraud