Breach of Duty by Directors in TGG Company

Facts of the cases:
The Grumpy Grande Pty Ltd (“TGG”) is a company having only five directors who
are brothers in relation; also they are the only shareholders. It is specialized in
bringing premium, fresh coffee to corporate, social, etc. events. According to the
company’s constitution, any of the directors need votes of the other directors in
case of selling their share of the company; also, they can sell it only internally to the
rest of the directors. It also states that, all business decisions must be taken by
majority votes only. However, in last few years, their business started de-escalating.
This situation created tension between the brothers. The four older brothers
suspected that the youngest one, i.e. Tim, will be resigning soon. As a result, they
kept on ignoring his business idea, proposals and started misbehaving with him. In
such a circumstance, Tim heard his oldest brother talking over phone about how
they would not approve his decision of selling his shares and use their power of
majority votes; also, this would provoke him and he would leave the company
without any demands.
Statutory and Equitable remedy:
“Section 180 (1) of the Corporations Act 2001 (Cth) requires that the test for
degree of care and diligence of a director in the discharge of his duties and exercise
of his powers would be the same which a reasonable man would be expected in the
same circumstances, if he would be the director of the company.” This requires the
directors of the company to exercise their power as a director in a diligent manner
and needs to assure that their actions are backed by carefulness. In measuring the
extent to which the degree of care needs to be guaranteed is to be measured with
respect to the conscience and actions of a reasonable man. This can further be
illustrated with the case of Australian Securities and Investments Commission
v Linchpin Capital Group Ltd [2018] FCA 1104.
In the concerned case, the four brothers, who are also the only directors and
shareholders of the company, are found negligent enough due to personal grudges
against the youngest brothers. As a result, they ignore his business ideas and
proposals such as selling the company assets in bargaining prices. But, such ideas
could actually be helpful in the slowing down business of the company. In
discharging their duties as a director, the four elder brothers have been taking
arbitrary decisions which has the probability of causing injury to the business of the
company. So, they are liable of not discharging their duty as reasonable and
prudent directors.
“Section 180 (2) has been provided as safeguard in case of breach of duty of
care and negligence by the director of a company. But only if the following
requirements of the section 180 (2) are fulfilled by a director, and then he can take
the defense of this section to avoid his liability as a director for breach of duty of
care.

 His business judgment was exercised in good faith and for the appropriate
purpose
 He did not have any material interest on a personal front in the subject
matter of his decision.
 He informed other directors of the company about the judgment decision.
 He logically believed that the decision taken by him was in the best interests
of the company.”
This is termed as the business judgment rule and this can be availed by the
directors who have been alleged to have acted in the contravention of their duties
as a director. This requires the director to ensure that his decision that has been
alleged to be detrimental to the company is required to have been taken in a good
faith. In the furtherance of the same, the director should not have any personal
interest inflicted from the same. The same can be illustrated with the case of
Hawes v Dean [2014] NSWCA 380.
None of the above stated defenses apply to the four older brothers. They just
suspected Tim of resigning and hence do not have any good faith or appropriate
purpose in ignoring the business ideas. They planned to provoke Tim and make
him leave the company without taking his deserved share; hence, they are liable
of personal material interest. Also, their decisions, in no scenario, are in the best
interests of the company. This is because the main objective of the elder
brothers in this particular situation was to deprive Tim from his share in the
company. They have been utilizing the majority voting rights for the purpose of
serving their own purpose of acquiring the shares of Tim in the company without
paying him for any of the same. This renders the defense of business judgment
rule to be not applicable to them.
“Sections 182-183: provide that it is the duty of the director of the company that
he should not take misuse or take advantage of his position or any information for
his personal benefits or for causing detriment to the company. It is recognized as a
conflict of interests of the director, arising due to his position of being a fiduciary in
different companies. The common law prohibits the director to take advantage of
his position for his benefit.” In this regard, it can be state that the directors are
required to ensure that the information of confidential nature that is available to the
directors for their position in the company, has not been disclosed or misused for
the purpose of aiding the personal benefit of the director which would in
consequence cause harm to the company. The same can be illustrated with the
case of Barnes v Forty Two International Pty Limited [2014] FCAFC 152. The
director of a company has been both barred under common law as well as the
statutory law to indulge into any activity that has the effect of accruing any
personal benefit to the director at the cost of injury being caused to the company.
This can be illustrated with the case of ASIC v Vines (2005) 55 ACSR 617.
The four brothers are being seen here to misuse their power of majority voting
against Tim. According to the above sections, it is completely wrongful act. This has
the effect of indulging into any activity that has the effect of accruing any personal
benefit to the director at the cost of injury being caused to the company. They have
been using their majority voting rights to deprive Tim from his rights towards the
company. This would have the effect of gaining the shares of Tim without paying
him any proceed for the same. Moreover, the decisions they have been taking in

relation to the selling of assets of the company, which has a value towards the
operation of the company at a bargain price. This can be construed to be a conduct
that would earn the directors the share of Tim in the property without having any
money to be paid towards him. This conduct has been causing detriment to the
company as they have been taking unreasonable decision just for the purpose of
annoying Tim and compel him to give up his position in the company. This can be
construed as a misuse or take advantage of his position or any information for his
personal benefits or for causing detriment to the company. It is recognized as a
conflict of interests of the director, arising due to his position of being a fiduciary in
different companies.
“Section 26 (2) of the Corporate Affairs Commission: may impose a civil
pecuniary penalty of $200,000 and if he makes a breach of provision of civil
penalty, then he may be subjected to criminal proceedings as well under the
Section 184 (2) of the Corporation Act
.
The Australian Securities and Investment Commission (ASIC) can definitely take
action against directors who are the wrongdoers or guilty. It can apply to the court
for the following:
1. A contravention declaration.
2. Order for pecuniary penalty.
3. Order for compensation.”
“Section 206C: provides that the commission may disqualify a director from his
position.”
“Section 588 (G): provides that it is the breach of duty by the director if:
1. At the time, the company incurred debt, he/she was director of that company.
2. The company had been either already insolvent or became insolvent due to
the incurring of debt.
3. There existed reasonable grounds to suspect that the company would
become insolvent
 The director was aware of such grounds; or
 Any reasonable person, in similar circumstances would be aware.
4. He/she became unsuccessful in preventing the company from insolvent
trading.”
The TGG company is running in loss, therefore, has a valid chance of being
insolvent. But the four brothers, because of their own personal grudges and
problems, are doing things that are not still in the company’s favor. Hence, it is very
much clarified that the directors are guilty of breach of duty.
“Common changes to a company constitution include:
 implementing a new company structure;