Fiduciary Duties and Breach of Duty of Care and Insolvent Trading by Directors

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Contents
PROBLEM QUESTION PART A..................................................................................................2
Issues............................................................................................................................................2
Relevant Law...............................................................................................................................2
Application of law........................................................................................................................3
Conclusion...................................................................................................................................5
PROBLEM QUESTION PART B...................................................................................................5
Issues............................................................................................................................................5
Relevant Law...............................................................................................................................5
Application of law........................................................................................................................6
Conclusion...................................................................................................................................7
Bibliography....................................................................................................................................9

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PROBLEM QUESTION PART A
Issues
1. Advise Daniel and Sarah if they have breached any fiduciary obligations owed to
Blue in relation to:
a. Their involvement with Crystal
b. The loan to Winning Wines
2. Advice Melanie if she has breached any fiduciary obligations owed to Blue or
JVI?
Relevant Law
A company is a business form which is created only when the business is incorporated. Once the
registration is done, then, the company is an artificial/mock person in law which is capable to
acts like a normal person. In (Salomon v A Salomon & Co Ltd, 1896)it was held that a company
with the help of its officers can undertake actions like a normal human being. (Anderson, 2008)
Since a company has no mind of its own, it requires officers to act for the company. The
company director is the most prominent person who takes actions on behalf of the company.
Section 9 establishes that any person who acts like a director is considered to be the director of a
company. In (Chameleon Mining NL v Murchison Metals Ltd , 2010) it was held that a shadow
and a de facto director are also considered as company directors. Every company director is the
authoritative representor of the company and has various powers to take actions on behalf of the
company as per section 198A of the Act. (AICD, 2012)
But, along with the powers, there are several duties that are associated with the director as held
in (Boardman v Phipps, 1966). One of the duties that are imposed upon the directors is fiduciary
duties or the duty of good faith. The duty of good faith is imbibed both under common law and
statutory law and thus it is important to understand the duty under both the legal frameworks.
(Gibson & Fraser, 2013)
Under common law
A fiduciary relationship is established amid a fiduciary and a beneficiary wherein the beneficiary
appoints a fiduciary to act on his behalf in certain situations there by formulating the association

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of confidence and utmost care. When any fiduciary is imposed with the fiduciary duties, then, the
duties involve: (Cockburn & Wiseman, 1996)
i. Every fiduciary must make sure that there should not be any situation when there is
conflict amid his own interest and the interest of the beneficiary. If there exists any of
such situations, then, it is the duty of the fiduciary to make sure that to avoid any such
kinds of conflicting situation;
ii. Every director (fiduciary) must make sure that he should not make any secret profits
and if any of such profits are made then the director must bring the same in the
account and knowledge of the company and is held in (Regal Ltd v Gulliver , 1942).
Under statutory law
The common law fiduciary duty is imbibed under the Corporation Act 2001 as a duty of good
faith under section 181 of the Act. As per section 181 (1) of the Act, it is submitted that every
director of the company must act in good faith and in the best interest of the company and for
proper purpose. Objective test is applied in order to evaluate as to whether the duty is comply
with or not. Objective test implies that it is the court which has to determine as whether the duty
is comply with pr not and not what is the personal notion of the company director and is held in
(Whitehouse v Carlton Hotel Pty Ltd, 1987). Some of the instances wherein section 181 is held
to be violated are: (Cassidy, 2006)
When the director prefers his own interest above the interest of the company and is held in
(Walker v Wimborne, 1976). As per ( Farrow Finance Company Ltd (in liq) v Farrow Properties
Pty Ltd , 1997)& (Kinsela v Russell Kinsela Pty Ltd (in liq) , 1986)the best interest of the
company is analyzed upon the situation that exists. So, if the interest of the company is comply
with even when the director has no intention of the same, still there is compliance of section 181
of the Act.
The non compliance of section 181 brings penalties in the form of: (vision, 2018)
i. If the breach is dishonest and reckless then criminal charges be imposed as per
section 184;
ii. Civil penalty of $200,000.under section 1317E (1) can be imposed;

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iii. Disqualification of director
iv. Account for profits;
v. Equitable compensation;
vi. Contract can be rescinded
vii. Injunction orders;
Application of law
Blue Pty Ltd (Blue) is a proprietary company. The company has three directors, that is, Melanie,
Daniel and Sarah each hold 25% of the total shares and Max (Daniels brother) holds the rest 25%
of the shares). They all are indulged in the company management.
It is now important to resolve the issues.
Issue 1
Daniel is the CFO of the company
Sarah is the marketing manager of the company.
Advice to Sarah and Daniel related to fiduciary duty owned to Blue with
a. Their involvement with Crystal
In 2009, a JVI is created by Blue and AMGL, both holding 50% shares each.
Sarah and Daniel have created a new company, Crystal Clear Pty Limited (“Crystal”), along with
Mitchell (boyfriend of Sarah) without the knowledge of Melaine (one of the directors of Blue).
Mitchell previously invited Blue to invest in his project of blockchains. But, the investment
proposal is declined by Melaine on the advice of Daniel that the project is not sound for Blue.
Later the project is initiated by Mitchell. Sarah and Daniel wherein they created crystals as a
public company and have listed it on ASX.
Now, Daniela and Sarah are aware that the Crystal’s new block chain technology will be a
significant competitor to the product that is being developed by JVI.
At this stage it is submitted that Daniel and Sarah are aware that are getting themselves involve
in such activity that results in creating competition against Blue. They deliberately attempt to
exclude Blue from entering into such project by denying the offer of Mitchell at the first place.
Thus, there acts are such that they preferred their own interest when there is conflict amid the
interest of Blue and their personal interest.