Introduction to Business Law | Case Study

Running head: INTRODUCTION TO BUSINESS LAW
Introduction to Business Law
Name of the Student
Name of the University
Authors Note

INTRODUCTION TO BUSINESS LAW1
ILAC
Issue
In this paper, the issue to be discussed is whether Brad, Elena and Jack have any liability
under the Corporations Act, 2001 towards the company or not.
Law
The current issue needs to be scrutinized in the light of the Corporations Act, 2001 (Cth).
Many authors are of the view that directors are the key asset of a company. Directors as well as
shareholders play an active role regarding the daily transactions of a company. Section 9 of the
Corporations Act, 2001 (Cth) describes the word director the meaning of which is:
 An individual appointed lawfully either as director or as an substitute director;
 An individual, although not appointed lawfully as a director, but acts as a director by
holding the same position (this type of director is also acknowledged as a ‘de facto’
director);
 An individual, although not appointed lawfully as a director, but acts as a director by
following the instructions or requirements of the appropriate authority (this type of
director is also acknowledged as a ‘shadow director’);
After defining the term director elaborately, the Act also specifies certain duties of
directors1.
Section 180 of the Corporations Act states that, 2001 (Cth), a director needs to take the
important decisions of the business organization with a duty of care and diligence. This same
type of duty is also observed under the Common law. Recently, several court cases have
highlighted this obligation regarding the endorsement of accounting reports (Centro case) and
board endorsement of report delivered by a business organization (James Hardie case). Several
researches prove that this duty could be violated by entering into risky transactions by the
directors and these type of transactions is not beneficiary for the company or it could also be
violated where the managing director failed to notify the board regarding the matter which
undoubtedly should have been conveyed to the attention of the board.
The rule of business judgment delivers a rule of ‘safe harbour’ for a director regarding
the claimant for a violation of care and diligence under section 180 or Common law. In Daniels
vs. Anderson [1995] 37 NSWLR 438 case the court held that it is the duty of the directors to act
like a prudent person in any situation. In ASIC vs. Healy [2011] FCA 717 case the same
observation was made.
According to section 181 of this Act, a director must act in good faith in the benefits of
the business organization and for an appropriate purpose. This duty also includes the
responsibility to dodge clashes and also to disclose and cope clashes at the time of its occurrence.
Many authors are of the view that it is an obligation of loyalty and faith, which is also
acknowledged as a ‘fiduciary duty’ levied by the Common law and an obligation mandatory in
the Corporations Act, 2001.
This duty is violated when the directors act beyond the constitution of the business
organization. The similar view was observed in Mills vs. Mills [1938] 60 CLR 150 case. If the
1 Act, Corporations. (2001). "Commonwealth of Australia." Australian Government

INTRODUCTION TO BUSINESS LAW2
director utilizes his/her exclusive powers for his/her personal benefit then he/she will be held
responsible for the violation of his/her fiduciary obligations with the organization2.
The obligation of using the authority of a director for an appropriate purpose is also valid
to use the resources and capital of the business. In Advance Bank Australia Ltd v FAI Insurances
Ltd [1987] 12 ACLR 118 case the court stated that it is the responsibility of the directors to
utilize the resources and capital of the business organization for an appropriate purpose and only
for the benefit of the organization. The directors should not use the resources and capital of the
company for any personal purposes. The Patterson v Humfrey [2014] WASC 446 case also
observed the same view.
In Martin v Australian Squash Club Pty Ltd [1996] case it was decided by the court that
violation of the fiduciary obligation would take place in case of misapplication of the company’s
resources and capitals.
Section 182 of the said Act3 elaborates that it is the duty of the directors of the business
organization not to utilize his/her position inadequately for achieving any unjustified gain for
himself/herself or for the benefit of some different persons which may affect the interest of the
business organization. In MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 case the
court has also given the same view.
Similarly, according to section 183 the director must not use any information for an
illegitimate purpose received by him/her by taking the advantage of his/her position in the
business organization as the director of that organization for achieving any unjustified advantage
for himself or for the benefit of some different persons which may affect the interest of the
business organization. This similar view has been observed in the decision given by ASIC v
Vizard [2005] 145 FCR 57 case, where a non-executive director, namely, Vizard utilized the
material information gained from a meeting of board of directors for his personal benefit.
According to Section 588G a director will be held responsible for the purpose of
insolvent trading only at the time when any transaction has been made by the director of taking
loan when the business organization is bankrupt or may turn bankrupt or there exists rational
grounds which indicates that the business may turn bankrupt4.
In Hall vs. Poolman [2007] 215 FLR 243 case the court held that the directors need to be
capable for making decisions, which unavoidably include certain degree of profitable threats, if
the economy is to be progressive.
Section 344 of the said Act5 elaborates that it is the duty of the directors to take equitable
steps to assure that the business organization must comply with the responsibilities in relation to
the maintenance of financial statement.
In Centro (ASIC vs. Healey) & Ors [2011] FCA 717 case, apart from section 180 of the
said Act, section 344 was also taken into consideration by the Court.
2 Appuhami, Ranjith, and Mohammed Bhuyan. "Examining the influence of corporate governance on
intellectual capital efficiency: Evidence from top service firms in Australia." (2015) Managerial Auditing
Journal 30.4/5: 347-372.
3 Corporations Act, 2001 (Cth)
4 Tomasic, Roman, Stephen Bottomley, and Rob McQueen. Corporations law in Australia. (Federation
Press, 2002)
5 Corporations Act, 2001 (Cth)