Legal Advice on Breach of Duty by Directors under Common Law and Corporations Act 2001 (Cth)

LAW2001 Corporations Law
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Issue
The central issue is to offer Tim legal advice in the capacity of legal advisor for Modern
Design Pty Ltd in relation to the issues that the company is facing regarding potential breach
of duty by directors with reference to both common law and Corporations Act 2001 (Cth).
Rule
The directors occupy a significant position in the company and play a vital role in the success
of the company. Considering the importance of their role, there are certain set of duties which
are expected from them. These duties may be common law duties or dictated by statute
particularly the Corporations Act 2001.
Common Law Duties
It is noteworthy that the companies are owned by shareholder who are real owners and these
tend to appoint directors to manage the affairs of company. Hence, it can be concluded that
there is an agency relationship with the directors acting as agents to the shareholders who act
as principal. Owing to this relationship, there are fiduciary duties on the agents to safeguard
the interest of the principal. For the directors, these are summarised below.
 There is a duty on the part of directors to act in good faith and thereby safeguard the
interest of the company and shareholders. This duty is implied on the basis of the
agency relationship where agents need to use the authority provided in a manner that
furthers the interest of the principal i.e. company and shareholders in this case. Thus,
various decisions made by the directors should be aimed towards progress of
company and shareholders’ interest (Harvey, 2009).
 The directors must act with care and diligence. This implies that the directors must
discharge their duty with utmost care and diligence and thereby should not engage in
negligent conduct. Considering the damage that can be incurred by the shareholders
owing to the negligent conduct of the shareholders, it is imperative that various
decisions are taken with reasonable care after conducting requisite due diligence so
that the duty to care owed to shareholders is not breached (Gibson and Fraser, 2014).
 The directors must avoid any conflict of interest since they are required to act in the
interest of the shareholders and this may be adversely impacted by the presence of
conflicting interest. Hence, to discharge fiduciary duty, it is essential for the directors
to avoid such situations (Pathinayake, 2014).

 Owing to the position occupied by the directors, they are exposed to a plethora of
confidential information. It is imperative that the directors should not disclose this
information as the interests of the company and hence the shareholders may be
adversely impacted (Lindgren, 2011).
 Additionally, directors are expected not to abuse the corporate opportunities provided
for serving their own interests and instead focus on the interest of the company and
the owners (Harris, 2013).
Statutory Duties
There are statutes which tend to list down the duties of directors and the potential liabilities
for breach of these duties. The relevant statutory duties are highlighted below.
 Section 180 - In accordance with s. 180(1), the directors are expected to discharge
their duties with adequate care and due diligence which any reasonable person in their
position would be expected to undertake given the underlying circumstances. The
breach of this duty would lead to civil liability for the director as highlighted in
s.1317E (Harris, 2014).
The directors can use the business judgement rule as cited in s. 180(2) as their defence
against the potential breach of the above duty since no liability would arise if the
underlying judgement was made in good faith, with appropriate knowledge and was
aimed at safeguarding the shareholders’ interest (Pathinayake, 2014).
 Section 181 – In accordance with this section, the directors must exercise the
underlying authority in good faith and for the proper purpose only. The breach of this
duty would lead to civil liability for the directors as highlighted in s.1317E (Cassidy,
2013).
 Section 182 – In accordance with this section, the directors should not exhibit
improper use of position for gaining any advantage for self or anyone else. Further,
the directors must not take any action towards the detriment of the company. The
breach of this duty would lead to civil liability for the directors as highlighted in
s.1317E (Ciro & Symes, 2014).