Corporate Law: Duties and Consequences for Breach by Directors

This article discusses the duties of directors under the Corporations Act 2001 and the consequences for breaching them. It includes case studies and defences available to directors. The focus is on the breach of duties by Lilian and Gumpta, directors of All Mine Pty Ltd and Greedyas Pty Ltd respectively.

Running head: CORPORATE LAW
Corporate Law
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Issue
Whether Lilian and Gumpta have breached their duties as directors. Whether there are any
possible consequences for their conduct.
Rule
The Corporations Act 2001 provides for the duties that a director of a company must
discharge. The duties are enumerated in section 180, 181, 182 and 183 of the Corporations
Act.
According to section 180(1) of the Corporations Act, a director must exercise its powers
and discharge its duties conferred upon him by virtue of being a director with proper care and
diligence. The care and diligence will imply the amount of care and diligence that a
reasonable person would maintain under similar circumstances. The same can be supported
with the precedent ASIC v. Rich.
According to section 181, the director of a company is under an obligation to exercise his
duties and powers in good faith, which will ensure the best interest of the company. The
actions of the directors must also be for a proper purpose.
According to section 182 of the Corporations Act, a director is prohibited to utilize their
position in the company to serve their personal interest. The actions of a director should not
be detrimental to the company. The same can be illustrated with the case of ASIC v. Hellicar.
According to section 183 of the Corporations Act, a director is restricted to make use of
the information, which became accessible to him by virtue of his position in the company to
serve personal interest resulting in detriment to the company. The same rule has been
discussed in the case of ASIC v. Vizard.

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The directors of a company are under an obligation to abide by the duties conferred upon
him by the Corporations Act. The violation of any of the provisions regarding the duties of
the director will incur a civil penalty for the directors in compliance with section 1317E of
the Corporations Act. The same can be illustrated with the case of ASIC v. Lindberg. In the
event of the violation of the duties being reckless and reflects intentional dishonesty, the
directors will be rendered liable under section 184 of the Corporations Act. Section 184
provides for criminal sanctions. In the case of AISC v Flugge & Anor, an incurrence of
criminal penalty by the director was sentenced with 10years of imprisonment.
The directors involved in such a breach of duty will also attract the section 206B of the
Corporations Act. This section contains provisions relating to automatic disqualification of
the directors in the event of conviction for the breach of duties. Any director who will be
convicted for any offence under the Corporations Act will be rendered disqualified
automatically from carrying out position as a director. He will be disqualified from being a
director. Section 206C provides for the suspension of the director alleged to have breached
his duties as a director.
However, the Corporations Act provides for certain defences that are available to the
directors alleged to have breached his duties as a director under section 180(2) and section
1317S. Section 180(2) of the Corporation Act contains the business judgement rule, which
states that if the director alleged to have breached his duties as a director can prove that he
has acted in good faith for a proper purpose, such actions have not incurred any benefit to
him and he had a reasonable belief of the action to be appropriate, then he may take resort to
this section for defence. Section 1317S of the Corporations Act confers a discretionary power
to the court to excuse the director of his breach of duties if the court is satisfied that the
director has exercised his powers honestly and it would result in injustice if the director is not
excused.

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In the case of ASIC v. Cassimatis, the directors of the company, Mr. and Mrs. Cassimatis
were held liable for the breach of duties conferred upon them for being directors of a
company under section 180(1) and were delivered with a sentence against them.
In R v. Hodgson, the court held the directors liable for the breach of duties conferred upon
them for being a director in a reckless manner and convicted them with a criminal penalty
delivering a five and a half years of imprisonment.
In the case of ASIC v Healey & Ors, the court held the directors liable for violating the
their duties as a director relating to the exercise of reasonable care and skill.
In the case of ASIC v. Adler, the court held the director of the company to be in breach of
their duties as a director under section 183 and have awarded the director with a civil penalty.
In the case of Regal (Hastings) Ltd. v. Gulliver, the court held that the directors should
refrain from appropriating the assets and wealth of the company for serving personal benefit
even if the same results in the best interest of the company.
Application
In the present case, Lilian is the director of the All Mine Pty Ltd, which renders him liable
to abide by the duties conferred upon him under section 180(1), 181, 182 and 183 of the
Corporations Act. In failure to comply with any of the duties mentioned in these sections, the
director will be held liable to penalty under sections 1317E and 180(2).
Lilian has failed exercise its powers and discharge its duties conferred upon him by virtue
of being a director with proper care and diligence. He failed to attend every meeting of the
All Mine Pty Ltd, which he was obligated to attend. The director was unaware of the fact that
the company was approaching insolvency. This was a failure on the part of the director in
exercising his duties relating to care and diligence. Moreover, without being aware of the

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financial condition of the company and without making any effort to have knowledge about
the same, Lilian has entered into a contract with Gumpta for the supply of much needed
computers for $100,000. These will amount to the breach of the duties provided under section
180(1) and 181 of the Corporations Act. The same can be illustrated with the case of ASIC v.
Cassimaits.
Again, Gumpta, being the managing director of the Greedyas Pty Ltd is rendered with the
liability to abide by the duties conferred upon him under section 180(1), 181, 182 and 183 of
the Corporations Act. In failure to comply with any of the duties mentioned in these sections,
the director will be held liable to penalty under sections 1317S and 180(2).
Gumpta has failed exercise its powers and discharge its duties conferred upon him by
virtue of being a director with proper care and diligence. This has made him liable for breach
of section 180(1). He failed to exercise proper care in entering into a contract with the All
Mine Pty Ltd being aware of their chances of being insolvent.
Gumpta has failed to exercise his duties and powers in good faith, which will ensure the
best interest of the company. Gumpta had knowledge of the approaching insolvency of the
All Mine Pty Ltd but still he has chosen to enter into a contract with the same supplying
computers. This shows a breach of section 181.
Gumpta has violated his duty to refrain from utilising his position in the company to serve
personal interest causing detriment to the company. He has entered into a contract with the
All Mine Pty Ltd in which Lilian is the director. Lilian is an old friend of Gumpta and he had
knowledge about the approaching insolvency of the company. After being aware of all the
facts Gumpta has entered into a contract with the same to meet his sales target, which has
landed the company in trouble. Therefore, it can be stated that Gumpta has violated section
182 of the Corporations Act.

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Gumpta is restricted to make use of the information, which became accessible to him by
virtue of his position in the company to serve personal interest resulting in detriment to the
company. Gumpta disclosed the confidential information of a proposed merger to his old
friend Lilian and suggested to buy the shares of the same. The said merger has proved to be
beneficial for both Lilian and Gumpta, which was due the use of confidential information
leaked by Gumpta. This was a breach of section 183 of the Corporations Act. The same can
be illustrated with the case of ASIC v. Adler.
It is evident from the above discussion that Lilian and Gumpta have violated their duties as
directors and have breached section 180(1), 181, 182 and 183 of the Corporations Act. This
will have the effect of application of section 1317E, section 206B and section 206C.
Moreover, if the court is of the opinion that the alleged directors have breached their duties in
a reckless manner, the court may award them with criminal sanctions.
Conclusion
Lilian and Gumpta have breached their duties as directors. They will be held liable for the
same and will incur civil penalty.

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Reference
Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002)
ASIC v Cassimatis (No 9) [2018] FCA 385
ASIC v Flugge & Anor [2016] VSC 779
ASIC v Healey & Ors [2001] FCA 717
ASIC v Hellicar [2012] HCA 17
ASIC v Rich [2009] NSWSC 1229, (2009) 236 FLR 1; (2009) 75 ACSR 1
ASIC v Vizard [2005] FCA 1037; 145 FCR 57; 219 ALR 714; 54 ACSR 394
ASIC v. Lindberg [2012] VSC 332; 91 ACSR 640
R. v. Hodgson, [1998] 2 S.C.R. 449
Regal (Hastings) Ltd v Gulliver [1942] UKHL
The Corporations Act 2001