Analysis of Director Duties under Corporations Act 2001: A Case Study

This report analyses the principles of the Corporations Act 2001 to assess whether Lillian and Gumpta have breached their duties as directors. The report links the judgements of the court given in different cases with the facts of this case study. The possible consequences which both the parties might face include civil and criminal penalties.

0
Corporate Law

1
EXECUTIVE SUMMARY
In this report, the principles of the Corporations Act 2001 are analysed to assess
whether Lillian and Gumpta have breached their duties. The judgements of the court
given in different cases are assessed in this report to link them with the facts of this case
study. It is found that both parties have violated their duties as directors. The possible
consequences which both the parties might face include civil and criminal penalties.

2
TABLE OF CONTENTS
I: Issue................................................................................................................................................................... 3
R: Rule................................................................................................................................................................... 3
A: Application.................................................................................................................................................... 6
C: Conclusion...................................................................................................................................................... 7
Reference List.................................................................................................................................................... 8

3
I: ISSUE
Did Lillian and Gumpta violate any director duties in this case; if yes, then what are the
legal consequences?
R: RULE
Directors play a crucial role in a company since they are responsible for managing its
operations. The operations of a corporation are conducted by two parties which include
its shareholders and directors. The shareholders are considered as owners of the
company, and its operations are managed by directors. However, these bodies are not
responsible for the debts of the company because it is a separate legal entity (Kershaw
2013). The corporation has a separate existence from its owners, and their liability is
limited. This principle was established in leading cases such as Salomon v Salomon & Co
Ltd [1897] AC 22 and Lee v Lee’s Air Farming Ltd [1960] UKPC 33. However, this did not
eliminate directors’ liability if they engage in any practices which are against the
interest of the company or its shareholders. Since the directors are responsible for
taking all the decisions for the company, they owe a fiduciary duty towards the
company. This duty is recognised under the common law and statutes. The
Corporations Act 2001 (Cth) is a good example; this act governs the operations of
companies operating in the country. Various director duties are recognised in this act
which is applied to the directors while they take business decisions in the company. It is
important that the directors have taken care and diligence which is a key duty given
under section 180 of the Corporations Subsection (1) provided that directors have to
ensure that a standard of care and diligence is maintained by them while they discharge
their duties.
Subsection (2) provides that they should exercise this judgement while taking business
judgement. Based on this duty, the judgement was delivered by the court in ASIC v Vines
[2005] NSWSC 738 in which the CFO of the company was charged by violating this duty.
The CFO was negligent while he made announcement to the public regarding the
financial position of the company (Barbar 2014, p. 27). Subsection (2) provides that
directors must:

4
(a) Act in good faith,
(b) Without focusing on personal benefits
(c) Learning about the subject matter of the decision, and
(d) It must be their rational belief that the outcome of this decision will benefit the
company.
Another key duty is imposed on directors which they discharge their duties under
section 181. This duty provides that the directors have to ensure that they consider the
outcomes of their actions to act in good faith without adversely affecting the interest of
the company. According to subsection (1) (a), they should not take any action by
considering their personal interest. Subsection (1) (b) provides that they should avoid
using their position to take an action which could be detrimental for the company. ASIC
v Adler [2002] NSWSC 171 is a good example; in this case, the director gives a loan to a
third company for the personal benefit which caused harm to the company.
It was clear that the director did not act in good faith because there were no chances of
returning of the money of the company which was given as a loan and the director also
invested such money in another company in which he was the sole shareholder. The
court provided that section 181 (1) is violated based on which civil penalties were
imposed on the director. AWA Ltd v Daniels t/a Deloitte Haskins & Sells & Ors (1992) 10
ACLC 933 and ASIC v Cassimatis (No 8) [2016] FCA 1023 are also good example in which
the court provided that the decisions which are taken by directors while focusing on
their personal interest rather than benefit of the company are considered as a violation
of section 181. Moreover, decisions which could also be harmful to the company also
come within the scope of this section. Another relevant section in this context is 183 in
which a duty is imposed on directors relating to the use of information. The directors
are responsible for developing strategies in the company to expand its operations;
therefore, they have access to confidential information about the company in order to
ensure that they take relevant decisions which are in the benefit of the company. While
using the confidential information, the directors have to ensure that they use such
information for proper purpose only.
Section 183 (1) prohibits from using the information in order to gain an unfair
advantage or causing harm to the organisation. It was held by the court in Howard Smith
v Ampol Petroleum Ltd [1974] AC 821 case that the directors should only use the

5
confidential information about the company for purpose purposes only. If the decision
is made while prioritising personal interest by the director rather than considering the
negative impact on the corporation, then they can be held liable for violating their
duties. Moreover, directors have to ensure that they did not incur any debt in the
company while it is insolvent or the incurring of the debt is likely to adversely affect the
solvency of the company (Worthington 2016, pp. 213-216). This duty is given under
section 588G in which the directors are prohibited from insolvent trading. Subsection
(1) provides that the director should not take any decision to incur debt in the company
when he/she knew about the financial position of the company which leads to
liquidation if any debts or liabilities are incurred. The court held in ASIC v Plymin, Elliott
& Harrison [2003] VSC 123 case that section 588G (3) provides that the directors should
prevent any decision to take debt while the company is insolvent or it is likely to be
after taking the decision. Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR
115 is another leading case in which the court provided that the director can be held
liable for violation section 588G (2) if they negligently take their business decisions
which considering the interest of the company which leads to its insolvency.
The directors can rely on various defences which are given under section 588H in order
to avoid the legal penalties of violation section 588G. According to section 588H (2), if
reasonable grounds are available in the particular scenario to justify that the new debts
which will lead to the insolvency of the corporation and its solvency will not be affected
after incurring the debt, then he/she cannot be held liable for insolvent trading (Varzaly
2015, pp. 281-319). If the directors misused the information which could substantially
increase or decrease the share prices of the company, then the court can impose penalty
on them based on insider trading. The directors who misused the confidential
information of the company to purchase or its sell its shares can be held liable for
insider trading under section 1013 (1) of the Act. The directors can face civil liabilities if
they breach their duties under section 1317E. If they did not comply with the guidelines
given by the Corporations Act, then the court can impose a civil penalty as per the
provisions given under section 1317E. The court can take back the profit which they
acquire unfairly and impose penalty on them for failing to comply with their duties. In
case the directors acted dishonestly, then they can suffer criminal penalties as well.
Therefore, the directors can suffer both civil and criminal charges if they did not adhere
to the duties which are imposed under the Corporations Act.

6
A: APPLICATION
Care and diligence are expected for directors under section 180 (1); however, Lillian
and Gumpta failed to comply with the same. Lillian was not careful when she decided to
make the purchase for computers without realising that All Mine Pty Ltd is likely to
become insolvent. Gumpta also violated this duty since he did not act diligently to avoid
the sales order to ensure that the interest of the company is not breached (ASIC v Vines).
Section 181 (1) is violated in this case as well. Lillian did not act in good faith because
her actions cause detriment to the company which leads to its insolvency; thus, she
violated section 181 (1) (b) (ASIC v Adler). Gumpta violated section 181 (1) (a) since he
did not act in good faith because his decision was focused on material personal interest.
Section 183 provides that directors should not misuse the confidential information
about the company which is exactly what Gumpta did. He shared such information with
Lillian, and both of them acquired shares of Greedyas Pty Ltd to made a profit of
$20,000 each; therefore, section 183 (1) is violated by Gumpta (Howard Smith v Ampol
Petroleum Ltd). The information shared by Gumpta was confidential, and it had a
substantial impact on the share prices due to which Lillian and Gumpta were involved in
insider trading.
They can be held liable under section 1013 (1). The decision made by Lillian to
purchase computers for the company was not taken with care. She acted negligently
because she did not evaluate the financial position of the company before incurring the
debt. She was involved in insolvent trading due to which she violated section 588G
(ASIC v Plymin, Elliott & Harrison). The defences given under section 588H (2) provides
that the director must take reasonable precautions to believe that the company was
solvent. The reasonable standard was not maintained by Lillian while taking the
decision to incur debt which leads to the insolvency of the company; thus, she is liable
for insolvent trading. Civil liability will be imposed on each director for violation of their
duties by the court. The court can hold them liable under section 1317E and impose a
penalty. The profit earns by each director can also be taken back by the court. Criminal
penalties can be imposed on Gumpta since he was dishonest towards his position in the
company. The court can take back the profit generated by both directors unfairly, and
they can be disqualified from acting as directors based on the court’s discretion.

7
C: CONCLUSION
Based on the evaluation made above, the decisions taken by Lillian and Gumpta
conflicted with their duties as directors. Duties given under section 180, 181 and 588G
are violated by Lillian. Gumpta will also be likely to hold liable for breaching section
180, 181 and 183. Along with these duties, Lillian and Gumpta were involved in insider
trading as well under section 1013. Both the parties will likely face civil penalties under
section 1317E, and they have to return the profit which they earn back the company
along with penalties for breach of duties. Criminal charges can also be imposed on
Gumpta since dishonesty was involved from his part while he was acting as a director
since he focused on material personal interest. Both directors are likely to be
disqualified by the court for a specific period.

8
REFERENCE LIST
ASIC v Adler [2002] NSWSC 171
ASIC v Cassimatis (No 8) [2016] FCA 1023
ASIC v Plymin, Elliott & Harrison [2003] VSC 123
ASIC v Vines [2005] NSWSC 738
AWA Ltd v Daniels t/a Deloitte Haskins & Sells & Ors (1992) 10 ACLC 933
Barber, F 2014, ‘Indirectly directors: duties owed below the board,’ Victoria U.
Wellington L. Rev., vol. 45, p.27.
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Corporations Act 2001 (Cth)
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Kershaw, D 2012, Company law in context: text and materials, Oxford University Press,
Oxford, UK.
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Salomon v Salomon & Co Ltd [1897] AC 22
Varzaly, J 2015, ‘The enforcement of directors’ duties in Australia: an empirical
analysis,’ European Business Organization Law Review, vol. 16, no. 2, pp.281-319.
Worthington, S 2016, ‘DIRECTORS' DUTIES AND IMPROPER PURPOSES,’ The Cambridge
Law Journal, vol. 75, no. 2, pp.213-216.