Company Law & Director Duties

This assignment explores the legal ramifications faced by directors in a hypothetical company scenario. It delves into concepts such as duty of care, skill, and good faith, analyzing their potential breaches in relation to project decisions and insolvency. The document further assesses the defenses available to the directors under relevant Australian legislation and case law.

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................4
Question 3........................................................................................................................................6
Question 4........................................................................................................................................7
Question 5......................................................................................................................................11
References......................................................................................................................................13

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Question 1
Issue
The question which has been identified in this case is in relation to the breach of directors duties
as per the provisions of the Corporation Act 2001 (Cth) (the act)
Rule
Section 180-184 the act deal provides the duties which the directors must act in accordance with
respect to discharging their obligation towards the operations of the company.
As provided in Section 180(1) of the act a director can be held accountable for the breach of this
section if he or she does not apply proper skill and diligence while discharging their obligations
in relation to the company.
When a question in relation to the compliance with such section has to be determined the court
deploys an imaginary reasonable director in the same position when the direct in context was
while taking a decision in relation to the company and then seen whether the reasonable director
would have indulged in the same conduct or not. In case the court is satisfied that no reasonable
director would have indulged in the same action committed by the original director, such director
would be held liable to the breach of section 180(1) by the court.
In the case of Australian Securities and Investment Commission (ASIC) v Cassimatis (No.
8) [2016] FCA 1023 the court ruled that for the purpose of analyzing the violation of section
180(1) of the Act, no reasonable director would indulge in an actions which may result in the

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contravention of legal provisions as such contravention cannot be in the best interest of the
company and definitely not a result of proper skill and diligence.
Section 181 of the Act is violated of the actions of the directors of the company are not in good
faith and towards the best interest of the company.
In section 182 of the CA it has been ruled that the directors will breach the provisions of this
section if it is found that they have used the position they have in the company to achieve
personal interest by causing harm to the company. If there is any conflict of interest situation
which a director of the company is facing where he has to choose between his interest and the
companies interest he must always chose the interest of the company. In addition the directors
also have to ensure that any conflict of interest situation is disclosed to the board as per section
192 of the Act.
Application
From the above discussed provisions provided by the Act it can be stated that the operation of
the organization carried on by the directors are governed by the principles. In the given situation
Eric being the non executive director of the company has the duty to act in the best interest of the
company according to section 181 of the CA. he also has a duty to avoid any conflict of interest
situation of his personal interest and company’s interest. Thus buy persuading the board to
finalize the deal with a company where he is a partner to gain personal benefit and not disclosing
such situation to the board accounts to the violation of section 181 and 182 of the CA.
Morton being the director of the company has been imposed with a duty to act with proper care
and diligence in relation to the company. Under the section he has the duty to use personal skill
and diligence to benefit the company, however he has not done so by not protesting against the

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deal which the company got into with Tricky Partners. A reasonable director if placed in the
position of Mr. Morton would have not supported the deal knowing that the Eric is violating the
provisions of the CA. Thus Mr. Morton is liable for the breach of section 180 (1) of the Act
Conclusion
Eric has violated section 181-182 of the act being the non executive director f the company.
Whereas Mr. Morton has breached section 180(1) by not using appropriate skill and care towards
the operations of Gold Coin Bank.
Question 2
Issue
The question which has been identified in this case is in relation to the breach of directors duties
as per the provisions of the act committed by the other three directors of Bricks Construction Co.
Rule
In the case of Asic v Adler and 4 Ors [2002] NSWSC 171, section 181 of the Act had been
discussed in details. The section imposed a duty on the directors and other officers of an
organization to discharge their obligation and use their powers towards the best interest of the
company in good faith. The duties must also be discharged towards a proper purpose for the
company. Section 181 can be also contravened by the director even if they believe they have
discharged their duties in good faith through the application of the same test which is used to
determine the contravention of section 180(1). In the given case it was clear that the defendant
director have breached section 181 of the Act as they being the directors of the company indulge
in activities which were not towards the best interest of the company.

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In the same case the court also analyzed the provisions in relation to section 182 of the Act. The
court stated that section 182 stands violated if the director of a company has used the power
vested in him through the virtue off his position in the company in such a way where he is
working for a personal interests rather than the interest of the company. As the director in the
case has used his position to make the company gets into a deal for his personal interest and not
the interest of the company the director violated section 182.
Application
In the given situation it has been found that the other three directors of Bricks do not have good
terms with the fourth director. By not involving the fourth director they are indulging in an
oppressive conduct which can be punished under section 232 and 233 of the Act. Nevertheless
here the breaches constituted by the other three directors in relation to the company are
discussed. Through opening another company the directors have clearly violated the provisions
of section 181 of the CA as such an action is not at all in good faith and is contrary to the interest
of bricks as it would be deprived of its profits. They have also violated section 183 as they have
used the information obtained from the company for such deal. In addition by passing a special
resolution which stated that Bricks did not have any interest in the project the directors have
violated section 182 of the Act by using their position information in a way which hampers the
interest of the company for personal interest.
Conclusion
The three directors are liable for the violation of section 181-183 of the Act because of their
actions.

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Question 3
Issue
The question which has been identified in this case is in relation to the breach of directors duties
as per the provisions of the act as well as fiduciary duties imposed by common law committed by
the CEO and director of Comet Pty Ltd, Mr Hawker.
Law
The directors in Australia not only are imposed with statutory duties but also fiduciary duties
under the common law. These duties state that a director must always base his actions towards
the company on bona fide intentions and not in a way which hampers the interest of the company
in addition the powers of the directors given to them by the company must not be used for an
improper purpose. the fiduciary duties also impose an obligation on the directors to avoid any
conflict of interest as provided in the case of Chan v Zacharia [1984] HCA 36. In addition the
directors also have the duty to retain their discretion over the affairs of the company.
In relation to the breach of general duties as opposed to the statutory duties the directors are
likely to be subjected to the remedy of recession, statutory compensation or equitable damages.
Section 181 of the Act mirrors the duty of good faith, proper purpose and best interest provided
by general law. The section imposes a duty on the directors and other officers of an organization
to discharge their obligation and use their powers towards the best interest of the company in
good faith. The duties must also be discharged towards a proper purpose for the company.
Section 181 can be also contravened by the director even if they believe they have discharged
their duties in good faith through the application of the same test which is used to determine the
contravention of section 180(1).

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Section 182 of the Act prohibits the director from misusing his position to case detriment to the
company. Section 183 of the Act prohibits the director from misusing information to gain unfair
advantage for themselves.
Application
In the given case it has been provided that Mr Hawker who is the CEO and Director of comet has
indulged into activities which are not good for the company in order to save personal reputation.
Hawker by directing the funds from comet to the subsidiary in order to save personal reputation
have violated the best interest fiduciary duty under general law as well as the section 181 of the
act under statutory law as the act is clearly not in the best interest of the company which had to
face insolvency as a result of Hawkers actions. In addition Hawker has violated section 182 of
the Act along with the fiduciary duty of not making improper use if position by indulging in the
act of fund transfer. Therefore it can be provided that Hawker can be held liable for the breach of
section 181 and 182 of the Act as per statutory duties and the common law duty to act in best
interest and not to make improper use of position.
Conclusion
Hawker is liable under both general law and statutory law duties
Question 4
Issue
1. The question which has been identified in this case is in relation to the breach of
director’s duties as per the provisions of the Act committed by the COO of the company
along with the defenses available

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2. The question which has been identified in this case is in relation to the breach of directors
duties as per the provisions of the Act committed by the directors if the company in the
light of their qualifications along with the defenses available
Rule
As provided in Section 180(1) of the act a director can be held accountable for the breach of this
section if he or she does not apply proper skill and diligence while discharging their obligations
in relation to the company.
When a question in relation to the compliance with such section has to be determined the court
deploys an imaginary reasonable director in the same position when the direct in context was
while taking a decision in relation to the company and then seen whether the reasonable director
would have indulged in the same conduct or not. In case the court is satisfied that no reasonable
director would have indulged in the same action committed by the original director, such director
would be held liable to the breach of section 180(1) by the court.
In the case of ASIC v Healey (2011) 83 ACSR 484 an argument was provided by the non-
executive directors that they could rely on the company’s external auditors and management
towards ensuring that the financial statement are in compliance with the Australian accounting
standards. However the court in this case ruled that under the provisions of the Act every
member of the board of directors has been imposed with a responsibility of focusing on and
attending to the financial statements and such responsibility cannot be abdicated or delegated to
others.

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In the case of Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 it was ruled
by the court that in case a director possesses a special skill their standard of care towards a
company is held to be that of person professing such skills.
In the case of ASIC v Rich (2003) 44 ACSR 341 it was held by the court that the liability of the
non-executive directors of a company are not limited to the knowledge, inaction , ignorance or
experience of the directors.
As a defense Section 198D of the Act allows the directors to delegate any of their responsibilities
to any person unless it is not restricted by the constitution of the company. Section 190(1) of the
CA does not allow a director to abdicate responsibility. If the delegation of power has been done
in a negligent manner the directors can only defend themselves if after making appropriate
enquires the directors believed or have reasonable grounds to believe that the delegates are
competent and reliable with respect to the delegated power under section 190(2) of the Act.
According to section 189 of the Act directors can reasonable have reliance on the decision of
professional advisors, employees if the reliance was made after making proper independent
assessment in good faith. However as provided by the Healey case reliance only be reasonable if
the contrary is not proved.
In the Rich case the court ruled that whether the director have indulged in reasonably informed
decision making is analyzed by determining the significance of the decision, time in hand for
obtaining information, cost of information, confidence of directors in those giving the
information, the nature of the decision towards the demand of competency by the board and
whether the information was available reasonably and not considered.
Application

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In the given situation the COO of the company has recruited some of his friends for the purpose
of preparing a report. The fresh recruitments are young graduates who are inexperience’s in
handing a matter which is of high significance for the company and requires experienced experts.
This is clearly a breach of exercising proper diligence and care in relation to the operations of the
company. However in this case the COO can take the help of the business judgment rule as a
defense as provided in section 180(2) of the Act according to which a director is free to make
any judgment for the company in good faith and in compliance of law. However any reasonable
director under the same circumstances as the COO would have not recruited the inexperienced
experts as provided in the rich case. Given the significance of the decision and the reasonable
availability of the decision the COO should have appointed more experienced experts. In
addition he can take the defense of reliance as per which decision provided by other can be relied
on under section 189. However there was no independent assessment done by the COO so this
defense would also not be available.
With reference to the situation of the non executive directors as per the above discussed cases a
subjective test is no longer used to determine the breach of duty. In the Healey case it had been
specifically provided by the Court that the liability of the non- executive directors of a company
are not limited to the knowledge, inaction , ignorance or experience of the directors. Thus in
given situation the two non-executive directors one of which was a geologist and the other an
engineer it can be provided that they should have made the board cautious about the decision in
relation to the project. This can be said because as per their qualifications they had expert
knowledge in the area of the project which they did not use in relation to the company. They
cannot use their position of being non executive as a defense as discussed in the Healey case.
Conclusion

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The COO and the non-executive directors are both liable to the breach of director’s duties and
the defenses which are available to them are not very strong.
Question 5
Issue
The issue which has been determined in this case is whether the directors are liable in relation to
the provisions of insolvent trading
Rule
Section 588G of the Act expressly prohibits any director or officer of a company to indulge in
any kind of trading activity when they have the information that the company has become
insolvent or reasonably believe that the company may become insolvent as a result of such
activity.
The directors of the company can evade the liability for a breach of duty if they were not present
at the time which a decision had been made due to sickness of any their circumstances which
were beyond their control.
Section 588h of the Act provides that if the directors of a company had reasonable grounds to
believe that their activities would not make the company insolvent or the company is solvent at
the time of such trading they can be excluded from the liability. The section had been used and
discussed in the case of Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 were
reliance was put by the directors on other person to determine insolvency.
Application

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In the given situation it has been provided that the directors of the company had indulged in
trading activities when they had been informed by the financial officer that the company is
nearing insolvency. The directors did not take into account the advice provided but the CFO of
the company very seriously. Thus they carried on with the trading and which could be considered
as a breach of section 588G of the Act. Here the directors cannot take the defense available in
section 588H of the Act as they cannot prove that they reasonably believed that the company
would continue to be solvent after such activity.
The CFO who was not present at the time the decision was taken cannot use the above discussed
defense of absence which can be used in case of circumstances beyond control and sickness as a
anti aging surgery could have been postpone after the meeting about the decision.
Conclusion
From the above discussed analysis it can be concluded that the directors of the company are
liable to insolvent trading under the Act.

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References
Asic v Adler and 4 Ors [2002] NSWSC 171
ASIC v Healey (2011) 83 ACSR 484
ASIC v Rich (2003) 44 ACSR 341
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA
1023
Chan v Zacharia [1984] HCA 36
Corporation Act 2001 (Cth)
Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109