LAWS20059 Corporations & Business Structures: Director's Case Study

This case study provides legal advice concerning the duties and potential liabilities of directors within a corporation, referencing relevant legislation such as the Corporations Act 2001 and case law including Salomon v A Salomon and Co Ltd and ASIC v Adler and 4 Ors. It covers key aspects such as the business judgment rule, the differences between proprietary and public companies, and the potential consequences of breaching director's duties, including civil and criminal penalties. The study further explains remedies available to the company and shareholders in case of a breach, as well as processes like voluntary administration, liquidation, receivership, and deeds of company arrangement. The analysis emphasizes the importance of directors understanding and fulfilling their obligations to avoid personal liability and ensure proper corporate governance. Desklib offers this and many more solved assignments for students.

Question one
In most of the cases, a corporation is considered as a distinct legal entity (Salomon v A Salomon
and Co Ltd., 1897).1 The result is that in most of the cases, where the affairs of the company are
being managed efficiently, the debts of the company can be enforced only against the company.
However, in some cases where the directors have violated the law, the directors can be held
personally liable for the debts of the company and they may also be held liable for other
regulatory action.2
According to the general rule, the directors of a corporation are not personally liable. However,
the director may be considered as personally liable where there has been violation of duty by the
director and the consequence of such breach is that a loss has to be suffered by the Corporation.
Therefore in such circumstances, where the director acted legally or has breached the civil or
criminal liability provisions mentioned in the Corporations Act, 2001 the director may be held
liable for compensating the company for the loss suffered by it. In case of a breach of duty by the
director, the ASIC may seek criminal or civil penalties against the directors. The director may be
held liable for criminal offense for which the penalty may go up to $200,000 or imprisonment up
to five years of both. In case of the contravention of a civil penalty provision, the director may be
ordered to pay up to $200,000 to the Commonwealth. At the same time, the director may be held
personally liable for compensating the company for any loss or damage suffered by it.
Question two
1 Salomon v A Salomon and Co Ltd [1897] AC 22
2 P Clarke, J. Clarke, 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd Edition, Oxford University
Press

It is very important that the directors remain aware of their duties. These duties have been
imposed by Corporations Act, common law and by the Constitution of the company (Asic v Adler
and 4 Ors., 2002).3 On the other hand, the failure to fulfill the duties imposed on the directors may
have serious consequences.4 These consequences include a jail term up to five years, civil or
criminal penalties that may go up to $200,000 and at the same time, the director may be
disqualified from managing your corporation in future. Another consequence of the breach of
duty by the director is that the director can be held personally liable for the obligations of the
corporation. This can potentially have an impact on the personal assets of the director and may
even lead to bankruptcy. In view of the provisions mentioned above, it can be said that if it is
found that the director of the company has acted in breach of his or her duties and violated the
civil or criminal provisions mentioned in the Corporations Act, the director may be held
personally liable for the obligations of the corporation and at the same time, the director may
also have to compensate the company for any loss that may be suffered by the company as a
result of the breach of duty by the director. It also needs to be noted in this regard that the duties
that have been imposed on the directors continue even after the corporation has ceased to trade or
when it has been the registered.
Question three
All the directors of the corporations have to use the judgment while they are making decisions on
behalf of the company. This is an interesting part of the duties of the directors that it is formally
recognized by the law in the business judgment rule. This role provides a defense to the directors
3 Asic v Adler and 4 Ors [2002] NSWSC 171
4 Daniel Khoury, Yvonne Yamouni, 2010, Understanding Contract Law, 8th Edition, LexisNexis Butterworths

who have made decisions on behalf of the company.5 Hence, the business judgment rule acts as a
legal defense that is available to the directors of the corporation when they have to face
allegations or litigation that the directors have failed to acted with care and diligence. The
business judgment rule has also been added in the Corporations Act, along with the duty of the
directors which requires them to act with care and diligence in section 180 of the Act (ASIC v
Rich, 2009).6 According to this section of the Act, it is necessary that the directors and officers of
the corporation use their powers with care and diligence. However, this is not an absolute duty as
it requires only the level of care that can be expected to be exercised by any reasonable person if
the person was a director of the corporation under similar circumstances. On the other hand, the
business judgment rule has been introduced by the law to recognize the commercial realities and
the potential consequences of the violation of duty by a director or an officer of the corporation.7
Briefly speaking, this rule allows the fact that no commercial decision can be described as
certain. Sometimes decisions made by the directors may result in loss. Therefore if the director
has made the decision in good faith, a defense is available in the form of business judgment rule.
Question four
The two major types of companies in Australia are proprietary and public company. The
proprietary company is the most common type of corporation formed in Australia. Generally it is
signified by the use of the word "Pty" at the end of the name of the company. A proprietary
company is privately held company in Australia. It is commonly used by the parties were
conducting business. The minimum requirement related with the formation of this type of
5 Jane Swanston, ‘Discharge of Contracts for Breach’ (1981) 13(1) Melbourne University Law Review 69
6 Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
7 C Kidd, ‘Partial Performance o Lump Sum Contracts: Proposals for Reform’ (1985) 59 Australian Law Journal96

corporation is that it should have at least one director and one shareholder. The Corporations Act
provides in this regard that appropriately company is not allowed to have more than 50 non-
employee shareholders. Similarly such company cannot be involved in fundraising or selling the
shares of the company to the public. It is also required in case of this type of company that at
least one director of the company should reside in Australia, and more than 18 years of age.
The second most commonly used company that is a public company. The law allows the public
companies to raise money from the public by offering their shares to the general public,
generally by listing the shares on the share market.8 The persons purchasing the shares of the
company are known as its shareholders. A public company can be recognized from the use of the
word Limited or its abbreviation, Ltd. and end of the name of the company.
Question five
In case of a breach of duty by the director of the company, the company may itself bring a claim
against the director if the company can establish that it has suffered a loss as a result of the
breach of duty (ASIC v Vines, 2005).9 In this regard, if any profit has been made by the director,
the director may be required to surrender the prophet to the company. Any contract or other
arrangement created by the director in breach of duty will be considered as void although it is
available to the company that it may ratify the agreement if it wants to do so. At the same time,
the company may also seek an injunction which prevents the director from carrying out or
continuing with the breach. The company may also seek damages in the form of compensation in
case of negligence on the part of the director. The company may also seek restoration of the
property of the company and rescinding of a contract if the director had any undisclosed interests
8 G L Williams, ‘Partial Performance of Entire Contracts’ (1941) 57 Law Quarterly Review 373
9 ASIC v Vines [2005] NSWSC 738

in such a contract. Due to the reason that most companies will not bring a claim against its own
directors, the law came up with a mechanism which allows the shareholders to force the
company to seek the above-mentioned remedies. Therefore, the shareholder may bring a claim
against its director in the name of the company and with the permission of the court.
Question six
Voluntary administration takes place when the directors of a company, which is facing financial
problems or a secured creditor charge over most of the assets of the company appoints an
external administrator who is known as voluntary administrator. The voluntary administrator
investigates the affairs of the company, reports to the creditors and recommends to creditors and
the company should enter a deed of company arrangement or if it should go into liquidation or if
it needs to be returned to the directors.10
Liquidation can be described as the orderly winding up of the affairs of the company. It includes
the selling of the assets of the company and distributing the proceeds among the creditors. Any
surplus is then distributed to the shareholders.
Receivership: generally, a company goes into receivership been a secured credit debt has
appointed a receiver who has a charge over almost all the assets of the company. The main role
of the receiver is to collect and sell sufficient charge the assets of the company so that the debt
owed to the secured creditor can be repaid.
Deed of company arrangement: DOCA is a binding arrangement between the corporation and
creditors and it governs how the affairs of the company will be dealt with, that have been agreed
as a result of the fact that the company has entered into voluntary administration. The purpose of
10 M Dockray, ‘Cutter v Powell: A Trip Outside the Text’ (2001) 117Law Quarterly Review664

DOCA is to increase the chances of the company continuing, or providing a better return to the
creditors as the immediate winding up of the corporation.

Bibliography
C Kidd, ‘Partial Performance o Lump Sum Contracts: Proposals for Reform’ (1985) 59
Australian Law Journal96
Daniel Khoury, Yvonne Yamouni, 2010, Understanding Contract Law, 8th Edition, LexisNexis
Butterworths
G L Williams, ‘Partial Performance of Entire Contracts’ (1941) 57 Law Quarterly Review 373
Jane Swanston, ‘Discharge of Contracts for Breach’ (1981) 13(1) Melbourne University Law
Review 69
M Dockray, ‘Cutter v Powell: A Trip Outside the Text’ (2001) 117Law Quarterly Review664
P Clarke, J. Clarke, 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd Edition,
Oxford University Press
Case Law
Asic v Adler and 4 Ors [2002] NSWSC 171
ASIC v Vines [2005] NSWSC 738
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Salomon v A Salomon and Co Ltd [1897] AC 22