Federation University BULAW5915 Corporate Law: Duties and Liabilities

This case study examines the duties and liabilities of company directors under Australian Corporate Law, particularly focusing on the Corporation Act 2001. It analyzes scenarios involving de facto and shadow directors, the duty of care, and the best judgment rule, referencing key cases like ASIC v Adler and Daniels v AWA Ltd. The study assesses whether a director breached their duty of care, skill, and diligence in decision-making, and explores available defenses under Sections 180(2), 189, and 190 of the Corporation Act 2001. It further discusses the role of the common seal in executing documents and the assumptions third parties can make, referencing Freeman and Lockyer v Buckhurst Park Properties. The analysis concludes by determining the liability of a director for actions taken without proper consultation or adherence to corporate procedures, considering potential defenses under the best judgment rule and the implications of Sections 127, 128, and 129 of the Corporation Act 2001. The document is available on Desklib, a platform providing students with study tools and solved assignments.

Running head: AUSTRALIAN CORPORATION LAW
Australian Corporate Law
Name of the Student
Name of the University
Author Note

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Task A:
Answer a)
It is the duty of the directors to act as the formal director of a company even though they
are not being appointed by following the prescribed procedures (Ertimur, Ferri and Oesch 2015).
In this regard, the provisions of Section 9 of the Corporation Act 2001 can be emphasized with
defines a director of a company. In this provision, the subject matter of de-facto director has
enumerated which states that, a director may also be perform the duties of the sole director even
though such director has not been formally appointed. From the above explained context, the
subject-matter of shadow director comes into view. A person can act as the shadow director of
the company and perform the duties which the main director would have performed however; in
such process the shadow director is not permitted to reveal his true identity (Lee and Roberts
2015). It is evident that every director has a duty of care towards the other directors of the
company and the shareholders as well (Nottage and Aoun 2015). In some cases, a person may be
appointed as an alternative director of a company for the purpose of carrying out the main
functions of a director. Such alternative director has been given the sole authority to protect the
interests of the members of the company. In ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC
171, the director of the company participated in the decision making process although he has
been elected as the director of the company without proper appointment. It is the duty of the
directors to act in the best interest of the company by receiving prior consent of the shareholders
and other existing directors. If the directors fail to do so, then various defenses are available
under the provisions of Sections 180(2), 189 and 190 of the Corporation Act 2001 for the
purpose of safeguarding their interest and protect them from being personally liable. In this
context, the subject-matter of best judgment rule comes into existence which is depicted in the

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provisions of Section 180(2) of the Corporation Act 2001. If the decision made by the director is
for the best interest of the corporation then such decision can be regarded as the best judgment
rule. Therefore, it is worth mentioning that, the interests of such director can be protecting with
proper application of the provisions of Section 180(2) of the Corporation Act 2001. The concept
of best judgment rule has been briefly explained in the landmark case of ASIC v Rich (2009) 236
FLR 1. In such case, the Court took the decision by taking into consideration the intention of the
directors that whether they have acted in due care, skill and diligence. If the nature of the
decision is such which has caused reasonable harm to the company but the intention involved
with such decision was in good faith, then only the liabilities of the director can be protected by
applying the best judgment rule (Ertimur, Ferri and Oesch 2015). However, it is important on the
part of the directors to provide reasonable evidence regarding the fact that such decision was
made for the benefit of the company.
The provisions of Section 189 of the Corporation Act 2001 safeguards the interests of the
directors to the best possible means if the directors have made their decision by relying upon the
facts provided by any employee, member, expert advisor or any other director of the corporation.
In this regard, the provisions of Section 190 of the Corporation Act 2001 can be emphasized.
This Section states that the directors of a company are authorized to delegate their powers
however; such delegation must be in good faith.
The provisions of Section 180(1) of the Corporation Act 2001, clearly states that, every
director should carry on their duties wit due care and diligence. The case of Daniels v AWA Ltd
(1995) 13 ACLC 614 can be applied in order to provide brief explanation of the duties of a
director which must be exercised with due care and diligence. In this case, it was held by the
Court that, it is necessary on the part of the directors to take reasonable steps in order to establish

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themselves in a position by which they could efficiently monitor the management of the
corporation. It is important that the directors must develop general understanding regarding the
subject matter of the business in which the company is dealing. In this case, it was held by the
Court that, the laws which are concerned with the duties of a director has been designed in such a
way which would promote good governance by limiting the conflict of interests within the
directors of the company. In order to determine the intention of the directors to exercise in due
diligence and care, the Courts took into consideration both the subjective test and the the
objective test.
From the given case study, it is evident that, Lana was not the main director of the
company however; she was given the authorization to act as the director of the company by Rik.
In this regard, the provisions of Section 9 of the Corporation Act 2001 is applicable because
without being formally appointed Lana could attend board meetings and take decision in favor of
the company. it can be observed that the decision taken on the part of Rik regarding the shifting
of the premises was not taken in due care and diligence as he did not consult with the other
directors. In this regard, the provisions of Section 180(1) of the Corporation Act 2001 is
applicable as Rik has not exercised his duties keeping in view the provisions of the this section.
Various defenses are available to Rik because the nature of his decision was such that it was not
intended to harm the company and the decision was taken for the benefit of the company.
Therefore, the provisions of the Sections of 180(2), 189 and 190 of the Corporation Act 2001 are
available to Rik in order to help him to escape personal liability. Therefore, it can be rightly
stated that, Rik as a director of the company has breached his duty to care, skill and diligence by
making the decision without involving the two directors.
Task B:

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Answer b)
Under the best judgment various defenses are available which shall protect the directors
from being personally liable for their decision. These defenses are-
 The directors must prove that the decision was made in good faith and in due care and
diligence.
 There was no personal interest.
 The decision was taken for the profits of the company.
The common seal plays significant role during the execution of any document (Pelling and
McGuire 2015). Every document that needs to be executed on behalf of the company must be
stamped with a common seal which must be duly signed by the directors of the company as
contained in the provisions of Section 127(1) of the Corporation Act 2001. However, for the
execution of any legal document on the behalf of the company must be based upon a number of
assumptions which are clearly depicted in the provisions of Section 129(5) and 129(6) of the
Corporation Act 2001. It is worthwhile to refer here that the assumptions made under the
provisions of Section 129(5) are consistent with that of the regulations contained in the
provisions of Section 127(1) of the Corporation Act 2001. In this context, the provisions of
Section 127(2) of the Corporation Act 2001 shall also apply because after the executed document
has been signed and stamped with the common seal; such process must be witnessed by at least
two directors of the company. However, it is worth noting that, for the successful execution of
the documents in relation to the terms contained in Section 127(2), the provisions of Section
129(6) must be applicable. According to the provisions of Section 129(6), it may be assumed by

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any reasonable person that the common seal of the company has been fixed to the document by
relying upon Section 127(2).
Apart from the assumptions made under the provisions of Section 129(5) and 129(6) of the
Corporation Act 2001, various assumptions are associated with third parties as well. In this
regard, it is noteworthy to mention here that third parties can also make assumptions when the
conduct of the directors is fraudulent in nature (Connor 2016). The conditions regarding
assumptions on the part of the third parties are depicted in the provisions of Section 128(3) of the
Corporation Act. The provisions of Section 128(4) of the Corporation Act 2001 clearly state that,
third persons are not authorized to make assumptions according to the regulations set by the
Section 129 of the Corporation Act. However, the terms of the provisions shall only be applied if
suspect develops regarding the fact that the assumption made by the third part was incorrect
(Ertimur, Ferri and Oesch 2015).
It can be observed in the case of Freeman and Lockyer v Buckhurst Park Properties
(Mangal) Ltd [1964] 2 QB 480, without formal appointment, the director of the company was
performing the duties of a Managing director. It was observed that as a result of the duty of such
Managing director which was exercised in excess of his authority, the company was held to be
liable.
From the given case scenario, the matter can be analyzed in relation to the abovementioned
provisions. It is evident that the contract has been signed by Rik personally without mentioning
anything about his company. It can be also noted that when such contract was signed, the other
directors were not consulted as well. The document when prepared was not stamped with the
common seal and was not duly signed by two directors i.e. by Lana and Patel. Therefore, it can

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be stated the company cannot be held liable for the act of Rik. In this case, Rik shall be held
personally liable for his own conduct. However, various defenses are available to save Rik from
personal liability under the best judgment rule. It can be observed that the decision taken by Rik
was not for his own personal interest but for increasing the prosperity of the business in which
the company was involved in. by moving the premises of the company, Rik wanted to secure the
place of the business in the market. The best judgment rule from the beginning protects the
directors from being personally liable in case their interests cause detriment harm to the
company. However, the decision taken on their part must be in good faith, due care, skill and
diligence. In such process, it can be rightly commented that while discharging the duties as a
director of the company Rik did not act keeping in view the provisions of Section 127(1) of the
Corporation Act 2001. It can be stated that the provisions of Sections 129(5) can be relied
because Lana assumed that the decision taken by Rik was not valid as it was taken without
informing the other two directors. In this regard, it is worth mentioning that such assumption on
the part of Lana was correct and therefore it could be relied. However, the provisions of Sections
129(5) are not applicable because the decision taken by Rik was not nor conducted with an
intention to make fraud. One can also rely upon the provisions of Section 128 (4) while
analyzing the situation because the lease agreement signed by Rik was not valid as it has been
executed by using his own signature. Finally, mention can be made of the fact that the company
Fruut Pty. Ltd should not be forced by the other company Watel Pty Ltd for the purpose of
continuing the lease of the new premises for a considerable time period of three years. This is
because the, document was executed in the name of Rik and not on the behalf of the company.

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References:
Cases:
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Rich (2009) 236 FLR 1.
Daniels v AWA Ltd (1995) 13 ACLC 614.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Journals:
Connor, T., 2016. Should the Statutory Business Judgment Rule Apply to Directors' Compliance
Decisions?. Company And Securities Law Journal, 34, pp.403-407.
Ertimur, Y., Ferri, F. and Oesch, D., 2015. Does the director election system matter? Evidence
from majority voting. Review of Accounting Studies, 20(1), pp.1-41.
Lee, J.H. and Roberts, M.J., 2015. International returnees as outside directors: A catalyst for
strategic adaptation under institutional pressure. International Business Review, 24(4), pp.594-
604.
Nottage, L. and Aoun, F., 2015. The Rise of Independent Directors in Australia: Adoption,
Reform, and Uncertainty. U. Miami Int'l & Comp. L. Rev., 23, p.571.
Pelling, L. and McGuire, N., 2015. Court finds directors fulfil the requirements of the statutory
business judgment rule. Governance Directions, 67(9), p.533.