Business Law: Analysis of Director's Duties, Breaches, and Liabilities

This report examines the duties of company directors, focusing on the responsibilities outlined in the Corporations Act 2001. It analyzes potential breaches of these duties, such as failing to act within the company's powers, promoting the company's success, exercising independent judgment, demonstrating due diligence, avoiding conflicts of interest, and refraining from accepting benefits from third parties or declaring interests. The report uses case studies, including Coleman v Myers, AWA Ltd v Daniels, and RBC Investor Services Australia Nominees Pty Limited v Brickworks limited, to illustrate these concepts and their legal implications. The consequences of breaching these duties, including criminal and civil liabilities, are discussed, with reference to the Corporations Act 2001 sections 180, 184, 191, and 205G. The analysis extends to the rights of shareholders and creditors to take legal action against directors for breaches of fiduciary duties and insider trading, drawing upon case law such as Bray v Ford, Norman v Theodore Goddard, Jeffree v NCSC, Percival v Wright, and Bishopsgate Investment Management Ltd. V Maxwell. The report concludes by emphasizing the importance of directors acting in the best interests of the company and its stakeholders, and the potential ramifications of failing to do so.

Running Head: Business Laws
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Business Laws
Student’s Name:
1/15/2019

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Issue
Whether Lilian and Gumpta breached their duties while working as the directors of the
company and what are the possible consequences for their conduct?
Rule
The following are the role of the directors of the company:
1. To act within the powers of the company: The role of the director is to act within the
constitution of the company. In other words, it is the duty of the director to act within the
powers mentioned in the MOA and AOA of the company (Finch and Milman, 2017).
2. To promote the success of the company: The interest of the company must be protected
by the directors of the company (Bottomley, 2016). The directors should increase the
performance of the company by promoting the success of the company. The director should
not only focus upon the short term progress of the company but they should think for the long
term success of the company (Zhu and Yoshikawa, 2016). The director of the company
should comply with the following requirements to promote the success of the company:
a) To protect the interest of the company.
b) To act fairly with the employees of the company.
c) To establish good relations with the suppliers and customers of the company.
d) To maintain high standards of conduct of the business (Barker, 2016).
e) Ensuring that the business operations of the company are in the benefit of the society.
3. To exercise the independent judgment of the company: The director of the company
should give his/her judgments without any pressure (Huebner and Klein 2015). The director

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should form an independent judgement for the best interest of the company. Such judgments
must lead to the generation of higher profits for the organization (Baxt, 2017).
4. To exercise due diligence, skills, and care: As per the section (s 180) of Corporations
Act 2001 the director of the company should use a reasonable amount of skill and care for the
benefit and for the progress of the company. The director should use general knowledge for
the benefit of the company (Millstein, Odoner, and Sharma 2018).
5. To avoid a conflict of interest: The director must try and avoid the conflict of interest in
the form of getting benefits from any such orders or getting interested from the properties of
the company (Bilchitz and Ausserladscheider Jonas, 2016). The conflict of interest will not
arise if such interest is pre-authorised by the board or by the memorandum or article of
association. The following situations may lead to the conflict of interest for the company:
a) Advisory positions: The director of the company should not have the same advisor as the
advisor of the competitor company.
b) Multiple directorships: A director should not be a director of the competitor's company
(David and Ausserladscheider, 2016).
c) Personal interests: As per the section (s 191) of the Corporations Act 2001 a director of a
company should disclose all his/her personal interest which he/she can gain with a particular
transaction of the company (Setó‐Pamies, 2015).
If the director of the company thinks that he/she may be in a possible situation of conflict that
he/she must check the article of association of the company where he/she can find the
common conflict situation (if any) mentioned where he/she can act on the basis of provisions
mentioned in the AOA. The director of the company must act according to the provisions
mentioned under the article of association of the company. Such provisions will remind the

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director of the company against the company and the promoters of the company which will
help them to regulate their behaviour for the best interest of the company (Chiu, 2015).
6. By not accepting benefits from the third parties: The director must act within the best
interest of the company, it is the duty of the director to not to accept the benefits from the
third parties over the interest of the company. Such benefits from third parties might prove a
loss for the company (Iida, 2015).
7. By declaring an interest (if any) with the arrangements of the company: As per section
(s 205G) of Corporations Act 2001 the director of the company should declare all the
personal interest on any transaction or on any sale and purchase of assets which would
hamper the profit and benefit of the company (Boyer and Tennyson, 2015). The director of
the company is also liable to show any future conflicts of interest on any transactions or any
business operations of the company (Agrawal and Cooper 2015).

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Application
As per the case law of Coleman v Myers the court of law commented that the shareholders of
the company complained that the company’s directors failed to meet the fiduciary duties and
a decision was given by the court of law that the director of the company has failed to comply
(s 171) of the Corporation Act 2001, where the director of the company has to make full
disclosure regarding the actions done by him. It can be noted that the financial position of All
Mine Pty Limited is not good and Lilian as a director of the company did not know about the
current financial position of the company as she never attended the board meetings of the
company which is a breach in the duties as the director of the company. As per the case law
of it can be understood that Lilian without getting any approval from the board made a
contract with the Greedy Pty Limited to purchase computers worth $ 1,00,000 and such a
contract has not been ratified by the company. As per the case law of AWA Ltd v Daniels
t/as Deloitte Haskins & Sells it was held by the court of law that it is the duty of the director
to take reasonable care and diligence to monitor the decisions taken by the management of
the company. The court of law also commented that the director of the company should have
an understanding regarding the work culture and its business dealings. Lilian breached the
duty of a director as she acted on behalf of the company which has not been ratified by the
company. On the other hand, Gumpta who was a friend of Lilian suggested buying shares of
Greedyas Pty Ltd as it was merging with Cheapas Pty Lty. Such breach of conduct has been
done by the Gumpta as the director of the company as she leaked the sensitive information of
the company to Lilian which has resulted in them in earning $ 20,000 each. As per the case
law of RBC Investor Services Australia Nominees Pty Limited v Brickworks limited the court
of law that a director should work for the best interest of the company. A director can have

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multiple directorships until it does not affect the conflict of interests of the company and the
secrecy of data of the company is being maintained. It can be noted that both Lilian and
Gumpta breached their duties which is punishable in law as they leaked sensitive information
of the company and pursued insider trading which has violated section (s 588G) of the
Corporations Act 2001. Upon investigation on both Lilian and Gumpta, they may face the
following consequences under the section (s 184) of the Corporations Act 2001:
a) They both may be held liable for such misconduct which would lead to criminal
liability with a penalty of $ 2,00,000 and imprisonment up to 5 years.
b) The court of law may order both Gumpta and Lilian to pay $ 2,00,000 to the
commonwealth.
c) The court may order them to compensate for the losses of the company.
d) The court of law may prohibit Lilian and Gumpta to manage the affairs of the
company (Collin‐Dufresne and Fos 2016).
As per the case law of Crowther Group Plc v International Plc, it was held that the directors
of the company have breached the contract for the highest bid of the shares of the company,
but such actions were done by the directors for the best interest of the company. Hence it was
concluded by the court of law that the directors of the company were not held liable for their
actions as their act was made with bona fide intentions for the company. Lilian and Gumpta
did not act within the best interest of the shareholders and creditors of the company which has
resulted in facing certain risk and loss factors. Hence the creditors and shareholders of the
company may sue Lilian and Gumpta for persuing insider trading by referring to the case law
of Bray v Ford where the court of law held that the director of the company should not allow
themselves in a situation where the conflict of interest arises; the court says in case of any
conflict of interest the director has the right to step down as the director of the company. The

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court also directed to the directors to work in the best interest of the company. However as
per the case law of Norman v Theodore Goddard where it was held by the court of law that
the company’s director should exercise skills and intelligence for day to day business
operations of the company and meet obligations of the company. From the above case study,
it was analysed that both Lilian and Gumpta failed to exercise such skills and intelligence for
the day to day business operations of the company. It shall also be observed that Lilian and
Gumpta also did not protect the rights and interest of the creditors of the company. As per the
case law of Jeffree v NCSC where the court of law has commented that the director of the
company was obliged to protect the interest of the creditors of the company. The court of law
said that the director has committed a breach of trust as he fails to preserve the reserve capital
of the company for the creditors of the company. Hence the creditors of both the companies
have a right to sue both Lilian and Gumpta for their actions which would have affected their
rights and interest. According to the case law of Percival v Wright, it was held that the
shareholders of the company sued the directors claiming breach of fiduciary duty on the
negotiations done by them to sell the whole company; as such conduct has resulted in a loss
for the shareholders of the company. It was decided by the court of law that the directors of
the company owe the duties to the company, not to the shareholders of the company.
However, in the above case study, it was observed that Lilian has entered into such contract
on behalf of the company which has resulted in a loss to the shareholders as well as the other
stakeholders of the company. Also from the reference of Bishopsgate Investment
Management Ltd. V Maxwell where it was held that the directors of the company have
breached their fiduciary duties as they transferred their shares to Maxwell Group without any
consideration. The court of law held the directors responsible for not acting in the best
interest of the company. On the basis of such case laws, the stakeholders have the right to sue
their respective directors as their actions have affected their rights and interest. However, on

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the basis of the case law of Greenhalgh v Arderne Cinemas Ltd the stakeholders of the
company have the right to sue the Lilian and Gumpta and can claim compensation for their
losses and breach of rights.
Conclusion
As from the above analysis, it can be observed that Lilian breached (s 180) of Corporations
Act 2001, where she failed her responsibility to act as the director of All Mine Pty ltd where
entered into such contract without understanding the financial position of the company. Such
a contract has led to a huge increase in problems for the company which has resulted in the
liquidation of the company. On the other hand, Gumpta and Lilian also breached (s 1043A)
of the Corporations Act 2001 and are liable for conducting insider training as the sensitive
information of the company was leaked by Gumpta which has resulted in earning profits for
them. Upon investigation, they might be charged for insider trading in the form of fine or
imprisonment by the court of law. Hence it can be concluded that both Lilian and Gumpta did
not perform their duties well as the directors of the company as their actions led to a potential
risk to both the company. In case of Lilian, All Mine Pty Ltd has gone insolvent and the
company has started liquidating the assets of the company, the stakeholders of All Mine Pty
Ltd has the right to sue Lilian as she did not perform her duties well. In the case of Greedyas
Pty Ltd and Cheap-as Pty Ltd, the stakeholders of both the company should take some
necessary steps as and conduct an investigation upon Lilian and Gumpta as they both
conducted insider trading.

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References
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Corporate Finance, 34, 169-190.
Barker, R., (2016). The Duties and Liabilities of Directors—Getting the Balance Right. The
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Bilchitz, D. & Ausserladscheider Jonas, L., (2016). Proportionality, Fundamental Rights and
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Bottomley, S., (2016). The constitutional corporation: Rethinking corporate governance.
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