Law of Business: Directors' Duties, Company Constitution Analysis

This business law assignment delves into two primary areas: company constitutions and directors' duties. The first part examines the effect of a company's constitution, including replaceable rules, on the relationships between members, and between members and the company. It explores the process of amending the constitution, the rights of members, and available remedies for violations. The analysis includes relevant sections of the Corporations Act 2001 (Cth), such as sections 140, 136, 232, 233, and 234, and pertinent case law. The second part focuses on directors' duties, both equitable and statutory, and the consequences of breaching these duties. It outlines the equitable duties of directors, including acting in good faith and avoiding conflicts of interest, and statutory duties under sections 180, 181, 182, and 183 of the Corporations Act. The assignment also considers the business judgment rule and remedies and penalties for breaches, referencing sections 206C, 1317E, and 233 of the CA, along with relevant case law such as ASIC v Cassimatis and ASIC v Lindberg. The assignment concludes with an application of these principles to specific scenarios, evaluating potential breaches of duty and providing recommendations.

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

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Question 1
Introduction to constitution and legal issues
The replaceable rules or constitution of a company provide the guidance which the
officers and directors of the organisation abide by in order to carry out the responsibilities with
respect to the organisation. The clauses of relationship with any third party as well as its
members are set out by the constitution of the organisation1. This part of the paper discusses
about effect the Constitution have with respect to the relationship between the members of the
company. This part also discusses whether our constitution can be amended and what are the
requirements and process involved in amending the constitution. The paper also discusses
remedies available to a member whose rights have been violated by the directors or majority
shareholders of the organisation. There are two primary issues which needs to be determined in
relation to this part of the paper. Firstly the issue is whether it is within the powers of Som to
impose the term which is incorporated into the constitution of Chocolate Cleaning Products Pty
Limited (CCP) in relation to him being the solicitor and not being replaced unless there is
negligence. Another issue which needs to be determined in relation to this question is whether
the directors of the company can change successfully its constitution as per the rules of the
Corporation Act 2001 (Cth).
Section 140 of the CA
Section 140 of the corporation act deals with the effect of replaceable rules and the
constitution of the company. Subsection 1 provides that the terms of the constitution and
replaceable rules of a company have an effect in form of a contract between each member of the
1 Hiller, Janine S. "The benefit corporation and corporate social responsibility." Journal of Business Ethics 118.2
(2013): 287-301.

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company and the company, between the members of the company with each other and between
the director and company secretary with the company. According to the contract each person
agree to abide by its terms as far as they are applicable on them. Unless there is an agreement
between the members of a company to be bound in writing search members cannot be found with
respect to any alterations in the constitution which has been made after they have become
members. These alterations should be related to asking a member to take up additional shares,
increasing the liability of the member my asking to pay money to the company or contributing to
the share capital and imposing limitations on transferring shares which are held by the member2.
Cases on Section 140 of the CA
In the case of Lion Nathan Australia Pty Ltd v Coopers Brewery Limited it was
provided by the court that the constitution of a company has the same nature like a commercial
contract between two or more parties and the violation of which results in contractual remedies.
Section 136 of the CA
According to the provisions of this section the constitution of the company can be
changed by passing a special resolution by the shareholders of the company. However if there is
a further Clause mentioned in the constitution the clause has to be complied with before the
clause can be amended. In addition in order to amend such condition the condition itself has to
be complied with before being amended3.
Section 232 of the CA
2 Corporation Act 2001 (Cth) at Section 140.
3 Corporation Act 2001 (Cth) at Section 136.

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Section is related to providing remedy to a person under section 234 of the CA whose
rights have been violated, prejudice or unfairly discriminated by an act or resolution or a
proposed act or resolution4.
Section 233 of the CA
As per section 232 any order can be made by the court including a specific action,
injunction, winding up of the company and modification or repealing the existing constitution5.
Section 234 of the CA
Proceedings can be brought under section 233 by any person who is a member of the
company a person who has been removed as a member of the company as a result of specific
reduction6.
Relevant cases in relation to Section 232-234
Gambotto v WCP Ltd7 the court held that the majority has to provide that the act was
overall fair and not prejudicial in case it is related to the Expropriation of shares.
Determination of issue 1
The constitution of CCP provides that Max can be only removed as a solicitor of the
company if negligence have been committed by him while discharging his duties in relation to
the company. Section 140 as discussed above establishes the contractual relationship between the
members of the company. Thus the directors of the company have been imposed with a duty by
the constitution not to remove Max as a solicitor if he has not committed negligence. In addition
4 Corporation Act 2001 (Cth) at Section 232.
5 Corporation Act 2001 (Cth) at Section 233.
6 Corporation Act 2001 (Cth) at Section 234.
7 (1995) ACLC 342

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as this conduct of the directors can be seen as an oppressive and unfair conduct Max can claim
remedies under section 232 by seeking an order under section 233 as he is eligible to do so under
section 234 being a member of the company. The court may order the directors not to remove
Max as a solicitor as it has the power to do so under s233.
Determination of issue 2
The directors of the company want to change the constitution. As per section 136 the
constitution can be changed by the passing of a special resolution which has been done so by the
directors as they have the voting number required.. Max may prevent the directors from changing
the constitution under Section 233 of the CA by obtaining an order to repeal the change of the
Constitution made by the directors. This is because under section 232 which is related to
oppressive remedy an order Max’s right are being oppressed by the directors. Max is a member
of the company as he has been provided through will 5% shares of the company. Thus he is
entitled to make a claim under section 232
Conclusion
The directors cannot remove Som as the solicitor of the company and they cannot change
the constitution in relation to the expropriation of shares under the provisions of section 140, 136
and 232-233.

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Question 2
Introduction to directors’ duties and legal issue
Directors of an organization are obligated to observe certain standards and follow certain
guidelines in relation to the facts of their operation with respect to the company they have been
appointed to manage. These standards and guidelines are known as directors’ duties to a
company which are provided in from of statutory duties and equitable duties. The principal
legislation setting out the statutory duties of director is the Corporation Act 2001. The equitable
directors’ duties are set out through various landmark cases and common law8. The major issue
to be determined in this part of the paper is to find out whether any of the duties have been
violated by the directors of Aussie Boats Ltd (“AB”). The applicable remedy for the breach of
duty is also provided through this part.
Equitable duties of directors
1. The duty to base action towards proper purpose and to observe good faith towards the
action
2. The duty to be loyal towards the company
3. The duty to avoid conflict of interest and prioritise the organization interest if such
situation comes up. In such situation priority always needs to be given to the company’s
interest rather than personal interest9.
Statutory duties under the CA
Section 180
8 Corporation law 2nd edition, Jason Harris publication: LexisNexis butterworths Australia 2011
9 Knepper, William E., et al. Duty of Loyalty. Vol. 1. Liability of Corporate Officers and Directors, 2016.

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Subsection 1 provides a duty which asks the directors to deploy appropriate diligence and skill
while discharging their powers. Whether skill and diligence have been deployed appropriately is
identified objectively through engaging a reasonable director (imaginary) in similar position and
comparing the actions of the imaginary director with the real director.
Subsection (2) provided business judgment rule. The rule is a defence which can be used by the
directors of the company. The defence is useful against the violation of any duty by the director.
According to the defence t is the right of a director to determine the level of risk which a
company is willing to take in relation to its purpose. Whether the defence has been appropriately
used is also determined objectively through the above discussed test.10
Section 181
The section ask the directors to act in proper purpose applying bona fide intentions while
exercising their powers. The duty is consistent with the equitable duty of acting in proper
purpose and good faith11.
Section 182
The power gained by the directors through the application of their position must not be misused
by them. They are not allowed to make personal gain by using the position and case
disadvantage to the company. The duty is also consistent with the equitable duties of directors12.
Section 183
10 Corporation Act 2001 (Cth) at Section 180.
11 Corporation Act 2001 (Cth) at Section 181.
12 Corporation Act 2001 (Cth) at Section 182.

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This duty is related to conflict of interest and similar to that of section 182. Here the directors
instead of position must not use any information which have been accessed by them as they are
the directors of the company to achieve own advantage by causing loss to the company13.
Remedies and penalties for the breach of duties by the directors
Section 206 C
Through the application of this section the court has the power to disqualify or suspend a director
of a company to manage any company for a prescribed period of time in case the directors are
guilty of breach their duties14
Section 1317E
The section provided civil penalties for the directors which include fines in case the breach made
by the director is considered as a serious breach15.
Section 233
As discussed in the previous question
Section 1324 gives defence to the directors id they have violated the duties16
Cases on directors’ duties
(ASIC) v Cassimatis17 -In this case the director who had been found guilty of violating his
duties had been imposed with a fine of $100000 as well as was disqualified from being a director
of any company for two years.
13 Corporation Act 2001 (Cth) at Section 183.
14 Corporation Act 2001 (Cth) at Section 206C.
15 Corporation Act 2001 (Cth) at Section 1317E.
16 Corporation Act 2001 (Cth) at Section 1324.
17 (No. 8) [2016] FCA 1023.

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ASIC v Lindberg18 - In this case the court found that if the directors do not work in the best
interest of the company and do not use their deploy diligence and skill towards the operation they
are liable for the violation of section 180(1) of the CA, where actual loss incurred by the
company is not essential to determine breach.
Determination of the issue
In the given circumstances the directors of Aussie Boats Ltd (“AB”) are finding it difficult to
compete with the other companies who also deal in boats. They are also feeling threatened by
one of their competitors who are planning to a make takeover bid as the competitor has
purchased their shares. The competitors have a reputation of removing the executive directors
once they have successfully made a takeover.
It can be evidently said that the issue of new shares to raise further capital and giving
consideration to another accompany for preparing a report done by AB is out of the fear that the
position of the director may be in danger if a successful takeover bid in made this is because the
company is nearing insolvency and a reasonable directors would not take the same action as per
section 180(1) of the CA. In the same way as any reasonable director would not have done so the
defence under section 180(2) (Business Judgment rule) would also not be applicable. It can be
stated further that the directors are not acting in good faith which violates section 181 of the CA.
This is because it would not be for the best interest of the company to risk another venture while
it is making losses. In addition section 182 and 183 of the CA have also not been complied with
as the directors are using the information and position they have to secure personal interest
which is the fear of getting removed as the directors of the company. Thus as the duties have
been breached the directors are liable to civil penalty provisions according to section 1317E and
18 [2012] VSC 332 - 91 ACSR 640.

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206C of the CA which may make them liable to financial penalties as well as suspension from
managing the corporation. The directors can also be held personally liable for any loss incurred
by the company as they have violated section 588G by doing insolvent trading. In addition the
Non-executive director can make a claim against the directors under section 232 of the CA.
Conclusion
The directors have violated the equitable and statutory duties they owe to the company. The
defence under section 180(2) would not be applicable they may claim defence under section
1324 of the CA. They are liable under section 1317E and 206C and remedy against their action
can be obtained under section 233 of the CA.

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