Detailed Case Study on Director's Duties and Corporate Transactions

This case study delves into various aspects of Australian company law, focusing on the duties and responsibilities of company directors as outlined in the Corporation Act 2001. It addresses the fiduciary duties of directors, including acting in good faith, avoiding conflicts of interest, and preventing misuse of position. The study also examines the legal implications of corporate transactions, emphasizing the importance of due diligence and reasonable decision-making by directors. Furthermore, the case study analyzes potential defenses available to directors facing allegations of breach of duty and explores scenarios involving negligent acts and policy implementations by company employees. The document also refers to important cases that have shaped the understanding of directors' obligations, such as ASIC v Cassimatis and Regal (Hastings) Ltd v Gulliver. This document is available on Desklib, a platform offering a range of study tools and resources for students.

Running head: COMPANY LAW
Q & A
Name of the Student
Name of the University
Author Note

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Table of Contents
Part B...............................................................................................................................................2
Question 1 (a)..............................................................................................................................2
Question 1 (b)..............................................................................................................................4
Question 2 (a)..............................................................................................................................6
Question 2 (b)..............................................................................................................................8
Reference:......................................................................................................................................11

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Part B
Question 1 (a)
According to the Corporation Act 2001, the directors are playing an important role in a
company. It has been established in the case of Salomon v Salomon that company is a legal
person separate from the stakeholders. Therefore, it can be stated that the company will not be
held liable for the negligent act of the directors until the act has been performed for the interest
of the company. However, as the company could not act individually, directors are treated as the
mind of the company. The Corporation Act has imposed certain duties on the directors as they
are holding significant position in the company (Bottomley, Stephen 2016). There are certain
equitable obligations imposed on the directors under the Corporation Law that are comprised in
section 180 to section 183 of the Act. These duties are known as the fiduciary duty of the
director. The primary duty of the director is to stay loyal to the company and act in good faith.
They are restricted to act negatively or should not earn illegal profit by using their position
(Rajanayagam, Shawn, and Carolyn 2015). In Australia, the fiduciary duties of a director can be
divided into four parts such as act in good faith (section 181); not to use their position for
improper purpose (section 182); they should avoid thee conflict of interest (section 183) and they
are required to retain the discretion (section 184). However, all these provisions are mandatory in
nature and the directors are bound to abide by the provisions of the Act if wanted to continue
their business in the provinces of Australia.
Australia is a business country and Corporation Act plays an important role in Australia.
In today’s world, many cases are pending before the Australian court where allegations have
been made against the directors and they have failed to perform their fiduciary duties effectively.

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Australian Securities and Exchange Commission is the main authority who inspects the work of
the directors and in case of any adverse situation; they filed case against the directors of the
company (Clarke, Thomas 2015). They are empowered to do so by the Government of Australia.
According to section 180 of the Corporation Act, every directors are required to perform their
acts with due diligence and they will take proper care in case of dealing with the shareholders. In
the case of ASIC v Cassimetis [2012], the court has been held that the primary duty of the
directors is to help the shareholders and act to secure their interest. If the directors have failed to
do it, they will be held liable and will be punished accordingly. The directors, being the mind of
the company, are required to act carefully and they should not deceive the shareholders for
gaining illegal profit. The same principle has been followed in the case of Regal (Hastings) Ltd
v Gulliver [1942] UKHL 1. It has been observed by the court that the directors must show
loyalty as the reputation of the company is depended on them and in case they are held liable for
wrongful act, the names of the company will get bad. Further, it has been held in Australian
Securities and Investments Commission v Adler (2002) 168 FLR 253, no directors are allowed
to use their post illegally and they should act in a proper way. According to section 182 of the
Corporation Act, the company directors must not misuse their power and they should not leak
any information that are confidential in nature. Further it has been mentioned in ASIC
v Vizard [2005] FCA 1037; (2005) 145 FCR 57 that the directors of the company are liable for
the profit of the company and they are restricted by the law to act in any improper way for the
same.
It has also been mentioned under the Corporation Act that the directors should have to
discharge their duties for the interest of the directors. They could not take the plea that they have
also suffered loss due to any act and the directors should have to inform the shareholders

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regarding any risk on the prior basis. Apart from the above noted duties, there are certain duties
imposed by the Corporation Act. According to section 588G, the directors are restricted to
engage in any insolvent trading. Further, section 344 requires the directors to be act in a prudent
way during the financial analysis. In addition to this, no director will disclose any personal
information of another director under section 205G of the Corporation Act 2001 (McNulty,
Terry, and Abigail Stewart 2015). If the directors are held liable for the breach of their statutory
duties, they may have to face civil as well as criminal penalties.
Question 1 (b)
Considering the important provision in a company, the directors are taking all the
important decisions and they are responsible for all the future transaction of the company. It is
the duty of the directors to think about the prosper of the company and they are legally obliged
for the future development of the company. The governing Act in this case is Corporation Act
that has been enacted in 2001. There are several provisions under the Act that are regulating and
guiding the acts of the directors. The directors are required to call for a meeting in case of taking
any important decision and they will take the decision after inspecting all the aspects of the
subject (Whincop, Michael 2017). However, the process of taking decision can be varied in case
of public limited company and private limited company. In case of private limited company, the
directors can cast their vote regarding taking any decision and in case of public limited company,
the directors are not allowed to cast their vote. If the directors of the company want to make a
contract, they have to take decision over the same.
The directors can take necessary decision regarding the sale, purchase and supply of any
goods. However, there are certain provisions under the Corporation Act 2001 that regulates the
transaction system or transaction process made by the directors. According to section 588FDA of

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the Corporation Act, any transaction made by the director can be known as unreasonable
transaction if the company has made any transaction (Chen et al. 2016). Besides, if any
transaction becomes a potential threat for the company or the company has incurred potential
threat by such transaction, it will be regarded as unjustified transaction and the directors are
required to stop the transaction.
Chapter 2B of the Corporation Act deals with company’s power in respect of an
individual or any outside jurisdiction. The chapter is comprised with four sections such as
section 124 to section 127. The legal capacity of the company has been described by section 124
of the Corporation Act (Sartori 2017). According to this section, a company has all the powers to
issue any share and cancel any share related to the company; issue debentures for a specific
period of time, sufficient options can be given by the company over the unissued shares,
distribute the property of the company among the members, circulate the security interest
regarding the property of the company and all the other things that has been allowed by the
Corporation Act to this effect (Méndez et al. 2016). However, it should be kept in mind that any
operation of the company must not go against the policy and interest of the company.
A director of the company can make transaction if the company is allowed to make so.
The constitution of the company is the main body that allows a director to make transaction and
decide the territorial and the pecuniary jurisdiction regarding the same. According to section 125
of the Act, the constitution of the company prescribes about certain restriction regarding the
exercise of power by the company. The object of the company has been pointed out in the
constitution. If the constitution of a company allows to do certain thing, the directors can do it.
On the contrary, the directors could not do anything that is not in accordance with the
constitution.

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Contract can be done either by the directors or by the agents and section 126 of the
Corporation Act deals with the same. According to this section, if an individual, who holds an
express or an implied authority can make, vary or discharge any contract without using the seal
of the company (Klettner et al. 2014). It has also been mentioned under section 127 of the
Corporation Act that the company can make all the transaction without the common seal of the
company if the company or any agent of the company or the director of the company can execute
any document that has been signed by two directors of the company or signed by the secretary of
the company. If the company is a proprietary company, the signature of the sole director will
enforce the company to participate in any transaction without using the seal. According to
section 131 of the Corporation Act, if a contract has been made, the company will be bound by
the terms of the contract.
Question 2 (a)
In this case, it has been observed that the directors of the company have appointed a new
employee who can make certain changes in the policy of the company and they have imposed
certain power to the employee. It has also been observed that the new employee has made new
policies and the directors have relied on the same. However, the policies were flopped and the
company has to suffer huge loss due to this. It can be stated that the directors have failed to show
sufficient diligence and did not take much care for the interest of the company (Bottomley et al.
2017).
According to section 180 of the Corporation Act 2001, every director of the company
should show certain degree of care while performing their acts and they are required to exercise

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their power as a prudent person. The directors of a company owe certain duties to the company
and they have to implement the same before taking all the decision during the course of their
employment. There are numbers of cases pending before the court where it has been observed
that the directors of a company have failed to perform their job diligently. In the case of ASIC v
Adler (2000), it has been observed that the director of the company had not maintain the
provisions of the Corporation Act prudently and failed to secure the interest of the company.
Similar principle has been established in the case of ASIC v Cassimatis [2016] FCA 1023 where
the Federal Court of Australia has decided that in case of a financial company, the directors are
obliged to discharge their job with ultimate care and diligence as the future of the investors are
attached with this (Dixon, Olivia 2016).
However, the directors, against whom such allegations have been brought, can take
certain defense under section 180(2) of the Corporation Act. The directors can take certain
defense for avoiding the breach of duty of care. The directors of the company can take the plea
that the act done by they were meant to go with the interest of the company and they were of the
view that such an act will help the company to make legitimate profit thereby. The directors are
required to show that the step that has been taken by them was purposive and they have
exercised all the duties in good faith. Further, they can take the plea that they had no bad
intention while making such decision and they had thought that their decision would make the
company out from any hurdle. They should have to show that they had no intention to gain any
illegal profit for them. in addition to this, if the directors can show that they have informed other
members of the company regarding their decision and this provision can be reliable for the
company and they can prove their legitimacy and faith to the company (Du Plessis et al. 2018).

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However, excepts all these provisions, there are certain other provisions that will act on
behalf of the directors and all these provisions will help the directors to defend them in such
cases where allegation has been made against the directors under section 180(1) of the
Corporation Act 2001. It has been mentioned in section 189 of the Corporation Act that any
director of the company can appoint any person in good faith and ask him to implement policies
for the protection and development of the company (Marsh et al. 2017). However, the ground
that the directors are considered in this case should be based on reliable source and all the
grounds taken by the directors should act for the benefit of the company. If the directors can
prove the same, it will be considered as a reasonable ground under the law. Further, under
section 190(2) of the Corporation Act, it has been mentioned that if a director of a company in
good faith delegates certain rights on the person and the intention is to secure the interest of the
company and if any mishap has been occurred due to this, the director will not be held
responsible for the same. These provisions have helped the director to prove their innocence as
against any complaint that lies especially under section 180 of the Corporation Act 2001 (Hedges
et al. 2016). If a director has held liable for breaching the provision of the grounds mentioned in
section 180 of the Act, he may face civil liabilities under section 1317E of the Act. However, if
the director be able to give sufficient excuse, they will be get relief under section 1317S of the
Corporation Act 2001.
Question 2 (b)
Corporation Act 2001 is the governing Act that discuss with different provision of the
company affairs and provides necessary supplements for the protection of the interest of the
company and all the stakeholders including the directors of the company. It is a well-known
principle of law that company is separate legal entity and directors are the mind of the company.

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Therefore, the directors are playing an important role and according to section 182 of the Act, the
directors are required to use their post on the basis of reasonable cause. They must not use the
power of their chair. In case they are held liable for any breach mentioned under those sections,
they may face criminal and the civil penalties. The directors can be suspended from their position
under section 206C of the Corporation Act 2001 (Tomasic, Roman 2015). The directors of the
company can be held liable for taking any debts from other organization under the following
grounds:
 The alleged person, at the time of the debt was the director of the company;
 At the time of debt, the company became insolvent or the company has become
insolvent due to taking debt;
 There were many possibilities to assume the facts that the company will be insolvent
and the directors had the prior information to that effect.
According to section 588G of the Corporation Act, if all or any of the above mentioned
requirements have been fulfilled, the directors will be held liable. However, the Corporation Act
has provided certain provisions by which the liabilities of the directors can be excused and they
can defend their position. However, at all the aspect the directors must have to show that they
were did the same with good faith and intention. The directors have no intention to make illegal
profit. The directors, against whom such allegations have been brought, can take certain defense
under section 180(2) of the Corporation Act (Anderson et al. 2017). The directors can take
certain defense for avoiding the breach of duty of care. The directors of the company can take the
plea that the act done by they were meant to go with the interest of the company and they were of
the view that such an act will help the company to make legitimate profit thereby. The directors
are required to show that the step that has been taken by them was purposive and they have

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exercised all the duties in good faith. Further, they can take the plea that they had no bad
intention while making such decision and they had thought that their decision would make the
company out from any hurdle. They should have to show that they had no intention to gain any
illegal profit for them. in addition to this, if the directors can show that they have informed other
members of the company regarding their decision and this provision can be reliable for the
company and they can prove their legitimacy and faith to the company (Marsh et al. 2017). As
per Section 189 of the Corporation Act, any director of the company can appoint any person in
good faith and ask him to implement policies for the protection and development of the company
(Hedges et al. 2016). However, the ground that the directors are considered in this case should be
based on reliable source and all the grounds taken by the directors should act for the benefit of
the company. If the directors can prove the same, it will be considered as a reasonable ground
under the law. Further, under section 190(2) of the Corporation Act, it has been mentioned that if
a director of a company in good faith delegates certain rights on the person and the intention is
to secure the interest of the company and if any mishap has been occurred due to this, the
director will not be held responsible for the same.

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Reference:
Anderson, Helen L., Jasper Hedges, Ian Ramsay, and Michelle Anne Welsh. "Illegal Phoenix
Activity: Is a'Phoenix Prohibition'the Solution?." (2017).
ASIC v Cassimatis [2016] FCA 1023
ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57
Australian Securities and Investments Commission v Adler (2002) 168 FLR 253
Bottomley, Stephen, Kath Hall, Peta Spender, and Beth Nosworthy. Contemporary Australian
Corporate Law. Cambridge University Press, 2017.
Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance.
Routledge, 2016.
Chen, Zhihong, Oliver Zhen Li, and Hong Zou. "Directors׳ and officers׳ liability insurance and
the cost of equity." Journal of Accounting and Economics 61, no. 1 (2016): 100-120.
Clarke, Thomas. "The Widening Scope of Directors' Duties: The Increasing Impact of Corporate
Social and Environmental Responsibility." Seattle UL Rev. 39 (2015): 531.
Dixon, Olivia. "Honesty without Fear-Whistleblower Anti-Retaliation Protections in Corporate
Codes of Conduct." Melb. UL Rev. 40 (2016): 168.
Du Plessis, Jean Jacques, Anil Hargovan, and Jason Harris. Principles of contemporary corporate
governance. Cambridge University Press, 2018.