Company Law: Vicarious Liability, Directors' Duties, and Case Studies

This report delves into key aspects of company law, specifically focusing on vicarious liability and the duties of company directors. The analysis begins with an examination of vicarious liability, explaining how employers can be held responsible for the actions of their employees, including discussions of relevant case law such as Prince Alfred College Incorporated v ADC [2016] HCA 37. It explores the tests used to determine employer liability, emphasizing the importance of employee awareness of job roles and employer precautions to mitigate risk. The report then transitions to the duties of company directors, as outlined in the Corporations Act 2001, particularly section 180(1). It stresses the importance of directors' due care, diligence, and informed decision-making, including their responsibilities regarding financial obligations. The report references significant cases, such as ASIC v Adler, ASIC v Healy [2011] FCS 717, AWA Appeal (1995) 37 NSWLR 438, 504, and the Centro decision, to illustrate director responsibilities. The analysis includes practical advice on how to avoid legal issues and protect businesses from potential liabilities, as well as a discussion of preventive measures and contractual agreements.

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Running head: COMPANY LAW
Company Law
Name of the Student
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Author Note

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1A
A person of superior position would be held liable for the act or omission of an act done
by his employee under the doctrine of Vicarious Liability. The common law holds the employers
liable for the wrongful act done by his employee, acting in the course of the business. When an
employee commits a tortious act in the course of employment, the employer is held vicariously
liable for the damage or loss caused to a third party by way of a transaction or agreement. The
doctrine of Respondeat Superior guides the rule of vicarious liability of the employer as he
shares a relationship of trust and confidence with his employee. This relationship makes the
employer liable for the negligence committed by the employee, for the employer bears a liability
of care towards the customer or supplier with whom the business deals. Therefore, the employer
has the responsibility to cover for the losses caused to the customers or suppliers arising out of
an unauthorized act, but in the course of employment, irrespective of the fact whether it was
committed in good or bad intention by the employee. The liability of the employer towards the
plaintiff needs to be decided by the court, along with the fact that whether the employee’s act or
omission has affected the plaintiff, giving effect to a cause of action.
The recent landmark judgment of Prince Alfred College Incorporated v ADC [2016]
HCA 37 has shaped the ambiguous approach to vicarious liability of the employer, as previous in
Australia, the legal responsibility of the employer pertaining to his employee’s wrongful act has
not been much clear. In this case, the court discussed the adoption of the right approach
regarding holding an employer liable for the tortious act of his employee, which has arisen in the
course of business. The employee, on the other hand must be aware of his job roles and
responsibility to avoid negligence and mistakes that causes injury to the third party. Additionally,
employees must be aware of their rights and duties, like his job role, his jurisdiction, transactions
to make on behalf of the employer and the business and the business decisions he is eligible to
undertake in absence of the owner or the deciding authority. To hold the employer liable, it must
be found out that whether the employee acted in personal capacity without the authorization of
the employer or acted in the course of business. This factor of acting ‘in the course of business or
employment’ can be judged on the basis of the following test:

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 It needs to be ascertained whether the employee was asked to do the act or refrain from
doing the act by the employer itself, that caused damage to the third party; and
 It is important to find out whether the unauthorized act of the employee has been done in
the course of business, which was asked t do by the employer.
These factors would help to determine whether the employer would be held liable for the tort of
negligence or negligent misrepresentation committed by the employee. The factor states that the
employer would be held vicariously liable even if the employee has acted without the
authorization of the employer, but it has to be proven that such unauthorized work is done in
such a manner that it seems to be impossible to avoid for executing the normal course of work.
In many cases, an act with criminal liability has also attracted vicarious liability of the employer
as it was acted in the course of the employment and therefore held the employer to pay damages
to the party so injured.
Therefore, the law protects the aggrieved party and the employer cannot defend himself
on the grounds of criminal liability of the case. This restricts the employer from escaping his
responsibilities. The employer would still be held liable for the tortious act of an employee who
has left the organization; as the act was carried out while the employee was in the course of
employment. The employer would be vicariously liable to pay damages to the third party who
has contracted injury or loss because of such wrongful act of the employee. However, it is to be
noted that the employer shall be eligible to bring charges against the employee who has
committed a wrongful act out of negligence or otherwise. Such charges would be brought under
the Employee’s Liability Act 1991. In this matter, it needs to be highlighted that the employee has
acted out of the course of employment or such action is in no way related to the course of
employment.
In this case, Jack, the owner and employer of Michelle would be vicariously liable to
make the payment due to the supplier for the purchase of the gold leaf sheets. Michelle
purchased the sheets, although without authorization of her employer, yet in good intention for
the betterment of the business along with making an impression on the customers. It is evident
that the purchase was done in an unauthorized way, yet it can be claimed by Michelle that it was
closely related with the job role as a Manager, who should consider about the profit and better

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ways to conduct the business. This makes it clear that such act of Michelle was made I the course
of business even if Jack, her employer, did not authorize it. Additionally, it was be claimed by
Michelle that such unauthorized purchase neither injure the supplier nor Jack, which makes her
clear from all the liabilities as an employee. On the contrary, it proved to be a profitable deal that
the customers appreciated, boosting the sale. It enhanced the financial situation of the bakery-
café and impressed the customers as well. Therefore, no injury has been caused to the third party
by way of negligence and so Jack would be liable to pay for the gold leaf sheets. In Perkins v.
Grace Worldwide (1997) 72 IR 186, it was held that there is a mutual trust between the employer
and the employee which is the most important essence of their bond and it is applicable for both
of them equally.
1B
To advice Jack so that he could avoid being held responsible for the tortious act of his
employees, he must ensure the adoption of preventive measure and precautions pertaining to the
conduct of the employees. He must refrain the employees from making unauthorized purchases,
no matter how lucrative the offers are. Jack must ensure that the employment contract must
contain clauses that refrains employees to indulge into actions not arising in the course of
employment or to make purchases that may have an adverse effect on the business. Jack needs to
retain his position as the owner strong so that it has an impact on his employees to maintain a
good conduct. The employer should have the ability to recognize probable risks that the business
may contract by the misconduct of the employees and must take necessary steps accordingly.
These steps would stops such tortious acts from cropping up on the first place. In addition to, it is
also significant for the employer to recruit, train and monitor his employee so that they do not
indulge into any occupational misconduct.
On the other hand, there should be a strict policy with the supplier so that he do not
supply any product without the authorization of the owner. Jack must looks for a better
contractual agreement with Glitzy Touch, which must include that they must not make offers to
the employees to make purchase in this absence.
Lastly, on this particular case, Jack should have left his accommodation details of
Montreal so that Michelle could contact him while making the purchase.

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2A
It is required for the director of a company to ensure that the decision they are making on
behalf of the company is supported with due care and diligence. Their decision-making has a
consequence upon the future of the company. They should maintain a record for their decision
making process as a director on behalf of the company, to avoid any kind of confusion in future.
They are expected to have a sufficient knowledge about the operation of the company, which
may have an effect over his decision-making. In order to take appropriate decision on behalf of
the company, they are required to attend the boards meeting to gain a minimum required
knowledge about the financial and the other status of the company. The Corporations act 2001
has imposed certain duties on the directors. Section 180(1) of the Corporations Act 2001 has set
up a standard which the directors need to maintain while performing their responsibilities and
discharging the duties. This section provides that the directors should maintain the minimum
degree of care and diligence that a reasonable man in his position had maintained. In ASIC v
Adler, the Court held that the directors owe a duty of care while decision making. By holding
this position he ensure that he has the skill of a reasonable person in his position and he should
be responsible for monitoring the management of the company. They should not make them
absent from the board of meeting without any reasonable cause. A director failing to comply
with his duties shall commit a breach of duty.
The director of the company is responsible for monitoring the financial status of the
company. Directors need to have adequate knowledge about the company if it has any financial
obligations. They should direct the company in relation to their financial obligations. It is one of
the duties of the director to know the debts of the company before they make a decision in
relation to financial transactions. ASIC v Healy [2011] FCS 717 established that the director of a
company is expected to hold an interest in the information available to him and must understand
the information. They are required to use their rational mind to perform the responsibility that
resides in them. In the AWA Appeal (1995) 37 NSWLR 438, 504 the Court reiterated while
defining the duties of the directors that they should be acquainted with the financial obligations
and status of the company. They must have a clear understanding to the financial reports. In the
Centro decision, the Court decided that it is one of the general duties of the director to possess

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sufficient knowledge about the debts and other financial obligations of the company. If a director
cause a breach of his duty, resulting a debt or loss to the company, he shall be personally liable
for the debt. In the Bell Group Ltd (In Liq) v Westpac Banking Corporations (No 9) [2008]
WASC 239, the Court maintained that the director should act for proper purpose and best interest
of the company. A director shall be personally liable for causing a breach of his duties which
resulted the company to incur debt.
In this case, Michelle had committed a breach of her duties she owed as a director to the
company. Michelle was obligated as a director to attend the board meeting of ‘La Petit Plat’ in
order to be aware of the conduct and condition of the company. Furthermore, she was required to
inform other members of the company before deciding to borrow from Best Bank Ltd an amount
of $600,000 on behalf of the “La Petit Plat”. She should have notified the other members that she
was unaware about the financial status of the company, and ask for an advice from them in such
situation. She had failed to act in in a good faith resulting into a breach of duties. She had also
failed to act for the best interest of the company as provided under the Corporations Act 2001.
She made a decision on behalf of the company about a subject matter without having sufficient
knowledge about the internal conditions of the company. A breach of duty arise on her part for
not informing the members of the company about the business judgement she made. She had also
failed in exercising due care and diligence towards her obligation by not actively being part of
regulating the management of ‘Le Petit Plat Pty Ltd’. Additionally, Michelle was obligated to
read the financial statements of the company in which she was the director, to know the financial
issues of the company. She must have gathered sufficient knowledge about the financial status of
the company whether the company has incurred any debts before incurring more financial
obligations for it. As an executive director, it was the duty of Michelle to know that the company
‘Le Petit Plat’ was under outstanding debts that they failed to pay. In such a situation, borrowing
$600,000 from the Best Bank Ltd was not a decision that could be considered for the best interest
of the company. Such irresponsible decision making by Michelle cannot be justified by any
reasonable excuse. If there was a reasonable man in the position of Michelle, he or she would
have exercised due care and diligence while making a decision of borrowing such an enormous
amount of money and taken advice from the other members. Michelle had failed to discharge her
duties as a director as it has been imposed upon her by the Corporations Act 2001. It can be said

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that Michelle shall be personally liable if the company had incurred any debt for the breach of
her duties.
2B
Decision-making is one of duties that is imposed upon the directors. They are responsible
to monitor the management of the company. They are given the duty to promote the success of
the company. The responsibility to act in good faith and proper purpose, resides on the directors.
They are compelled to act for the best interests of the company. Certain situation may arrive
when the director has failed to perform his duties. In such situation, the director commits a
breach of duties. A director can be held personally liable if the company acquires any obligation
or loss for the breach of duties committed by him. He may incur certain civil or criminal liability
for such breach. As a consequence he may be disqualified from the position. There are certain
ways to avoid the personal risk that the director may obtain by committing a breach of his duties
and incurring a debt for the company. The director should oblige to the duties that are conferred
upon him by the Corporations Act 2001.
“Le Petit Plat” can make certain changes in their operation to avoid this kind of personal
risk to a director. They may make a strict provision in the company requiring the directors to
comply with the duties of directors as provided under the Corporations Act 2001. They can make
a policy in the organisation to ensure the compliance by the directors and inspect it from time to
time. A regulation can be made requiring the directors not having detailed knowledge about the
status of the company to consult with other member before making a huge financial decision of
the company. The company should focus on improving the required skills and care of the
directors from time to time.
As an example, the Australian Securities and Investments Commission V Meredith
Hellicar & Ors [2012] HCA 17 can be discussed, which emphasised on the required care and
skills to be exercised by the directors. Director are required to hold sufficient knowledge about
the subject matter before making a decision. “Le Petit Plat” should make a strict regulation to
compel the directors to discharge their duties as per the Corporations Act 2001. A proper

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knowledge about the consequences of the breach of duties might have helped Michelle to avoid
the personal liability in this scenario. To avoid incurring a personal risk by the directors in this
scenario, “Le Petit Plat Limited” can bring a change in the governance policy of the company.
They must compel the directors to be present in the meetings of the company as this is the part of
the duties of the directors. It would help in managing the personal risks of the directors, as the
directors will be fully aware of the financial status of the company.

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References
ASIC v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002)
ASIC v Healy [2011] FCS 717
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 (‘Centro’)
Australian Securities and Investments Commission V Meredith Hellicar & Ors [2012] HCA 17
AWA Appeal (1995) 37 NSWLR 438, 504
Employee’s Liability Act 1991
Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186
Prince Alfred College Incorporated v. ADC [2016] HCA 37
The Bell Group Ltd (In Liq) v Westpac Banking Corporations (No 9) [2008] WASC 239
The Corporations Act 2011