Corporate Law Case Study: Director's Fiduciary Duties

This assignment presents three case studies analyzing breaches of director's duties under Australian corporate law. The first case examines a takeover scenario where directors manipulate share prices to prevent a change in management, potentially violating fiduciary duties and statutory obligations under the Corporations Act 2001. The second case involves a director of Primo Construction Limited using confidential information to benefit a competing company, Iconstruct Limited, resulting in a conflict of interest and a breach of director's duties. The final case study explores a scenario where executive directors disregard the advice of non-executive directors and proceed with a risky contract, potentially leading to a breach of their fiduciary duties. Each case study identifies the legal issues, relevant laws, and application of those laws to the facts, concluding with an assessment of potential breaches and liabilities. This case study demonstrates a strong understanding of corporate law principles and their practical application.

Running head: CORPORATE LAW
CORPORATE LAW
Name of the Student
Name of the University
Author Note

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Case study 1
Issue
Urbanlodge Limited (‘Urbanlodge’) is planning a takeover of its competitor Uninest
Limited (‘Uninest’). The prevailing share prices are $10 and Urbanlodge has offered $12 per
share. The directors of Uninest through a resolution sanction loans in favour of one of the
directors, namely, Gilligan. This loan would be approved from the company’s reserves. Using
this loan Gillian was tasked with the responsibility of purchasing shares of Uninest in bulk. This
would inflate the share prices and hence Urbanlodge would be unable to make payments for such
an inflated price and thus would be unable to execute the takeover. This step was suggested by a
consultant Christine Neales. This was undertaken because the takeover would result in a
complete change of the management including the Board of Directors. However, as the
management was not performing satisfactorily the change would be beneficial for the company.
The issue here is to analyze if the directors breached any statutory or common law duties in
doing so and if the consultant is liable for such an action as well.
Law
The law governing companies in Australia is the Corporations Act, 2001 but Australia
also embodies common law principles1. Under common law which is also referred to as general
law directors have various fiduciary duties which must be observed by the directors. These
include the duty to act in utmost good faith in line with the interests of the company, duty to not
improperly use the powers vested in them, duty to use their discretion in line with the interests of
1 Brudner, Alan. The unity of the common law. OUP Oxford, 2013.

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the company and a duty to avoid any kind of conflict of interest to the best of their abilities2. This
meant that the director’s first and foremost duty lies towards the interests of the company.
In Chan v Zacharia3 it was held that an action that creates a conflict of interest between
the management and the interests of the company is in breach of their statutory obligations. This
means that using an authoritative position for personal gain where the use of power leads to a
harmful effect on the corporation it would be considered a conflict of interest4. This has also
been reiterated in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4)5.
As per Section 181 of the Corporations Act, 2001 the common law duty to act in good
faith and in the best interests of the company has been enacted statutorily6. This states that the
directors have an obligation to act in the best interests of the company with bona fide intentions.
Section 184 of the Corporations Act, 2001 set out criminal liabilities for a breach of the
director’s statutory obligation and sets out that such is applicable in cases where the directors
have worked against the interests of the company or have not observed utmost good faith (as per
Section 184 (1) (c) of the Act)7. Section 184 (2) (a) and (b) of the Act set out that where the
directors have used their position to gain an advantage for themselves or have acted recklessly
and this has detrimental effects on the company it would also attract criminal liabilities under
this section8.
2 Miller, Paul. "Justifying Fiduciary Duties." McGill Law Journal/Revue de droit de McGill 58.4 (2013): 969-1023.
3 [1984] HCA 36.
4 Llewellyn, Karl N. The common law tradition: Deciding appeals. Vol. 16. Quid Pro Books, 2016.
5 [2007] HCA 963.
6 Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. Routledge, 2016.
7 Schultz, Emma, Gloria Y. Tian, and Garry Twite. "Corporate governance and the CEO pay–performance link:
Australian evidence." International Review of Finance 13.4 (2013): 447-472.
8 Corporations Act, 2001 (cth).

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Howard Smith Ltd v Ampol Petroleum Ltd9 laid down a two-step test to determine if the
powers exercised by the board of directors are for proper purposes. This would aid in interpreting
if the board of directors are indeed in breach of their statutory and general law duties. It was
further stated here that the directors’ use of their powers to determine the final selling price of
the shares of the company is unlawful. The motivation to retain their positions through improper
use of their powers would also be deemed a breach of their statutory duties as held in this case.
The Corporations Act, 2001 does not provide for any liability on consultants and
independent contractors for the actions of the company10. This was also reiterated in the HIH
report published in 2003 following the HIH Insurance fraud11.
Application
In the given set of circumstances the directors of the corporation conspired to sanction a
loan from the company’s resources to a director to enable him to inflate share prices through
bulk purchase. This was done to prevent the change of management through takeover by a
competitor. This takeover would however aid the underperforming company’s ultimate interests.
Following the judgment in Howard Smith Ltd v Ampol Petroleum Ltd the two-step test
may be applied to this situation. The first is to determine the purpose of the power that is being
exercised by the board of directors. Here the power in question is their power to grant loans
through passing resolutions. The purpose of the power to pass resolutions through voting comes
by virtue of section 248G and the purpose of it is to allow the decision making process of the
company to be scrutinized through voting and that the opinions of all directors are taken into
9 [1974] AC 821.
10 Leung, Philomena, et al. Modern Auditing and Assurance Services 6e. Wiley, 2014.
11 Carey, Peter John, Gary S. Monroe, and Greg Shailer. "Review of Post‐CLERP 9 Australian Auditor
Independence Research." Australian Accounting Review 24.4 (2014): 370-380.

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account. By virtue of Section 181 of the act the decisions taken by the board must be in good
faith and in the best interests of the company and so it may be inferred that the powers conferred
in terms of passing these decisions must also be aligned with the obligations of this section.
The second step is to identify the purpose that their power was exercised for. In this
situation it is evident that the resolution was passed so that directors could retain their position is
the company by inflating share prices. This would also be detrimental to the company as the
takeover would ideally usher in better management. Thus, the purpose the power was used for is
improper.
This is also a conflict of interest and thus the judgment delivered in Chan v Zacharia
would also apply. And thus they were in breach of their general law duty to act in good faith and
in the best interests of the company.
This would also amount to a breach of their statutory duties as per Section 181 of the act.
This would attract criminal liability as per section 184 of the act.
The consultant Christine Neales would not be liable for any of the acts of the company as
the Corporations Act, 2001 does not provide for any liability in relation to consultants and
independent contractors. There is no liability under common law either.
Conclusion
The directors of the company were in breach of their fiduciary duty to act in good faith
and in the best interests of the company.
The directors were in breach of their statutory duties under Section 181 of the act. This
also relates to their duty to act in good faith and in the best interests of the company.

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The consultant Christine Neales would not fact any liability for the advice given by her.
Case Study 2
Issue
Shane is a director and shareholder of Primo Construction Limited (“Primo”) and has
incorporated a company called Iconstruct Limited (“Iconstruct”). This company was formed in
order to obtain a tender from another organization known as Landstock Limited (“Land stock”).
Both Primo and Iconstruct are bidding for the tender and it is awarded to Iconstrcut due to the
low price offered by it. But Shane was aware of the price offered by both companies and it may
be inferred that he used this information to his advantage in getting the tender in favour of the
company incorporated by him. The issue here is if this amounted to a conflict of interest and the
remedies.
Law
In Streeter v Western Areas Exploration Pty Ltd12 it was held that merely holding the
position of a director in two competing entities does not constitute a breach off the no-conflict of
interest rule. However, the director must ensure that no confidential information is divulged from
both sides13.
It was held in Green v Bestobell Industries Pty Ltd14 that diversion of business
opportunities would amount to conflict of interest. Diversion of business opportunities would
denote the misdirection of business opportunities to different entities or depriving a corporation
12 [2011] 82 ACSR 1.
13 Tarr, Julie-Anne, and Janet Mack. "Auditor obligations in an evolving legal landscape." Accounting, Auditing &
Accountability Journal 26.6 (2013): 1009-1026.
14 [1982] 1 ACLC 1

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of opportunities that would otherwise come to them. This is a common law fiduciary duty that
must be observed by the directors of all corporations15. A breach of such a duty would attract
damages.
The directors of a corporation have a civil obligation under Section 183 prohibiting them
from using information they have obtained by virtue of their position as a director to gain an
advantage for themselves or a third party [As per Section 183 (1) (a)] or to cause any detriment
to the corporation [As per Section 183 (1) (b)]16.
Section 184 (3) of the act provides for criminal liability in case of an improper use of
information obtained by person by virtue of his position as a director as per defined in Section
184 of the act17.
Application
In the given set of circumstances, Shane is a director and shareholder of both Primo and
Iconstruct. He had information about the tender bid made by both companies. Iconstruct making
a lower bid can be attributed to him having access to information regarding Primo’s bid.
Following Streeter v Western Areas Exploration Pty Ltd Shane’s position as a director in both
companies would not amount to a conflict of interest. However, the information he obtained as a
director of Primo was used to gain an unfair advantage which could be construed as divulging of
confidential information thus as laid down in the case Shane would be in breach of his common
law fiduciary duties relating to conflict of interest.
15 Kraakman, Reinier, and Henry Hansmann. "The end of history for corporate law." Corporate Governance. Gower,
2017. 49-78.
16 Corporations Act, 2001.
17 Corporations Act, 2001.

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The information divulged would give an advantage to Shane’s newly formed company
formed company and thus is a conflict of interest in light of his position as a director of Primo.
The information further lead to Primo losing the tender which could only be attributed to the
lower price quoted by Iconstruct (as stated by the facts). Thus, resultantly Primo lost out on a
business opportunity which it would have obtained under ordinary circumstances. This would be
construed as a diversion of business opportunities resulting from the acts of a director. This is a
conflict of interest as laid down by the judgment in Green v Bestobell Industries Pty Ltd and
thus is also a breach of the director’s fiduciary duties as per common law.
The information divulged by Shane gave Iconstruct and him (as a director and
shareholder) an advantage over Primo’s tender bid. Consequently the loss of the tender can be
construed as a detrimental effect caused to the company. Thus all requisites of Section 183 of the
act is in the present in the current scenario. Shane is thus in breach of his statutory duties as a
director of the corporation.
Conclusion
As established in the above discussions Shane is in breach of his common law fiduciary
duties as a director of the corporation. A breach in common law duties would amount to a civil
penalty in the form of damages.
Shane is also in breach of his statutory duties as a director as he is in contravention of
Section 183 of the act. The breach of his statutory duties as a director would attract penalties in
the form of criminal liabilities as per the provisions of Section 184 of the act.

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Case Study 3
Scenario A
Issue
Frank and Diane are executive directors of a company. The company also has two non-
executive directors Ron and Kelly. Frank and Diane are risk-takers and want to enter into an
agreement with “CorpGrain” whereas Ron and Kelly oppose it. There is a report stating that it
would not be feasible for the company to undertake a contract as it was likely to fail. Under such
circumstances Frank and Diane went forward with the contract and Ron and Kelly are persuaded
to vote in favour of it. The issue is if in doing so all the directors named above have committed a
breach of their fiduciary duties under common law and/or their statutory duties under the
Corporations Act, 2001.
Law
Under Section 180 of the directors are expected to act with due dare and diligence when
acting on behalf of the company under the provisions of Section 180 (1) of the act. As per
Section 180 (2) they are expected to meet their equivalent common law obligations which
embody the same responsibilities18. Thus when undertaking contracts directors are expected to
meet these standards of due diligence and care.
Application
Under the given set of circumstances Frank and Diane would be expected to meet due
standards of care when undertaking ventures on behalf of the company as per their duties under
Section 180 (2) of the act. The report from Ron and Kelly on their apprehensions about the
18 Corporations Act, 2001.

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venture and the report of the expert would have to be perused by both Frank and Diane. Such
perusal would make it evident that this venture would be detrimental for the company. Thus the
Business Judgment Rule would apply. This contravention would also be a breach of the common
law duties to act responsibly.
Ron and Kelly would also have the same responsibility and having read the experts report
would be obligated to vote against such a venture since they are fully aware of the risk the same
entails. Thus they would also be in breach of their duties under Section 180 (2) of the act if
convinced to vote in favour of it and hence their common law duties.
Conclusion
All the directors of the company, namely, Frank, Diane, Ron and Kelly are in breach of
their common law and statutory duties.
Scenario B
Issue
Under the same premise as Scenario A there is now an expert report in favour of the
venture and an agreement is entered with “CorpGrain”. The provided robotic assistance however
does not meet the expected standards of the contract and “CorpGrain” is suing for damages. The
issue here is if any statutory defenses would be available to the directors.
Law
Section 189 of the act deals with reliance placed on expert advice and the reliance being
brought it into question with regard to a directors performance of a duty under the statute or a

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duty under common law [As per Section 189 (c)]19. It is stated here that unless proven to the
contrary the reliance is taken to be reasonable.
Under Section 189 (b) (ii) the reliance would have to be put after a diligent assessment of
the advice given with regard to the corporation and its operations20. This is a binding statutory
duty on the directors.
Application
The directors of the company would have to fully assess the implications of such a
contract before entering into one as per their duties under Section 189 (b) (ii) of the act. However
careful assessment of the same would have forewarned the directors of the effects it could have
on the company. Thus executing the contract without complete assessment of the situation would
be a breach of their duties under the section.
Conclusion
Frank, Diane, Ron and Kelly were in breach of their statutory duties under Section 189 of
the act and hence would not have any statutory defenses available to them.
19 Corporations Act, 2001.
20 Corporations Act, 2001.

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Bibliography
Case law:
Chan v Zacharia [1984] HCA 36.
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
Streeter v Western Areas Exploration Pty Ltd [2011] 82 ACSR 1.
Green v Bestobell Industries Pty Ltd [1982] 1 ACLC 1.
Statues:
Corporations Act, 2001.
Articles:
Brudner, Alan. The unity of the common law. OUP Oxford, 2013.
Miller, Paul. "Justifying Fiduciary Duties." McGill Law Journal/Revue de droit de McGill 58.4
(2013): 969-1023.
Llewellyn, Karl N. The common law tradition: Deciding appeals. Vol. 16. Quid Pro Books,
2016.
Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance.
Routledge, 2016.