Report: Director's Duty Breach Analysis in Corporate Law BO1CLAW314

This report examines a scenario involving Lilian and Gumpta, directors of Greedyas Pty Ltd, to determine if they breached their director duties under the Corporations Act 2001 (Cth). It analyzes their actions concerning insolvent trading, misuse of company information, and insider trading. The report applies relevant sections of the Act, including 180, 181, 183, 588G, and 1013, along with case law such as ASIC v Vines and ASIC v Adler, to assess their liability. The analysis concludes that Lilian breached sections 180, 181, and 588G, while Gumpta breached sections 180, 181, 183, and 1013(1). Both face civil penalties, and Gumpta may also face criminal liability due to fraudulent behavior. The report references several legal cases and sections of the Corporations Act 2001 to support its findings.

Running head: Business Law Assignment 0
Corporate Law
BO1CLAW314
Student’s Name

Commercial and Corporation Law 1
Contents
Issue............................................................................................................................................................2
Rules............................................................................................................................................................2
Application..................................................................................................................................................5
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8

Commercial and Corporation Law 2
Issue
The issue of the case is to check that whether Lilian and Gumpta are liable to breach any director
duty. In addition, this is to check that what will be the consequences of such a breach.
Rules
A company is a legal person that has many rights and duties. Because of such legal personality, a
company is able to do many of the tasks by its own name. In addition to being a legal
personality, a company has a distinct recognition from its directors and members and such
people cannot held personally liable for any of the act of company Salomon v Salomon & Co Ltd
(1897) AC 22 is an important case in which separate legal identity of the company has been
recognized by the law. Although a corporation is a separate legal personality, yet the same
requires individuals to act on behalf of the same. These individuals are no one else but the
directors and officers of the company who take business decisions on behalf of the company but
are not personally liable because of the separate legal status of the corporation. Re Centura
Global Holdings Pty Ltd [2015] NSWSC 1744, Forkserve Pty Ltd v Jack (2001) 19 ACLC 399,
ASIC v Cassimatis (No 8) [2016] FCA 1023, Fodare Pty Ltd V Shearn, Supreme Court of New
South Wales, 25 May 2011 and so on are the cases where directors were held liable for the
breach of the duties mentioned under act has been breached.

Commercial and Corporation Law 3
In Australia, Corporations Act 2001 (Cth) (act) is the main legislation that provides the manner
of working in which all the directors and officers of the company are liable to perform their
respective Functions.
Firstly, section 180 of the act says that every director and officer of the company is required to
perform their duties with diligence and due care as similar to a reasonable person. Section 180(2)
of the act provides that while dealing on behalf of the company such officers and directors must
use their business judgment. It means they are required to develop the business judgment in the
positive faith and for an appropriate purpose. Further, directors of the company must have reason
to believe that the business judgment made by them is appropriate and in the best interest of the
company. This is a significant section and violation of the same can attracts the penalty. The
significance of the case can be understood by looking after the decision of the case of ASIC v
Vines [2005] NSWSC 738. In the decision of this case, court held the directors liable under
section 180 as he failed to maintain the duty of care and diligence. Section 181 of the act is
another significant section that prescribes the duties of the director. As per the provisions of this
section, every director and officer of the company must perform his or her functions and duties
for a proper purpose and with good faith for the best interest of the company
(Classic.austlii.edu.au, 2018). It was given in the case of Howard Smith v Ampol Petroleum Ltd
[1974] AC 821 that court will decide that whether an act was in the best interest or for the proper
purpose of the company or not.
In addition to the directors and officers, section 182 of the act puts some obligations to the
employees of a corporation too. The section says that it is the duty of every
director/officer/employee of the corporation to not to use their position either

Commercial and Corporation Law 4
 to gain the personal benefits or advantage for anyone else
 to cause impairment to the organization
The last general duty defined under the act is mentioned in section 183. As per this section,
officer, director, or employee of the corporation must not use the information related to the same
that they have come across because of their job, to gain the personal benefits or to cause
detriment to the corporation. In the case of ASIC v Adler [2002] NSWSC 171, a person named
Adler misused the business information for his personal benefit and thereafter held been liable to
breach the provisions of section 183 of the act.
The duties defined under section 181 to 184, are the general duties of a company. In addition to
these sections, duties of directors are also defined under other sections of the act. For instance,
section 588G. This is also a significant section, which imposes an obligation to the directors of
the company and prevents them by doing involvement trading. To make a director of the
company liable under this section, four of the following conditions are needed to be satisfied:-
 At the time of debt, the responsible person must be a director of the company
 Either company was insolvent or become insolvent by incurring the debt
 Reasonable grounds were there to believe on the insolvency status or probability of
insolvency of the company
 The director must incur such debt after the enactment of this section (Austlii.edu.au,
2018)
In the case of ASIC v Plymin, Elliott & Harrison [2003] VSC 123, directors were held liable for
the breach of section 588G, as they have not taken reasonable steps to prevent the company by
being insolvent. In addition to section 588G, section 588H is also there that contains some of the

Commercial and Corporation Law 5
defenses that a director of the company can take with the objective to avoid the liability under
section 588G. According to the subsection, 4 of section 588H, a director cannot be held
responsible for the insolvent trading under section 588G if the same was not involved in the
management of the company cause of illness or other good reasons and therefore was unaware
with the true financial situation of the company. Further, section 1013 of the act provides the
provisions related to insider trading and prevent a person to use that information of the company
which is not available to the public in general for the personal benefits.
Moving the focus of the discussion towards penalties for the breach of director duties, this is to
state that section 1317E is a civil penalty provision and every director and officer of the company
can be held liable under this section if they breach the provisions of sections 180-183. In
conjunction with this, the court can also impose the penalty in those cases where fraudulent
behavior of directors is involved.
Application
In the provided case Lillian, being the director of Greedyas Pty Ltd. was acting on behalf of the
same. She made an order of some computers valued $100,000 from another company named
Greedyas Pty Ltd. Lillian was not aware with the poor financial condition of her company as the
same was not involved in the management process of the same (the reason to do is not clear).
However, the managing director of Greedyas Pty Ltd, Gumpta knew that Greedyas Pty Ltd. is
not doing good business and is about to be insolvent yet he sold the computers in order to meet
the sale target. In this transaction breached their director duties under section 180 and 181 of the
company. They failed to act in the best interest of the company and their acts were also not for
the proper purpose. Applying the provisions of the case of ASIC v Vines, both of the directors

Commercial and Corporation Law 6
will be held liable to breach section 180, as they did not perform their jobs with diligence and
care. Gumpta has not performed his duty in the best interest of the company as he had reason to
believe that payment of computers can be in danger, as the purchasing company was almost
insolvent. Apart from these general duties, Lilian is also liable for the breach of section 588G
where she pursued the insolvent trading. All the requirements mentioned in this section are
satisfied. Firstly, Lilian was acting as director of the company while incurring the debt of
$100,000. Secondly, the company was about to be insolvent and been the same cause of
subjective debt. Thirdly, Lilian could be aware with the poor financial status of the company by
some efforts but she failed to so and at last, she incurred such debt after enactment of this act. As
all the conditions of the conditions are satisfied, Lilian is liable to conduct insolvent trading
applying the provisions of the case of ASIC v Plymin, Elliott & Harrison. In addition to the same,
she is not able to take the defense of her noninvolvement of management of the company as no
reasonable reason behind do so is mentioned.
In addition to the above, one more transaction has also been developed by Lilian and Gumpta.
Being the managing director of the company Gumpta was aware with the fact that the company
is going to be merge in another company which will lead significant impact on the share price.
As Gumpta was a close friend of Lilian, he also informed and advised Lilian to purchase shares
of the company and on this manner, they both earned profits. Here in this transaction, Gumpta is
liable to breach section 183 of the act. He misused the information of company for the
development of personal profits. Here applying the decision given in the case of ASIC v Adler,
Gumpta is liable for misusing company’s information. Further, he is also liable for insider
trading which is restricted under section 1013 (1) of the act.

Commercial and Corporation Law 7
As both the directors have breached certain duties under the act, they are liable for the civil
penalties by the virtue of section 1317E of the act. Further, Court can held Gumpta liable for the
criminal liability as well because he acted in a fraudulent manner while acting in the capacity of
managing director.
Conclusion
This is to conclude that yes, Lilian and Gumpta breached their director duties. Where on one side
Lilian is responsible for breach of section 180,181 and 588G, Gumpta is liable to breach the
section 180,181,183 and 1013(1) of the act. They both are liable for civil liabilities and Gumpta
also seems to be liable for criminal liability.

Commercial and Corporation Law 8
References
ASIC v Cassimatis (No 8) [2016] FCA 1023
ASIC v Plymin, Elliott & Harrison [2003] VSC 123
ASIC v Rich (2003) 44 ACSR 341
ASIC v Vines [2005] NSWSC 738
Austlii.edu.au. (2018) Corporations Act 2001 - Sect 588g. [online] Available from:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html [Accessed on
17/01/19]
Classic.austlii.edu.au. (2018) Corporations Act 2001 - Sect 181. [online] Available from:
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html [Accessed on 16/01/19]
Corporations Act 2001 (Cth)
Fodare Pty Ltd V Shearn, Supreme Court of New South Wales, 25 May 2011
Forkserve Pty Ltd v Jack (2001) 19 ACLC 399
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Re Centura Global Holdings Pty Ltd [2015] NSWSC 1744
Salomon v Salomon & Co Ltd (1897) AC 22