Victoria University, BLO5540, Semester 2 Assignment: Corporate Law

This assignment solution addresses two key questions related to corporate law. Question 1 examines the duties of directors, including good faith, proper use of position, and preventing insolvent trading, as outlined in the Corporations Act 2001. It analyzes a scenario where directors, including Dion, Vance, Larry, and Peter, potentially breach these duties by failing to disclose opportunities, making decisions that led to insolvent trading, and improperly using their positions. The solution explores the application of the business judgment rule as a defense and discusses the potential civil and criminal penalties for breaches. Question 2 focuses on shareholder rights, specifically addressing oppressive conduct by majority shareholders and the remedies available to minority shareholders under the Corporations Act, including the power of the court to grant relief and grounds for compulsory winding up.

Question 1
(a)
In this part of the question, it has to be explored if any person can be held responsible for the
breach of duties that are present for the directors of corporations.
Rule: under the corporation’s law, several duties are present for the directors. These duties have
been mentioned in the Corporations Act, 2001. In view of these duties, it is required that the
actions of the director should be bona fide. Moreover, the director should always give preference
to the interests of the company. The Corporations Act also requires that the directors should use
their position in the company only for proper purpose. Therefore, s. 181 imposes a duty of good
faith on the directors of corporations (Austin and Ramsay, 2013). This provision requires that the
powers given to the director should be used in good faith. Similarly, the director should always
keep in mind, the best interests.
According to s 182, the talent provided that the position of the directors should not be used
improperly. An example of the improper use of the position of director takes place when the
director continues to allow the company to act even when the director is aware that the financial
condition of the company is not stable.
Is there anything that has been imposed on the directors is to prevent insolvent trading. This duty
has been mentioned in s 588G. therefore, this provision provides that it is the responsibility of
the directors that they should not allow the company to trade if they are aware of the fact that the
company may be insolvent or if they have doubts that the company may be insolvent (Ford,
1978).

Application: at the present scenario, Dion failed to disclose the opportunity that was offered to
the company, by the CEO of Organica Ltd to the board of his company. As mentioned above, it
is the duty of the directors and one with which the bona fide. Moreover, the directors are also
under an obligation to give preference to the interests of the corporation (Farrar and Hannigan,
1998). The test that can be applied for this purpose to see if the directors have complied with the
duty, is an objective test. Therefore, this does is concerned with honesty and good faith. Hence, it
will be treated as the violation of the duty is the directors have subjectively failed to properly
consider the interests of the company. For example, this case may be present when the directors
assume that the company's interests correspond with the interests of the director and they fail to
treat the interests of the company as a separate entity (Paterson and Ednie, 1976). It is also very
significant that the directors to consider the interests of all the shareholders jointly. As compared
to this situation, when the corporation becomes insolvent or there is a risk that it may become
insolvent, the law requires that the. Directors should prefer the interests of creditors instead of
the shareholders.
Under these circumstances, it can be said that the directors are under an obligation according to
which they should not use their powers for an improper purpose. It can be said that an improper
use of their powers has taken place by the directors when the directors use these powers in order
to receive a personal benefit or for the purpose of defeating the voting power of the current
shareholders and creating a new maturity for this purpose. It needs to be noted that the law
requires that while using the power of issuing new shares, it is significant that the directors
should consider the interests of the company as a whole. For example, in such cases, it can be
said that the purpose is proper if it is done for raising capital or take advantage of an opportunity
that has arisen for the company.

There has been another breach of duty by the directors. These breaches related with the duty
body with the director should not allow the company to trade if the company is insolvent. On the
other hand, during the whole meeting, Vance recommended Food Works should make another
investment of $100,000 for its marketing and media advertising efforts. This strategy was also
favored by the other two directors, Dion and Larry. However, Peter, who is also director of the
company had considered the cash flow statement and he also discussed the matter with the
company's accountant and came to the conclusion that already there were -- no problems for the
company. Therefore, it was clear that the company was going to face insolvency.. As Elizabeth
was not a good idea to me any more investment in advertising and marketing. Even in the
presence of such circumstances, the three directors of Food Works, Vance, Larry and Dion
decided that the company should go ahead with making additional investment of $100,000. They
also passed a resolution for this purpose, according to which the company was to continue with
aggressive strategy regarding marketing and advertising for the next year. However, within a few
months, the company ran dry of capital. In this way, it can be said that in this scenario, these
directors of the company were also responsible for the violation of the duty which requires them
to prevent insolvent trading by the company. This amounts to the breach of s. 588G of the Act.
Conclusion: by applying the relevant provisions of the Corporations Act, in this case, the
conclusion arises in this question that three directors of Food Works, Vance, Larry and Dion
have reached their duties imposed on them as the directors of the company.
(b)
Issue: the issue is related in any defense that may be available to the directors of the company
regarding the allegations concerning the breach of duty.

Law: the law offers a defense to the directors when it has been alleged that the directors are
liable for the breach of their duties. These defenses available as a business judgment rule. It was
the role of the common law, but now, this room has been incorporated in the Corporations Act.
Therefore, s. 180 (2) contains the provision that is based on the business judgment rule. It
provides a defense to the directors for the business judgments that have been made by them in
good faith. But the Act provides that the director should not have any personal interest in the
decision that is being made by them. It is also required that the decision should be an informed
decision up to the level that is reasonably expect to perform any other person acting in a similar
position. At the same time, it is also required that it should be reasonably believed by the
directors the judgment being made by them is for the welfare of the company.
Application: as mentioned above, there are certain requirements that should be fulfilled for
availing the defense that is available in the form of business judgment rule. However in the
present scenario, the defense available in the form of this rule is not available to Dion. The
decision was not made by Dion in good faith and keeping in view the welfare of the company.
Therefore, Dion used a lucrative business opportunity that was presented to Food Works by the
CEO of Organica Ltd., who another company, Lifestyle Today Ltd. Dion is the sole director and
only shareholder of this company. Therefore, in the present scenario, Dion, used his position as a
director of Food Works improperly as he tried to achieve a personal benefit.
Conclusion, in view of the facts mentioned above comment is that it can be said that the defense
is not available in the present case. The directors of Food Works cannot use the defense provided
by the business judgments rule.
(c)

Issue: here the issue is if the penalties that can be imposed on the directors under the
corporations act for the breach of their duties, and also the remedies that may be available under
the law for the breach of duties by the directors.
Law: civil as well as criminal penalties have been prescribed for the directors when they are held
liable for the breach of their duties. According to the Corporations Act, when the director has
been liable for the breach of duty mentioned in s. 588G (3), the law provides that criminal
proceedings can be initiated against the director. The maximum penalty that can be imposed
under the law in such cases is a fine up to $200,000 and an imprisonment of 5 years. In this
regard, s. 206B provides that when the director has been convicted regarding a criminal offense,
such directories automatically disqualified from managing corporations. At the same time, civil
penalties may also apply in such a case. The ASIC may seek declaration from the court regarding
the contravention, pecuniary penalty and damages.
Application: under the circumstances, when the directors are liable for the violation of their
duties, civil and criminal penalties may be imposed on such directors. The breach of duty
includes the violation of the duties according to which the directors did not allow the corporation
te trade if they have doubts that the company may not be in a sound financial position. Therefore,
the directors may have to face civil or criminal penalties for the breach of duty.
Conclusion: in this case, the directors of Food Works Pty Ltd may have to face civil or criminal
penalties in view of the fact that they have violated their duties as directors of the company.

Q2
Issue: the facts that are present in this scenario reveal that it has to be considered if the majority
shareholders controlling Carpets Galore Pty Ltd can be held to be liable for oppressive conduct.
Similarly, it also needs to be seen if any remedies available to the minority shareholders that
have been provided by the Corporations Act.
Law: the rule of I majority is considered as a basic concept of the corporate law. However there
is also an inherent risk of abuse present in case of the rule of majority. This risk can be
particularly seen regarding the corporations that are closely held. This risk increases due to the
fact that generally in case of such companies the shareholders play a major role in the
management of the corporation (Hillam v Ample Source International, 2012). Hence, there are
chances that the conflict may arise as a result of the fact that decisions made by majority
shareholders are not accepted well in view of the interests of the shareholders collectively. It is
also worth mentioning that due to the disputes that may arise between the shareholders, there is a
risk of an irritable breakdown of trust and confidence in the company. In the same way, the
situation of such conflict may also cause a deadlock. Hence, in order to deal with such instances,
certain remedies are available to the minority shareholders (Morgan v 45 Flers Avenue Pty Ltd.,
1986). The purpose behind providing these remedies to the minority is to make sure that the
decisions are fair and efficient.
One such provision is s. 232 of the Corporations Act. This provision provides a power to the
court, according to which relief may be granted by the court if the company is involved in
oppressive conduct. At the same time, s461(1)(e) provides a ground for compulsory winding up
of the corporation if the court is of the opinion that the directors acted for the purpose of looking

after their personal interests instead of taking care of the interests of the company (Roberts v
Walter Developments Pty Ltd., 1997).
However, mere disagreement that is present between the majority and minority cannot be
considered as oppressive conduct. Therefore, all the relevant facts and circumstances may be
seen by the court for the purpose of arriving at the conclusion if any prejudice was the result of
the conduct that cannot be reasonably justified (Chander, 2003). For this purpose and objective
test has to be applied. Under this test, it needs to be seen if the majority's conduct was against the
interests of the shareholders collectively (Bahls, 1990).
Application: according to the provisions of corporations regulated with oppressive conduct, in
the present case, it can be mentioned that the decisions taken by David and Ben can be described
as oppressive conduct. For example, the decision taken by these two directors, which provided
that the pay of these two directors will be increased, but the same was not granted to other two
directors, Sarah and Caitlin. Similarly, even if the company made good profit, but the majority of
directors decided that it was not going declared a dividend. This information was continued for
the last 4 years even if the company made regular profit. Moreover, David and Ben failed to
inform Sarah and Caitlin that they were going to hold meeting of the board of the company even
while they took me to get decisions during these meetings.
Conclusion: the conclusion arises in this case that the majority of directors of Carpets Galore Pty
Ltd were involved in oppressive conduct and the remedies provided by the Corporations Act for
oppressive conduct are available to the minority.

References
Austin R P and Ramsay, I M., 2013, Ford’s Principles of Corporations Law, LexisNexis
Butterworths, 15th ed, 432
Bahls, S. C., 1990, ‘Resolving Shareholder Dissension: Selection of the Appropriate Equitable
Remedy', 15 J. Corp. L. 285.
Chander, A. 2003, ‘Minorities, Shareholder and Otherwise', 113 Yale L. J. 119
Ford, H A J., 1978, Principles of Company Law Butterworths, 2nd ed., 345
John H Farrar and Brenda Hannigan, 1998, Farrar’s Company Law Butterworths, 4th ed., 382
Paterson W E and Ednie, H H., 1976, Butterworths, Australian Company Law, vol 2 2nd ed.
Case Law
Hillam v Ample Source International (No 2) [2012] FCAFC 73
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882