Corporate Law Assignment: Analysis of Directors' Duties and Defenses

This report examines key aspects of corporate law, focusing on the duties and liabilities of company directors. It delves into the definition of a director, including de-facto and shadow directors, and explores the legal framework governing their actions, primarily referencing the Corporations Act 2001. The report analyzes the implications of breaching these duties, referencing cases such as ASIC v Adler, and discusses the defenses available to directors, including the business judgment rule as outlined in Section 180(2) of the Act. It also covers the delegation of power and reliance on information from other sources (Sections 189 and 190). Furthermore, the report addresses issues surrounding contract law, the execution of documents, and the assumptions third parties can make regarding a director's authority. It analyzes how the business judgment rule can be used to defend against claims of breach of contract, and discusses cases like Freeman and Lockyer v Buckhurst Park Properties. The report concludes by applying these legal principles to specific scenarios, assessing director conduct and potential liabilities.

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

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TASK A:
Issue:
The issue is that whether the directors have breached their duties.
Law:
From the very beginning, the provisions of Section 9 of the Corporation Act 2001 deal
with the definition of a director. According to the provisions of Section 9 of the Corporation Act
2001, a person may not be appointed as the formal director of a company, if the nature of the
duty of the director is such that it can be regarded as de-facto (Gelter & Helleringer, 2015). In
this regard, it is noteworthy to mention here that, any person who has been appointed on the
behalf of the director of a company to perform certain tasks can also be referred to as the director
(Pugliese, Nicholson & Bezemer, 2015). In this context, the subject-matter of shadow-director
can be emphasized. A shadow director is also the director of a company who does not reveal his
identity and the fact that he is working on the behalf of the company (Smith & Rönnegard,
2016).
An individual may also be appointed by the main director of the company for the purpose
of acting as an alternative director (Williams, Bingham & Shimeld, 2015). The requirements for
the appointment of an alternative director are contained in the provisions of Section 9 of the
Corporation Act 2001. The directors of the company have a duty towards the shareholders and
the other members of the company which is concerned with the protection of their interests
(Rauterberg & Talley, 2017). In the case of ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC
171, it was seen that though Adler was elected without formal appointment to act as the director,
he decided matters for the benefit of the company. Various defenses are available in order to

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protect the interests of the directors of a company. These defenses are briefly explained in the
provisions of Sections 180(2), 189 and 190 of the Corporation Act 2001. In order to protect the
interest of the directors in relation to the nature of the decision taken on their part, it is important
to emphasize upon the best judgment rule (Laster & Zeberkiewicz, 2014). In this regard, it is
worthwhile to refer here that, if a director makes best judgment for the best interest of the
company, then in such case his interest shall be protected under the provisions of Section 180(2)
of the Corporation Act 2001. In the famous case of ASIC v Rich (2009) 236 FLR 1, the
importance of the best judgment rule has been explained. In this case, the Court held that,
directors may take decision on behalf of the company however; in such process the intention of
the directors must be taken into consideration that whether the directors have taken such decision
in regard to duty of care, skill and diligence. The best judgment rule protects the directors from
being liable for the decision made on their part in company matters (Williams, Bingham &
Shimeld, 2015). However, if the nature of the business judgment is such that it has been done
with a good intention and for increasing the profits of business of the company, then the directors
can escape liability (Pugliese, Nicholson & Bezemer, 2015). In the case of ASIC v Adler (2002)
41 ACSR 72; [2002] NSWC 171, it was seen that the directors of the company has breached
their duties in regard to the statutory provisions contained in Section 180(1) of the Corporation
Act 2001. There involved as conflict of interest in regard to the decision taken by Adler. In this
case, it was held by the Court that the provisions of Section 180(2) which deals with best
judgment rule shall not be applicable because the directors have not taken their decision in due
care, skill and diligence and failed to present evidence that their best judgment was for the best
interests of the company.

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In order to protect the liability of the directors of a company in regard to the best
judgment taken by them, the provisions of Section 189 of the Corporation Act can be
emphasized. The director shall be able to escape from personal liability, if he relied upon the
information provided to him by an employee, advisor and another director of the company
according to the provisions of Section 189 of the Corporation Act. However, the nature of the
information has to be such that it can be relied upon. According to the provisions of Section 190
of the Corporation Act 2001, the directors of the company have an obligation regarding
delegation of power however; it is important that the delegated powers must be exercised by
them. If the nature of the power has been delegated in good faith, then it can be relied upon
(Rauterberg & Talley, 2017).
Application:
The directors should exercise their duties with proper care and due diligence which are
contained in the provisions of Section 180(1) of the Corporation Act 2001. In this regard,
reference can be made to the case of Daniels v AWA Ltd (1995) 13 ACLC 614. In this case, it
was held by the Court that the directors in order to carry on their duties must exercise them with
care, skill and diligence. Therefore, the directors of a company must possess a basic
understanding regarding of the business involved in the company. The case of Daniels v AWA
Ltd (1995) 13 ACLC 614 can also be applied for the purpose of differentiating between the
powers of the executive and non-executive directors of the company. In this regard, it is worth
noting that executive directors are also the main directors of the company whose function is to
carry on the business operations of the company. On the other hand, non-executive directors are
part time directors. In order to determine that; whether the directors of a company are acting in
due care and diligence, the objective test have been applied by the Courts. However, the Courts

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applied the subjective test in cases where there was a purpose to determine that certain
circumstances could be taken into consideration in order to evaluate the fact that whether the
decision taken on the part of the directors were for the interest of the company.
Conclusion:
It can be observed that though Lana was not formally appointed as the director of the
company, she actively participated in the decision making of the company and attended board
meetings in such process. In the present case, it can be emphasized that, Rik is the director of the
company and the decision he took during the board meeting for the purpose of shifting the
premises was not in accordance with the provisions of Section 180(1) of the Corporation Act
2001. This is due to the reason that, Rik took such decision without even informing the other
directors i.e. Patel and Lana and therefore he has not acted in due diligence and care while
performing his duties. In the present case scenario, it can be emphasized that the directors of the
company has the authority to escape personal liability by using the defense of best judgment rule.
In this case, as the decision taken by Rik was for increasing the profits of the company, therefore
he can escape personal liability by relying upon the best judgment rule.
TASK B:
Issue:
The issue in this case is that whether Fruit will be forced to keep the lease running for a
period of three years.
Law:

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For the purpose of defending claim involving breach of contract, three defenses are
available to the directors under the business judgment rule (Kraakman & Hansmann, 2017).
These defenses can be undermined as-
I. The nature of the decision must be such that it has been made in good faith and to fit the
purpose.
II. There must not be any personal interest associated with such decision.
III. It has to believe rationally that the decision on the part of the director must be for the
benefit of the company.
According to the provisions of Section 127(1), in order to execute a document on the behalf
of the company, it must be accompanied with a common seal. It is required that such document
needs approval by way of signature of two directors of the company. In this regard, the
assumptions contained under the provisions of Section 129(5), shall be rightly applied to the
regulations regarding the execution of document as contained in Section 127(1). The document
that has been executed on the behalf of a company by using the common seal should have been
witnessed 2 directors of the company according to the provisions of Section 127(2) of the
Corporation Act 2001. Therefore, in this case, it can be emphasized that in order to execute the
document according to the terms mentioned in Section 127(2), the assumptions depicted in the
provisions of Section 129(6) of the Act can be relied.
Various assumptions are made by third parties in regard to the duties of the director
(Pugliese, Nicholson & Bezemer, 2015). According to the provisions of Section 129, the third
parties can assume that the provisions of this Section can be rightly applied to the duties on the
part of a director or officer or an agent regarding the execution of a document with or without

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seal. In this regard, it is worth mentioning that, the document that has been executed on the
behalf of the company has to be duly signed by 2 directors by using the common seal as depicted
in the provisions of Section 127(1) of the Corporation Act 2001. It is worthwhile to mention here
that, assumptions can also be made by third parties in cases, where there is an involvement of
directors in actions concerned with fraud in relation to business operations. Such provisions are
contained in Section 128(3) of the Corporation Act 2001. In this regard, the provisions of Section
128(4) of the Corporation Act 2001 can be rightly applied which states that, a person is not at the
authority to make assumptions as stated by the provisions of Section 129 of the Corporation Act
2001. The terms contained in such provision shall come into effect only if during the time of
making the deal; it was suspected that the assumption made by the concerned person was not
correct.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, it
was seen that one of the directors acted as the Managing director of the company however; he
was not appointed formally. In this regard, it was observed that such Managing director
performed the duties by exceeding his authority and for which the company was liable. In this
case, the Court held that, the company acted as the principal while the Managing director being
the agent acted on behalf of the company. As a result of this, the company was liable. Similarly,
in the present scenario, it can be observed that the contract was signed by Rik in his own name
and not on the behalf of the company. Therefore, in this case, the company shall not be held
liable for the lease contract signed by Rik.
Application:

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Therefore, from the given case study, it can be observed that the contract has been signed by
Rik without receiving previous consent from the rest of the directors i.e. Patel and Lana. In this
regard, the three defenses available under the business judgment rule can be referred in order to
safeguard the interest of Rik and to save him from being personally liable. It is noteworthy to
mention here that, the business judgment rule can be applied in cases here the directors has
undertaken business judgment or decision in good faith and for the benefit of the company. In
order to escape personal liability by relying upon the defenses of the business judgment, no
personal interest of the director should be involved. In the present scenario, Rik can rely upon the
defenses under the business judgment rule. This is due to the reason that, Rik took the decision
of moving the company to new premises because he wanted to increase the profits of the
company and therefore the decision was made with good faith. However, while making such
decision, Rik has not acted according to the provisions of Section 127(1) of the Corporation Act
2001 because it was not signed by the two directors i.e. by both Patel and Lana. The document
was not prepared by accompanying with a common seal and such execution of the document was
not witnessed by the two directors of the company. It is worth examining the fact that, the
assumptions depicted under the provisions of Sections 129(5) can be relied upon because it was
previously assumed by Lana that Rik should not have signed the lease agreement without
informing the existing directors of the company. This is due to the reason that, it can be assumed
by any reasonable person of prudent nature that the document must be duly signed by 2 directors
of the company which was not followed by Rik. The provisions of Section 128(3) of the
Corporation Act 2001 shall not be relied upon as Rik was not involved in any fraudulent act.
However, the provisions of Section 128 (4) can be relied upon because in the present case, from

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the very beginning Lana assumed that the lease agreement made by Rik was not valid as it was
made without informing her and Patel.
Conclusion:
Lastly, it can be stated that Fruut Pty. Ltd cannot be forced by Watel Pty Ltd in order to keep
the new premises for lease for a period of three years. This is due to the reason that the new
contract was not valid as it was signed by Rik by not acting according to the provisions
explained above.

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References:
Cases:
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Rich (2009) 236 FLR 1.
Daniels v AWA Ltd (1995) 13 ACLC 614.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Journals:
Gelter, M., & Helleringer, G. (2015). Lift Not the Painted Veil: To Whom Are Directors Duties
Really Owed. U. Ill. L. Rev., 1069.
Kraakman, R., & Hansmann, H. (2017). The end of history for corporate law. In Corporate
Governance (pp. 49-78). Gower.
Laster, J. T., & Zeberkiewicz, J. M. (2014). The rights and duties of blockholder directors. The
Business Lawyer, 33-60.
Pugliese, A., Nicholson, G., & Bezemer, P. J. (2015). An observational analysis of the impact of
board dynamics and directors' participation on perceived board effectiveness. British
Journal of Management, 26(1), 1-25.
Rauterberg, G., & Talley, E. (2017). Contracting Out of the Fiduciary Duty of Loyalty: An
Empirical Analysis of Corporate Opportunity Waivers. Columbia Law Review, 1075-
1151.

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Smith, N. C., & Rönnegard, D. (2016). Shareholder primacy, corporate social responsibility, and
the role of business schools. Journal of Business ethics, 134(3), 463-478.
Williams, B. R., Bingham, S., & Shimeld, S. (2015). Corporate governance, the GFC and
independent directors. Managerial Auditing Journal, 30(4/5), 324-346.