Directors' Duties and Corporate Law: A Case Study Analysis (LAW2001)

This document presents a comprehensive analysis of three case studies related to corporate law, specifically focusing on the duties and responsibilities of company directors. The first case study examines whether directors of Uninest breached their duties under general law and the Corporations Act 2001 (Cth), particularly in the context of a takeover bid. The analysis considers the definition of a director, relevant common law duties, and statutory obligations under section 181 of the Corporations Act. The second case study assesses whether a director, Shane, breached his duties, including those outlined in sections 182, 183, and 191 of the Act, by using insider information for personal gain, and explores the potential remedies and penalties. The third case study, presented in a scenario, evaluates whether Frank, Diane, Ron, and Kelly breached their director's duties. Each case study applies legal principles and relevant case law to determine potential breaches and liabilities, providing a practical understanding of directors' obligations.

Running head: CORPORATE LAWS
Corporate Laws
Name of the Student
Name of the University
Author Note

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Case Study 1
Issue
Whether the directors of Uninest have breached any of their general law directors’ duties
and also their directors’ duties under the Corporations Act 2001 (Cth)1. Whether Neales
would have any liability.
Rule
The definition of the word director in respect of a company or any other body is provided
in the Corporations Act 20012. The person who has been appointed in the position of the
director any other body is named so. The Act also provides provision for persons appointed in
the position of an alternate director carrying out duties in the capacity of a director. It is
regardless of the name of the position of such person. A person may not be appointed as a
director but can be considered so if he is acting as such. In case a person is instructing the
directors and the directors are acting accordingly, then such person is also regarded as a
director. However, when a person is giving mere advices to the directors with respect of their
performance as a director under their professional capability, he will not be regarded as a
director. The word directors comprises of director, receiver, company secretary, manager,
administrator or liquidator.
The common law generally provides for three kinds of duties that must be followed by the
directors of the company. Such duties are as follows:
• to act in good faith to secure the best interest of the company
• to refrain from making any personal gain against the interest of the company and to
disclose any gain, which they have received while acting as directors.
1 The Corporations Act 2001 (Cth)
2 The Corporations Act 2001 (Cth)

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• to carry out their duties and functions with due care, diligence, and skill in an efficient
manner.
Section 181 of the said act provides the responsibilities of the directors and other officers
of the company to perform their duties and exercise their powers in good faith, honestly to
ensure the best performance of the company. They must ensure that they have been acting for
the proper purpose3. In the case of Asic v Adler and 4 Ors4, it has been held that the directors
should ensure that their actions has been carried out for a proper cause and for the benefit of
the company.
In the case of ASIC v Hellicar5, it has been contended by the court that the directors are
required to act in good faith while discharging hi functions as a director. He should also act in
a way which would be guarantee the benefits of the company.
In the case of ASIC v Rich6, it has been discussed that if the director has failed to ensure
the best interest of the company, such action would invite a civil penalty for the director.
Application
In the instant situation, Urbanlodge Limited (‘Urbanlodge’), a competitor of Uninest is
planning a takeover of Uninest. This is because the current management of Uninest is
underperforming, its share price is declining and it is experiencing cashflow problems.
Uninest’s shares are valued at $10.00 per share. Urbanlodge makes an offer of $12.00 per
share. The board of directors of Uninest is aware that Urbanlodge intends to replace the entire
management team (board of directors) at Uninest with a new management team, if
Urbanlodge is successful in its takeover bid. It is evident from the situation that this takeover
3 The Corporations Act 2001 (Cth) s. 181
4 [2002] NSWSC 171
5 [2012] HCA 17
6 [2009] NSWSC 1229

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will ensure the best interest of the company as the present management are not ensuring the
best interest of the company due to its incompetence.
Neales acts as a consultant for Uninest and has negotiated on behalf of Uninest in a
number of important transactions in the past, including the acquisition and development of
new properties and the negotiation of long leases. Due to her experience in the field, Neales
has been given great autonomy in decision making in Uninest and the board of directors
always follows her directions. This makes him a director under the definition of directors
provided under the Corporations Act and the statutory and common law duties that are
applicable to a director are also applicable to him.
The strategy that has been devised by Neales to stop Urbanlodge from taking over the
company is for the benefit of the shareholders and the directors and not for the benefits of the
company. The takeover will replace the management, which has already been
underperforming and the replacement of the management would be for the benefit of the
company. The actions of Neales in saving the management would ensure the best interest of
the management and not the best interest of the company. Hence, Neales can be said to have
breached his statutory duties that has been prescribed under section 181 the Corporations Act.
Therefore, applying the principle laid down in the case of Asic v Adler and 4 Ors, it can be
said that Neales has failed ensure that his actions has been carried out for a proper cause and
for the benefit of the company and is in breach of the directors’ duties.
Conclusion
The directors of Uninest have breached their general law directors’ duties and also their
directors’ duties under the Corporations Act 2001 (Cth). Being a director under the definition
of directors Neales also has a liability regarding the said breach.

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Case Study 2
Issue
Whether Shane has breached any of his general law and/or statutory duties as a director.
Whether there are any remedies and/or penalties, which would apply, if both the general law
and statutory director’s duties were breached.
Rule
It is necessary that the directors are needed to follow the duties of the common law. The
common law generally provides for three kinds of duties that must be followed by the
directors of the company. Such duties are as follows:
• The directors must act in good faith to secure the best interest of the company while
exercising their powers.
• The directors are prevented from making any personal gain against the interest of the
company. They are under the duty to disclose any gain which they have received while acting
as directors.
• The directors must carry out their duties and functions with due care, diligence, care
and skills in an efficient manner.
Section 182 prevents the directors or other officers of the company to take undue
advantage and benefits by using their position and power for personal benefits. They may not
act in such a manner that will result in the loss of the company7.
Section 183 inhibits the director or any other officer of the company from using any
information which he got for holding such position in the company, for any personal reason,
by causing detriment to the company8.
7 The Corporations Act 2001 (Cth) s.182
8 The Corporations Act 2001 (Cth) s. 183

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Under section 191 of the Act, the director who has been accruing certain personal benefits
from the affairs of the company is under an obligation to disclose the same to the other
directors9.
The duties given by the statute and common law are binding on the directors. If they
violate such duty, they may be subjected to civil penalty under section 1317E of the said
act10. In case, the violation is serious such that the directors did it intentionally, it would be
treated according to the provisions of section 18411. Section 184 provides criminal sanctions
for the directors. The case of ASIC v Adler12 illustrates the provision where a director was
subjected to civil penalty due to breach of director’s duty.
Remedies
The duties given by the statute and common law are binding on the directors. If they
violate such duty, they may be subjected to civil penalty under section 1317E of the said
act13. In case, the violation is serious such that the directors did it intentionally, it would be
treated according to the provisions of section 184. Section 184 provides criminal sanctions
for the directors14. In another case of ASIC v Flugge & Anor15, the directors were sentenced
to imprisonment for 10 years for the breach of their duties.
Application
In the present situation, Shane is the director and the shareholder of the Primo
Construction Limited (‘Primo’), which is an industrial construction company. Primo performs
construction work for Landstock on an ongoing basis and being the director of the Primo,
Shane has a knowledge that Landstock is going to call for tenders from various company for
9 The Corporations Act 2001 (Cth) s. 191
10 The Corporations Act 2001 (Cth) s. 1317E
11 The Corporations Act 2001 (Cth) s. 184
12 [2002] NSWSC 171
13 The Corporations Act 2001 (Cth) s. 1317E
14 The Corporations Act 2001 (Cth) s. 184
15 [2016] VSC 779

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a new construction contract to build an industrial warehouse near a major port. Shane also
knew that Primo has a likelihood to be awarded with the tender.
Shane has formed a new company called the Iconstruct, Limited before the process of the
tender could begin. In that company, Shane is the managing director and the shareholder of
the company. The existence of Iconstruct was outside the knowledge of the other directors
and the shareholders of Primo. It was in the knowledge of Shane that the tender submitted by
Primo will be based on the construction cost. Iconstruct has submitted a tender for the
contract with Landstock for a lower tender price than Primo’s tender price. This was a breach
of the duty of the director provided under section 182 of the Act, as Shane has taken undue
advantage and benefits by using his position and power in Primo for his personal benefits and
has acted in such a manner that will result in the loss of the company. Shane has also caused a
breach of his duty as a director as contained in section 183 by using the information which he
got for holding such position in the company, for a personal reason, by causing detriment to
the company. This is because Iconstruct has been awarded with the tender by for submitting a
tender of lower price than Primo by using the information Shane has obtained being the
director of Primo. The director will also be held liable in this case under section 191 of the
Act for not disclosing the personal benefits he has been accruing from the company.
Therefore, Shane will be liable to be subjected to civil penalty under section 1317E of the
said act. As the violation is serious and Shane did it intentionally, it would be treated
according to the provisions of section 184. Therefore, applying the principles established in
the case of ASIC v Flugge & Geary [2016] VSC 779, it can be said that Shane will be liable
and needs to be subjected to section 184 of the Act.

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Conclusion
Shane has breached his general law and/or statutory duties as a director. Shane needs to be
subjected to section 184 of the Act.
Case Study 3
Scenario A
Issue
Whether Frank, Diane, Ron and/or Kelly have breached any of their general law and/or
statutory directors’ duties.
Rule
According to section 180(1), the director is required to apply due care and diligence while
using his powers and duties entrusted to him being the director of the company. The standard
of care and diligence is to be such that as maintained by a reasonable man holding that
position16. They must ensure that they have been acting for the proper purpose. In the case of
Asic v Adler and 4 Ors17, it has been held that the directors should ensure that their actions
has been carried out for a proper cause and for the benefit of the company.
In the landmark case of ASIC v Cassimatis18, the court observed that the directors namely
Mr. and Mrs. Cassimatis are liable for the breach of the duties as given in section 180(1) and
sentenced them accordingly.
Application
In the present situation, the expert report has concluded that it would not be feasible for
the proposed task to be successfully executed by the autonomous drone system with its
16 The Corporations Act 2001 (Cth) s. 180(1)
17 [2002] NSWSC 171
18 (No 9) [2018] FCA 385

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existing software. Frank and Diane has denied to attend the meeting as they were not satisfied
with the expert report. They have persuaded the other directors to vote in favour of the
proposal to enter into the contract with CorpGrain. This cannot be treated to be in the best
interest of the company. The responsibilities of Frank and Diane as the directors of the
company to perform their duties and exercise their powers in good faith, honestly to ensure
the best performance of the company has been violated. They have not ensured that they have
been acting for the proper purpose. The decision was taken only of their stubborn and
domineering personalities. This is a violation of the directors. Being a director Ron and Kelly
were not supposed have agreed with Frank and Diane for the proposal. They have also
breached the directors duties.
Conclusion
Frank, Diane, Ron and/or Kelly have breached their general law and/or statutory directors’
duties.
Scenario B
Issue
Whether any statutory defences could be raised by the directors in the circumstances.
Rule
The Corporations Act provides for certain defences which the directors can avail of if they
violate any duty entrusted to them. The defences available to the directors are given in section
180(2) and section 1317S of the said act19.
Section 180(2) provides for the following defences, which the directors can use when
they are accused of breach of their duties. He can prove the following facts:
1. He has acted honestly in good faith and he had a proper reason to do it.
19 The Corporations Act 2001 (Cth) s. 180(2) and s. 1317S

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2. He has not incurred any personal gain for doing such act.
3. The director has an honest belief that he has acted for the benefit of the company.
4. He has worked for the best interest of the company.
Section 189 of the Act allows the director to base his decision upon the opinion provided
by the expert or professional with respect to a certain matter. However, this defence is only
available to the director if he has enough reason to believe that the expert or the professional
has the competence to extend advice on that particular matter.
Section 1317S of the Act empowers the court with a discretionary power of allowing the
director to be excused for the breach of his duty. However, court must not use such
discretionary power arbitrarily20. While applying such power, court must ensure that the
following conditions are satisfied. They are:
• The court must ensure that the director has acted honestly.
• The court after analysing the situation has genuine ground to believe that it is fair to
excuse the director.
Application
In the given situation, the results of the expert report instead indicate that the autonomous
drone system in fact has the capability to complete the task required by CorpGrain and that it
would be feasible to successfully execute the task. Dronebotics is therefore in a position to
enter into a very profitable contract with CorpGrain. The directors voted in the favour of the
contract. However, after purchasing the autonomous drone system, CorpGrain experiences
ongoing technical difficulties with the system and is unable to use it for the inspection of its
grain silos. CorpGrain states that its own expert can produce evidence that the existing
20 The Corporations Act 2001 (Cth) s. 1317S

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software is not adequate and it intends to claim substantial damages from Dronebotics. In this
case, the directors has the defences, which they utilise of avail immunity from this situation.
The directors in this case has acted honestly in good faith and he had a proper reason to do
it. They did not incur any personal gain from the institution of the contract. They had an
honest belief that the contract would ensure benefit of the company. They have worked for
the best interest of the company. However, the defences to be availed is the discretion of the
court. There the directors can raise the statutory defences provided under section 180(2) of
the Act. Moreover, the actions of the director in this case has been based upon the
professional advice of the expert and the director can seek resort to section 189 for the
availing immunity for the defects of the expert advice.
Conclusion
Statutory defences could be raised by the directors in the circumstances under section
180(2) of the Act.

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Reference
The Corporations Act 2001 (Cth)
Asic v Adler and 4 Ors [2002] NSWSC 171
Australian Securities and Investments Commission v Flugge & Anor [2016] VSC 779
Australian Securities and Investments Commission v Cassimatis (No 9) [2018] FCA 385
ASIC v Hellicar [2012] HCA 17
ASIC v Rich (2003) 44 ACSR 341