MLL221 Corporate Law: Director's Duties, Breaches & Defenses Analysis

This report provides a legal analysis of a director's potential breaches of duty and disclosure obligations under Australian corporate law, specifically focusing on the case of Luna Billy, the managing director of LulLaBy. It examines potential violations of sections 180 (duty of care and diligence), 181 (duty to act in good faith), 182 (duty not to misuse position), and 191 (disclosure of personal interest) of the Corporations Act 2001 (Cth). The analysis considers Luna Billy's actions in finalizing a deal involving infrastructure investment and its potential impact on the company. The report also discusses possible defenses Luna Billy may rely upon. Desklib offers a range of solved assignments and study tools for students.

Running Head: BUSINESS LAW
Business Law
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Author Note

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MEMORANDUM OF ADVICE
To
Ms Luna Billy
SUB: ADVICE ON ISSUES RELATING TO CORPORATE LAW
Respected Madam
We write this memorandum of advice to you in relation to the issues which are raised
through the facts provided by you. By going through the facts of the situation we think that you
require advice primarily on three specific Issues. These issues are as follows
 The potential breaches in relation to the duties owed by you as a director of the company The potential breaches in relation to the disclosure obligation owed by you as a director
of the company The defenses on which you may rely upon in the relation to the breach of duty and
disclosure obligations
POTENTIAL BREACHES OF DIRECTORS DUTIES
A director of a company is imposed with duties under statutory provisions and common
law. The company which is in context (LulLaBy) is a public company which has been registered

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with the ASX for eight years thus the provisions of The Corporation Act 2001 (Cth) (CA) are
applicable in the given situation. The CA is the primary statue which governs corporate affairs in
Australia.
The following general duties have been provided through the CA towards any person
who is a director of the company within the meaning of Section 9 of the CA. 1
SECTION 180 - The duty of care and diligence
This duty imposes an obligation on the directors or other officers of an organization to
depict a degree of “care and diligence” while they discharge their functions associated with the
organization. “care and diligence” in the given situation is measured through a “reasonable
person standard”. To make it simple for you a director or officer of a company has to discharge
his duties in a way which a reasonable person may be expected to discharge in a similar role as
the original director. If you have acted in the same way as a reasonable person (director) would
have done if he was in your position then the court would deem that you have complied with the
duty. On the other hand if the hypothetical reasonable director who was in your position would
have not taken the actions which you have taken it would be considered as a breach of the duty2.
The same form of duty is also imposed on the directors of the company through the provisions of
common law. The duty has been discussed on various occasions in Australia in a number of
cases by the courts. Few of the cases which involve the discussions of the duty and are relevant
to your situation have been included in this memorandum of advice for your reference. We
would like you to know that this duty may also be violated if you have made your company enter
into a transaction which is of a very risky nature if there is no or very little prospect of profits for
1 The Corporation Act 2001 (Cth) s. 9
2 The Corporation Act 2001 (Cth) s. 180(1)

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the company. In addition if the you as a director have not informed the board about the nature of
the transaction you may also be liable for the breach of this duty.
In the case of Daniels & Ors v Anderson & Ors [1995] 13 ACLC 614 it had been stated
by the courts that irrespective of their background the director have a duty to exhibit a greater
degree of care and diligence. Although the directors generally have an expertise they have to
have greater care towards the organization than only representing their expertise. The directors
are required to be informed about all aspects in relation to the business of the company3.
ASIC v Hellicar [2012] HCA 17 is a case where the directors have been held liable for
the breach of section 180 of the CA by approving the CEO to make misleading announcement in
relation to the ASX. 4Further in the case of Australian Securities and Investment Commission
(ASIC) v Cassimatis (No. 8) [2016] FCA 1023 the court held that the directors are liable for the
loss of reputation of the company as well, if its results out due not observing care and diligence
in their actions5. Another case where the duty of care and diligence has been discussed is the case
of ASIC v Adler and 4 Ors [2002] NSWSC 1716. In this case the managing director of the
company had been held to violate the provision of section 180(1) of the CA as there was a
failure on his part ensure that he properly safeguards a loan which has been sanctioned by his
company to a third party which was not in best interest of the company. This was because a
reasonable person in the same position would have discussed the proposal with the board before
the loan had been provided.
3 Daniels & Ors v Anderson & Ors [1995] 13 ACLC 614
4 ASIC v Hellicar [2012] HCA 17
5 Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
6 ASIC v Adler and 4 Ors [2002] NSWSC 171

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In the given situation you have provided us with the facts that you were on the verge of
retirement and undertook a arrangements in relation to the a transaction on behalf of the
company. You had the knowledge that if all things goes well than the share price of the company
will be increased before your retirements. The deal is in relation to an “infrastructure investment
in fiber optic cables and multi-year continuous maintenance contract in the national broadband
network (NBN)”. However you also had the knowledge that the investment needs a considerable
financial outlay and it was not sure whether the company had such financial resources. The deal
had been entered by the company under your leadership. In this given situation it is very likely
that you have contravened the provisions of section 180(1) as a reasonable director who had
knowledge that it was not sure that the company had the required financial resources in relation
to the deal would have not entered into the deal. You may be liable for the breach of civil penalty
provisions under section 1317E and may be imposed with ban for managing corporations in the
future and with financial penalties as well7.
SECTION 181 - The duty to act in good faith and best interest of the company for a proper
purpose
The primary requirement which the CA imposes on the directors of the company is that
they must act in “good faith and best interest of the company for a proper purpose”. Under this
duty is also covered the duty under common law to avoid a conflict of interest. However if a
conflict of interest comes into the context then the directors give importance to the company’s
interest rather than self interest8. The under section 181 mirrors the duty of trust and fidelity.
One of the recent cases where the court discussed about the breach of this duty is the case of
7 The Corporation Act 2001 (Cth) s.1317E
8 The Corporation Act 2001 (Cth) s.181

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Jones and Ors v Invion Ltd and Anor [2015] QCA 1009. In this case the court held that directors
who acted on behalf of the company to pursue personal interest rather than the interest of the
company have violated the provisions of section 181 of the CA10.
According to the facts provided by you to us you were on the verge of retirement and
when you undertook a arrangements in relation to the a transaction on behalf of the company.
You had the knowledge that if all things go well than the share price of the company will be
increased before your retirements. However because of the deal you have been able to attain a
lucrative retirement package. The package contain a high amount of money and allegations can
be made against you that you have entered into the deal in order to pursue person interest in
relation to the retirement package. It can be argued that you had knowledge of the fact that if you
secure a deal before you retire you will get a lucrative retirement package and thus you were not
bothered about the feasibility of the deal and the interest of the company. Thus where the interest
of the company is not prioritized over personal interest you may be liable for the breach of the
duty under section 181 of the CA.
Section 182 – Duty of not misusing position
Under this duty the directors are required not to make an improper use of the position
they possesses in the company to gain a personal advantage for themselves or for any other
person or to the detriment of the organization11. The case of Forty Two International Pty
Limited v Barnes [2014] FCA 85 is a primary case where the breach of this duty has been
discussed12. In this case the directors were found to use their position in the company to their
9 Jones and Ors v Invion Ltd and Anor [2015] QCA 100
10 The Corporation Act 2001 (Cth) s.181
11 The Corporation Act 2001 (Cth) s.182
12 Forty Two International Pty Limited v Barnes [2014] FCA 85

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own advantage of securing additional $16 million earn out payment and bringing detriment to the
company. In the given situation it can be stated that you may also be held for the breach of this
duty as it may be argued that you misused the position which you had in the company to gain
personally and case detriment to the company.
Section 183 – Duty of not misusing information from the company
Under this duty the directors are required not to make an improper use of the information
position they possesses in the company to gain a personal advantage for themselves or for any
other person or to the detriment of the organization13. However as per the facts which have been
provided by you we come to the conclusion that this duty will not be potentially violated by you.
We would in addition like you to know that if you are found to actually have violated the above
discussed duties you may be liable for the breach of civil penalty provisions under section 1317E
and may be imposed with ban for managing corporations in the future and with financial
penalties as well.
Section 184- reckless breach of duties
You may be held liable for a criminal offence under the criminal code section 6.1 if it is
found have recklessly violated the provisions of the above discussed duties14. However we would
like you to know that as per your situation the section has not been invoked by you.
POTENTIAL BREACHES IN RELATION TO THE DISCLOSURE OBLIGATION
13 The Corporation Act 2001 (Cth) s.182
14 The Corporation Act 2001 (Cth) s.184

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The CA sets out specific disclosures obligations which the directors of a company
operating in Australia and registered with the ASX have to comply with.
Under the provisions of section 191 of the CA it is the duty of the directors of an
organization to make continuous disclosure in relation to any personal interest they may have in
a transaction to the board of directors15. The provisions of this section have also been discussed
in the case of Forty Two International Pty Limited v Barnes [2014] FCA 85 where the directors
of the company were held liable for the breach of section 191 by not disclosing to the board the
personal interest they had in the transaction16. In the given situation as per the facts provided by
you an allegation may be brought against you that you had a personal interest in the transaction
(lucrative retirement package) and you failed to disclose such interest to the board of directors.
Thus you may be held liable for the breach of disclosure obligation which you have under this
section.
According to the provisions of Section 674 of the CA it is the obligation of a listed
organization to make continuous disclosure of information which may have an impact upon the
value or market price of the shares of the company. The requirement finds it basis on the
common law principle that all investors of the company must be provided with timely and equal
access to material information in relation to the company17. The information when disclosed in a
timely manner provided protection to the investors and subsequently enhances the reputation of
the market. Statutory liability is imposed on the directors of the organization for make an breach
in relation to the listing rules where any material information through which the market price
15 The Corporation Act 2001 (Cth) s.191
16 Forty Two International Pty Limited v Barnes [2014] FCA 85
17 The Corporation Act 2001 (Cth) s.674

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many be affected is not made available to the public. The rule is also provided through listing 3.1
of the ASX.
In the case of Riley v Jubilee Mines NL [2006] WASC 199, the court awarded damage to
the shareholders of the company where the directors were not able to comply with the provisions
set out in section 674(2) of the CA18. In another Taylor v Telstra Corporation Ltd [2007] FCA
2008 which was a class action the defendant organization made a settlement to pay its
shareholders an amount of $5 million for not being able to comply with the disclosure
obligation19.
Another significant case in relation to the breach of disclosure obligation is the case of
Fortescue Metals Group Ltd v Australian Securities and Investments Commission & Anor
[2012] HCA 39. Although in this case the defendant company was held not to violate the
provisions of section 674 it has been stated by the court that a the directors of the company may
are liable for the breach of their duties if they have failed to comply with the disclosure
obligations on relation to the organization20.
The provisions of section 674(2) of the CA has specifically provided that a listing entity
has to notify the market operator which in most cases is the ASX about any information which is
may not be generally available to the public and in a information which would be reasonable
expected by a reasonable person that if it was available generally it would have a material effect
on the value or price of Enhanced Disclosures securities of the company21. Further we would
also like you to know that it has been provided through the provisions of section 674(2A) of the
18 Riley v Jubilee Mines NL [2006] WASC 199
19 Taylor v Telstra Corporation Ltd [2007] FCA 2008
20 Fortescue Metals Group Ltd v Australian Securities and Investments Commission & Anor [2012] HCA 39
21 The Corporation Act 2001 (Cth) s.674(2)

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CA that any person who is found to be “involved” in the contravention made by a listed entity is
also liable for the breach of disclosure obligations in relation to the organization22.
Further ASX Listing Rule 3.1 imposes an obligation on the company that as soon as it
comes to know or becomes aware about an information related to it, which would be held by a
reasonable person as an information which would have a material effect on the value or price if
the securities of the entity, it must immediately convey such information to the ASX23.
Moreover an entity is deemed to be aware of the information in case an executive officer
or director ought to have or has got possession of the information in course of discharging their
duties which they owe as directors or officers of the company as per ASX Listing Rule 19.1224.
In the given situation it has been provided by you in the facts that although there have
been uncertainty in relation to the financial capabilities of the company towards the transaction
the company had carefully refrained from disclosing to the market the degree of financial
commitment. Further it has also been provided through the facts that as the company would not
be able satisfy its financial commitments under the contract, they provided 6 million AUD worth
of shares to the infrastructure company. In addition this disclosure was also not made to the
ASX.
In the given situation it is evident that where the company has not provided the
information about not being sure about its ability to satisfy the financial commitments, such
information would not be generally available to the public and the information would be
reasonable expected by a reasonable person that if it was available generally it would have a
22 The Corporation Act 2001 (Cth) s.674(2A)
23 ASX Listing Rule 3.1
24 ASX Listing Rule 19.12.

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material effect on the value or price of securities of the company. Thus the company has violated
its disclosure obligation.
Further the disclosure obligation has been violated by the company by not letting the
ASX know about the fact that as the company was not be able satisfy its financial commitments
under the contract, they provided 6 million AUD worth of shares to the infrastructure company.
This information would also not be generally available to the public and the information would
be reasonable expected by a reasonable person that if it was available generally it would have a
material effect on the value or price of securities of the company. Thus the company has violated
its disclosure obligation under section 674(2) of the CA25.
Further as the director of the company it was your duty to take reasonable care in relation
to the affairs of the company. This means that of the organization has violated the provisions of
section 674(2) you are also held liable for the violation of the section under section 672(2A).
This is because it has been provided through the provisions of section 674(2A) of the CA that
any person who is found to be “involved” in the contravention made by a listed entity is also
liable for the breach of disclosure obligations in relation to the organization. This can be further
emphasised as all such events took place before your retirement while you have been the director
of the company26.
Thus we would like you to know that upon the analysis of the facts provided by you it is
likely that you may be held liable for the breach of disclosure obligations which a organization
listed with the ASX owes under the CA .
DEFENCES WHICH MAY BE AVAILABLE FOR YOU
25 The Corporation Act 2001 (Cth) s.674(2)
26 The Corporation Act 2001 (Cth) s.674(2A)

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The defences which we have identified for you in relation to the above discussed
breaches are as follows
 The business Judgement rule under section 180(2) and common law
 Exceptions to the disclosure obligations
 Section 1318 and Section 1318S of the CA
THE BUSINESS JUDGEMENT RULE
The provisions in relation to the Business Judgment Rule (BJR) are provide under the
provisions of section 180(2) of the CA.
The BJR is applicable against an allegation for the breach of the duty of care and diligence
under section 180(1) of the CA and not other sections of the Act. The purpose of the rule is to
avoid any unwanted burden upon an entrepreneurial activity. It is provide through section 180(2)
that where a business judgement has been made by the director of a company it is held that the
care and diligence requirement is met in relation to the judgement where
 The judgement is taken for a proper purpose and good faith
 It does not have any personal material interest in relation to its subject matter
 The decision had been made after the subject matter of the judgement have been
reasonably being informed of by the directors like a reasonable director
 The director had a rational belief that the decision is taken in the best interest of the
company27.
27 The Corporation Act 2001 (Cth) s.180(2)