Breach of Director's Duties: Solartec Pty Ltd and Corporation Law

This report analyzes a corporation law case involving Solartec Pty Ltd, focusing on the potential breach of director's duties by Bill, the managing director, and Alex, the CFO. The report examines whether the directors violated their legal obligations under the Corporations Act 2001, including misuse ...Read More

Corporation Law
Name of the Student
Name of the University
Author’s Note

Issues
Whether the directors of the company Alex and Bill has breached the duties of the director of
the company.
Whether the Solartec has the right to take action against the breach of duties for the directors
of the company.
Whether company can claim compensation or impose penalty upon the directors for
breaching their duties.
Rules
The director of the company usually holds several legal obligations. After appointing as the
director in the company the duties and legal obligations must be known to the director. The
duties are the part of the company law, constitution of the company and shareholder’s
agreement of the company. Duties of director in Australia are governed by –
1. The common law or case law
2. Statutory of the Corporation Act 2001
3. The governing rules and the constitution of the company, shareholders of the
company
4. If the Company has any agreement
The main duties of the directors are that the directors should not misuse power and make
improper purposes. The directors must not vote for their personal advantage rather they
should vote for the company interest in order to help the company. The director action is
expected to have with loyalty for the company supreme interest1. The Corporation Act should
comply by the directors for the company and they need to implement their authoritative
power and duties. The directors must be aware of the company solvency and financial matters
related to the company2. Directors must renounce their duties with great care and
attentiveness. The company directors and the other executives in the company should culture
on their powers and should release their duties for valid purpose including good faith and best
interest of the corporation [s 181]3. Any action has been strictly prohibited for the directors
1 G Rauterberg and E Talley, "Contracting Out Of The Fiduciary Duty Of Loyalty: An Empirical Analysis Of
Corporate Opportunity Waivers", Repository.Law.Umich.Edu (Webpage, 2017)
<https://repository.law.umich.edu/cgi/viewcontent.cgi?article=2931&context=articles>.
2 Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 19 edition Thomson Reuters 2018.
3 "Duties Of Directors", Companydirectors.Com.Au (Webpage, 2019)
<https://www.companydirectors.com.au/dutiesofdirectors

taken against the company which can lead to the detriments of the corporation and misuse
their power for extracting the advantages for themselves or for someone else’s [s 182]. The
Corporation Act strictly forbid to use of those information the person gains from holding the
post in the corporation and restricts on any kind of detriment towards the corporation [s183].
Civil obligations are the consequences of all the provisions and the provisions are considered
as the civil penalty provision. If the court realize about the detriment cause by a person which
has been breached, the person may face an order to reimburse the Commonwealth which
takes a penalty of $200,000 up to. The person may compensate for the company loss [Part
9.4B]4. The alleged person can be disqualified by the court where the court considers a period
to be appropriate for managing the corporation [s 20C].
Corporation Act 2001 also considers an intentional offence or dishonesty made by the
director or other executive of the company as a criminal offence in which their power and
exercise would breach against the interest of the corporation. They have to discharge their
duties with loyalty and with an accurate purpose for the company. The criminal offence also
implies upon the person who misuses their power and position in the company deliberate and
dishonestly through the information collected from the corporation within their post [s 184].
The directors plays a duty within their knowledge to make full and frank disclosure for the
shareholders for holding proper judgments on any affairs. According to the Corporation Act
(s588G), the directors should not trade if the company is bankrupt as the directors remain
well updated about the fiscal condition of the company. The directors must keep the faith on
the employees and the other staffs in the company at the time of decision-making and the
directors have to make reasonable reliability according to the assessment of s189 Corporation
Act5. The directors must collect the financial report of the company and keep the information
about the company finance within all the transactions and finance associated issues. The
directors performs a duty according to the Corporation Act where the government bodies like
ASIC keeps the certain information for lodging6. The directors are bound with the duty to
exercise discretion. Which indicates their independent judgment for operating the
corporation. The matters of the discretion can be assigned by the directors where the
4 "General Duties Of Directors - Corporations Act 2001 (Cth)", Lawhandbook.Sa.Gov.Au (Webpage, 2019)
<https://lawhandbook.sa.gov.au/ch05s04s02.php>.
5 Baker Mckenzie, "Duties And Liabilities Of Directors Of Australian
Companies", Bakermckenzie.Com (Webpage, 2019)
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirectors_dec
17.pdf?la=en>.
6 "Duties Of Directors", Companydirectors.Com.Au (Webpage, 2019)
<https://www.companydirectors.com.au/dutiesofdirectors>.

delegation is valid within the best interest for the corporation. The director must be involved
in the positive discussion and utilize their judgement for performing the issues of the
company. The directors are restricted to compete with the company and company’s property
should not be used by them for their personal purpose. The directors are forbidden for
supplying the goods and the services by accessing in to the company contract without
disclosing the matter. Any possibility for raising the conflict in the company must be avoid
by the directors. The directors must be obliged to the interest of the company where the
interest conflict may arise. The creditors access in the company for making fraud and enter in
to the company with the purpose of fraud is an offence [s 592]7. The court can verdict
through an order to the person to compensate the debt as a penalty [s 593].Failure of the
distribution of the company information in record form through the books to the external
officers requested to get the information by the directors consider as an offence according to
the provision of Part 5.8 of the Corporation Act.
Application
Bill the managing director of the Solartec and Alex the CFO of the company has breached the
duties being directors of the company. They have breached the Corporation Act. The
application of the Corporation Act in a case law took place in New Zealand in the case of
Coleman v Myers where the director’s duty has been breached towards the shareholders. In
this incident Mahon J did not consider the decision of Percival v Wright8. An argument
seems to takes place in this case the shareholders helplessly forced to have the confidence
within the directors which they are not ready to accept the contract and the disadvantages by
the non-disclosing matters. The directors can sale the fiduciary duty which they themselves
own and the process of negotiation for selling the fiduciary duty by the directors after
disclosing the information to the purchaser that may suppressed or motivate the shareholder’s
judgement to form the offer relating to the decision. As per the rule that the directors cannot
have the fiduciary duty to the corporation shareholders but it can be seems that some of the
judge provides views on the directors to perform a separate duty for the company
shareholders which are referred as the fiduciary duty with respect to the nature9.
7 "Duties Of Directors", Companydirectors.Com.Au (Webpage, 2019)
<https://www.companydirectors.com.au/dutiesofdirectors>.
8 Percival v Wright [1902] 2 Ch 401
9 "Directors - What Are My Duties As A Director? | ASIC - Australian Securities And Investments
Commission", Asic.Gov.Au (Webpage, 2019) <https://asic.gov.au/regulatory-resources/insolvency/insolvency-
for-directors/directors-what-are-my-duties-as-a-director/>.

According to the statement of Mr. Flannigan in the case of “Coleman v Myers”10 has the
wrong analysis by the court appeal of New Zealand. The company shareholders complaints
against the company director for not disclosing the all the plans related to the finance and
share of the company. The directors are also alleged with a complaint of non-disclosing and
misleading the shareholders. These have been considered by the court as the breaching of the
rule and fiduciary duty. The court has later gives the verdict that the company directors have
not performed the fiduciary duty to the company shareholders. Mr. Cook stated that Percival
v Wright excludes only the voluntary fiduciary duties which would be pertaining to such
duties that can be fall on the director within a limited environment.
In the questions like duties of the directors in the bankruptcy of the company comes with the
shareholders of and they are considered as a body of the company. Whereas in the case of
insolvency the creditors interest intermediate. The issue has been raised for the decision of
Lord Templeman in the House of Lords where the case relates to the “Winkworth v Edward
Baron Development Ltd.”11 According to him the duty has been owed by the company for
the creditors of present and future. The court has accepted the decision in the case of Jeffree v
NCSC which takes place in the Western Australian Supreme Court. The court has also
considers the appeal in the case of “Fulham Football Club Ltd. v Cabra Estates Plc.12” The
court verdicts that the director’s duty must conferred over the creditor’s interest
consideration. But a wide number of academic criticizing comments as there is no such
protection on the future creditor interest.
In the case of “Mills v Mills” the court has stated that the directors of the company must act
according to the company interest in order to achieve the company success. As the Section
172 of CA 2006 has described about the duties of the directors that includes the obligation of
the directors towards the company success. In the case of Mills v Mills the verdict has been
stated which clearly states for acting of the directors for the company interest merely and
lonely which should not be attached to their own interest. In the case of Re Smith v Fawcett
according to the statement of Lord Green the company directors should not separate their
separation of the exercise bona fide to their consideration and not similar to what the court
may regard – which is all for the company interest not for the insurance purposes.
10 Coleman v. Myers, 29 A.D.2d 727
11 Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512
12 Fulham Football Club Ltd v Cabra Estates plc [1992] B.C.C. 863

In the case happened in the past “Re Englefield Colliery Co13” the director of the company
found and charged with the allegation for the liability to reimburse the fund to the company.
In the recent case similar to the above case of the “Crowther Group Plc v International Plc”
the court has verdict that the directors should be focused on the interest of the company and
should do what would be the best for the company. In the case of “Romer J in the Re City
Equitable Fire Insurance Co14” the court has stated that the director’s duties is very
essential to consider the nature of the company business. The importance is lies within the
information of the working manners and the function of the directors and other officers who
are operating the work of the company.
Conclusion
From the findings of the issues of the Solartec company the two persons, who are the
company directors, are proven to breach the Corporation Act 2001. The managing director,
Bill and Alex, the CFO of the company should remind the consequences of breaching their
directorial duties. The consequences also depends upon the measurement of company
detriment and effect on the company. The consequences may involves a penalty in the form
of imprisonment up to 5 years and this these would be sanctioned as the criminal offence
which is considered as anti-competitive. The directors can be charged and sentenced for
breaching the good faith for the company and conducting such dishonest activities which can
cause detriment to the company. According to the civil sanctions the penalty cost would take
up to $220,000 and the director will be disqualified from holding the post as the company
director. The company Solartec will suffer a great loss and financial damages including the
loss of public reliability towards the company. These will completely effect on the reputation
of the company for breaching the duties of such directors in the company.
13 Re Englefield Colliery Co (1878) LR 8 Ch D 388 (CA)
14 Re City Equitable Fire Insurance Co [1925] Ch 407

Bibliography:
Baker Mckenzie, "Duties And Liabilities Of Directors Of Australian
Companies", Bakermckenzie.Com (Webpage, 2019)
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabiliti
esofdirectors_dec17.pdf?la=en>.
Directors - What Are My Duties As A Director? | ASIC - Australian Securities And
Investments Commission", Asic.Gov.Au (Webpage, 2019) <https://asic.gov.au/regulatory-
resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/>.
Duties Of Directors, Companydirectors.Com.Au (Webpage, 2019)
<https://www.companydirectors.com.au/dutiesofdirectors
G Rauterberg and E Talley, "Contracting Out Of The Fiduciary Duty Of Loyalty: An
Empirical Analysis Of Corporate Opportunity
Waivers", Repository.Law.Umich.Edu (Webpage, 2017)
<https://repository.law.umich.edu/cgi/viewcontent.cgi?article=2931&context=articles>.
General Duties Of Directors - Corporations Act 2001
(Cth)", Lawhandbook.Sa.Gov.Au (Webpage, 2019)
<https://lawhandbook.sa.gov.au/ch05s04s02.php>.
Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 19 edition Thomson
Reuters 2018.
Percival v Wright [1902] 2 Ch 401
Coleman v. Myers, 29 A.D.2d 727
Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512
Fulham Football Club Ltd v Cabra Estates plc [1992] B.C.C. 863
Re Englefield Colliery Co (1878) LR 8 Ch D 388 (CA)
Re City Equitable Fire Insurance Co [1925] Ch 407