Business Law Case Study: Director's Duties and Legal Implications

This case study delves into the legal responsibilities and potential liabilities of directors under the Australian Corporations Act 2001. It analyzes scenarios involving breaches of duty, conflicts of interest, and the business judgment rule. The first question examines the actions of directors at Food Works Ltd, focusing on Dion's conflict of interest and the potential defenses available to directors facing insolvency claims. The second question explores the remedies available to shareholders, Caitlin and Sarah, under the Act, specifically addressing the possibility of a statutory derivative action against directors Ben and David. The analysis references relevant sections of the Corporations Act and case law, such as Foss v Harbottle and ASIC v Rich, to provide a comprehensive understanding of directors' duties and shareholders' rights. Desklib offers students access to similar solved assignments and past papers for further study.

0Running head: BUSINESS LAW
Business Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..................................................................................................................................2
Issue 1A..................................................................................................................................2
Issue 1B..................................................................................................................................4
Issue 1C..................................................................................................................................6
Question 2..................................................................................................................................8

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Question 1
Issue 1A
Issue
The issue is to determine whether any of the Directors have breached their duty as
Director under the Corporations Act 200.
Law
Section 180 of the Corporations Act 2001 lays down the care, duties and diligent
Directors need to carry out in Australia1. Subsection 1 of this section states that a director or
an officer must carry out his duties with utmost diligence and care, like a man of reasonable
prudence would2. While the subsection 2 of the same section lays down that the directors who
are under the obligation to take business judgments or decisions:
 must make them in good faith for a proper purpose;
 should not intend to have personal gains that would influence their judgement;
 should inform the others about a particular business decision that needs to be taken;
 the directors must believe that such business judgement or decision is for the best
possible interest of the company.
Section 181 of the Act clearly lays down that the directors or any officers must do their
duties and carry out their powers in good faith for the best possible interest of the corporation
and such duty must serves a proper purpose3. Section 182 of this Act states that a director,
officer or a secretary of a corporation should not strive to make use for their positions
improperly to:
1 S 180 of Corporations Act 2001(Cth)
2 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2018C00275>.
3 S 181 of Corporations Act 2001(Cth)

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 have an advantage for themselves or for others; or
 tarnish the reputation of the company4.
Section 191 (1) of the Act strictly directs a director to notify other directors about his
personal interest when there is a conflicting idea concerning the company and its best
interest5.
Application
In the given case study, there is a gross violation of duty by Dion in the capacity of an
Executive Director (under section 191(1) of CA 2001) of Food Works Ltd as he suppressed
the facts about doing personal business with Organica Ltd through his own solely owned
company named Lifestyle Today Pty, which is giving a tough competition to Food Works
Ltd. It is the first and foremost principle in a business that the members should not indulge
into a competitive business. Therefore Dion’s involving with Organica is unjust and unfair.
Additionally, Dion, Larry and Vance have somewhat breached their duty as directors
and can be held responsible for pushing the company to its dead end (section 181 of CA
2001). However, in this matter there are legal provisions under CA 2001 which would defend
them for their actions taken toward the best interest of the company.
Conclusion
Dion can be sued by the other directors for his misconduct and breach of duty for
suppressing such vital information from the other directors.
4 S 182 of Corporations Act 2001(Cth)
5 S 191(1) of Corporations Act 2001(Cth)

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Issue 1B
Issue
The issue is to find out whether the Director who has breach director’s duty have a
defence to plead innocence.
Law
Section 180 (2) of the Corporations Act 2001, lays down the Business Judgement
Rule, which states that a director or an officer is at liberty to take up any action for the best
interest of the corporation while making a business judgement6. They must make such
business judgments in the following manner:
 must make them in good faith for pursuing an appropriate purpose;
 should not intend to have personal interest or gains or interest that might influence
their business judgement;
 should inform the others and discuss among themselves about a particular business
decision that needs to be taken;
 The directors must rationally believe that such business judgement or decision is for
the best possible interest of the corporation.
Section 1317S of the Act, additionally, relieves the liabilities of the directors for
infringing the civil penalty provisions. If the alleged person proves that he has acted honestly
for the best interest of the company and all his actions are towards the betterment of the
company’s present situation, then in such case the person is excused for the infringement7.
6 S 180 (2) of Corporations Act 2001(Cth)
7 S 1317S of Corporations Act 2001(Cth)

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Section 1318 of CA 2001, grants power to the court to relieve the person who has
allegedly violated his duties under the Act, for a reason cited as the best possible business
judgement taken at the moment8.
However, the court runs the test of reasonable degree of ‘care and diligence’ laid down
under section 180 (1) of the CA9.
Australian Securities and Investments Commission v Rich is a landmark case that
suggests that the directors have a defence under the law to prove innocence10. They have the
defence to mark their actions for the best interest of the company11.
Application
Dion would be prosecuted for his act of suppression of information about his business
deal with Organica Ltd. as he violated his director’s duties under section 191 of CA 2001. On
the other hand, in the matter of pushing the company towards insolvency, Dion, Larry and
Vance has suitable defences available under section 180 (2), 1317S and 1318 of the
corporations Act 2001 to protect themselves from any civil proceedings.
Conclusion
Therefore it is clear that Dion has no remedy left with him for suppressing material
facts about the company and for competing with the company. While, Dion along with Larry
and Vance can plead innocence for carrying out the vigorous promotion and marketing
campaigns for the best interest of the company that eventually bankrupted it.
8 S 1318 of Corporations Act 2001(Cth)
9 S 180 (1) of Corporations Act 2001(Cth)
10 [2009] 236 FLR 1
11 https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-
guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/

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Issue 1C
Issue
The penalties for the breach of Director’s duty under Common Law and the
Corporations Act 2001 need to be determined.
Law
Section 184 of the Corporation Act states that breach of duties by a director may result in
Criminal Offence12. Section 184 (1) says that a director or officer is said to commit an offence
when they are dishonest on purpose, and when they do not discharge their duties in good faith
for the best possible interest of the company and for an appropriate purpose13. Section 184 (2)
lays down that it is an offence on the part of the directors to use the confidential information
received on the course of their business capacities, dishonestly:
 intending to gain upper hand or advantage for themselves or for another person, or to
disrepute the company; or
 Recklessly derive profit or advantage for themselves or for another; or to do
something detrimental to the company14.
Under Section 191 (1A), the director who has breached his duties faces strict liabilities
and is charged under section 6.1 of the Criminal Code15.
In addition to, Section 1317 E of the Act lays down all the penalties that a director or an
officer is liable to for breaking the laws made for them to follow in terms of Corporations.
12 S 184 of Corporations Act 2001(Cth)
13 S 184 (1) of Corporations Act 2001(Cth)
14 S 184 (2) of Corporations Act 2001(Cth)
15 Criminal Code Act 1995 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00235>.

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Application
Dion would be held liable for suppressing the vital information regarding making a
business transaction with Organica Ltd, which could have been arranged with Food Works
Ltd as it would have boosted Food Works Ltd’s financial condition. However, Dion decided
to make use of the opportunity to visit Europe that he received through Food Works Ltd and
divert such opportunity towards his personal gain. Remedies like restitution of profits,
injunction, rescission of contract and damages can be awarded by the court.
Conclusion
He could be sued by Food Works Ltd on behalf of the other directors for violating his
duties as a director; the court may take away his position as a director and grant several
remedies to the aggrieved party.

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Question 2
Issue
The issue is to determine whether Caitlin and Sarah have any remedies available
under the Corporations Act 2001.
Law
Section 236(1) and 237(2) of the Corporations Act 2001 discusses about the proceedings
that are instituted on behalf of a company. Section 236 (1) includes the instances when a
person may apply for bringing a proceeding on behalf of a company, if such person is:
 a member or anyone who has the capacity to be a member of such corporation or of a
related corporation;
 is or has been the company’s officer16.
Section 237 (2) states that the court should grant such applications if it has reasons to
believe that:
 the corporation itself would not bring the proceedings;
 the person or corporation so applying is acting in good faith;
 There lies a serious question of doubt if the petitioner is applying for leave for
bringing in the proceedings17.
The traditional rule of the liability of the directors toward the shareholders would lay
down as negligible as stated in the case of Foss v Harbottle.18 It stated that the directors only
hold duty and liability towards the company and not towards the shareholders, individually or
16 S 236(1) of Corporations Act 2001(Cth)
17 S 237(2) of Corporations Act 2001(Cth)
18 [1843] 2 Hare 461

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collectively. It had two aspects to it: (a) the appropriate plaintiff aspect; (b) indoor
management aspect. The plaintiff aspect made the basis or foundation of the rule as it is the
application to the Derivative Action. However, Wigram V.C. had laid down certain
exceptions to the rule which was entirely covered in Australia19.
However, in the case of Advent Investors Pty Ltd v. Goldhirsh, the convention rule of
directors not having a liability towards minority shareholders was upheld20. It was observed
that the directors, not have duties towards the company, they bear liabilities towards
shareholders21. Failure to carry out such duties would attract legal proceedings, which is
specially termed as Statutory Derivative Action22.
Application
Caitlin and Sarah could institute the legal proceeding against Ben and David under
section 236(1) and 237(2) of CA, as the directors not only ignored their views on a vital
decision regarding the growth and development of the Company; additionally the directors
suppressed fact about holding a board meeting and altering certain norms of the company
without even letting them know about it.
Conclusion
Therefore, Caitlin and Sarah, the shareholders can bring Statutory Derivative Action
against Ben and David, the directors for breaching their duties as directors toward the
shareholders.
19 FRAWLEY, NANCE. "THE COST OF BRINGING A STATUTORY DERIVATIVE ACTION IN
AUSTRALIA-IS IT TIME TO RECONSIDER THE TERMS OF SECTION 242 OF THE CORPORATIONS
ACT."
20 [2001] 37 ACSR 529
21
22 Keay, Andrew. "Assessing and rethinking the statutory scheme for derivative actions under the Companies
Act 2006." (2016) Journal of Corporate Law Studies 16.1: 39-68.

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Bibliography
Articles /Books/Journals
FRAWLEY, NANCE. "THE COST OF BRINGING A STATUTORY DERIVATIVE
ACTION IN AUSTRALIA-IS IT TIME TO RECONSIDER THE TERMS OF SECTION
242 OF THE CORPORATIONS ACT."
Keay, Andrew. "Assessing and rethinking the statutory scheme for derivative actions under
the Companies Act 2006." (2016) Journal of Corporate Law Studies 16.1: 39-68
Case Laws
Advent Investors Pty Ltd v. Goldhirsh [2001] 37 ACSR 529
Australian Securities and Investments Commission v Rich [2009] 236 FLR 1
Foss v Harbottle [1843] 2 Hare 461
Legislations
Corporations Act 2001(Cth)
Criminal Code Act 1995
Internet resources
Corporations Act 2001 (2018) Legislation.gov.au
<https://www.legislation.gov.au/Details/C2018C00275>v
Criminal Code Act 1995 (2018) Legislation.gov.au
<https://www.legislation.gov.au/Details/C2017C00235>

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https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-
companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-
wrong/