BLO5540 - Directors' Duties & Liabilities: A Corporations Act Analysis

This case study thoroughly examines the duties and potential breaches of directors under the Corporations Act 2001 (Cth), focusing on a hypothetical company, Food Works Ltd. It addresses several key issues, including the failure of directors to disclose relevant business opportunities, potential conflicts of interest, and the company's insolvent trading. The analysis covers sections 180-183 of the Corporations Act, which outline the duty of care, good faith, and proper use of position and information. It also discusses available defenses under section 1318 and potential penalties for breaches, including fines and disqualification from managing corporations. Furthermore, the study explores remedies available to minority shareholders in cases of oppression, such as unfair pay raises, dividend policies, and related-party transactions. The case study employs the ILAC (Issue, Law, Application, Conclusion) method to provide a structured and detailed legal analysis.

Running head: Business and Company Law
Business and Company Law

Business and Company Law 1
Contents
Answer to Q1.(a).........................................................................................................................................2
Issue............................................................................................................................................................2
Law.............................................................................................................................................................2
Application..................................................................................................................................................3
Conclusion...................................................................................................................................................4
Answer to Q1(b)..........................................................................................................................................5
Issue............................................................................................................................................................5
Law..............................................................................................................................................................5
Application..................................................................................................................................................5
Conclusion...................................................................................................................................................6
Answer to Q1(c)...........................................................................................................................................7
Issue............................................................................................................................................................7
Law..............................................................................................................................................................7
Application..................................................................................................................................................7
Conclusion...................................................................................................................................................8
Answer to Q2..............................................................................................................................................9
Issue............................................................................................................................................................9
Law.............................................................................................................................................................9
Application................................................................................................................................................11
Conclusion.................................................................................................................................................11
Bibliography...............................................................................................................................................12

Business and Company Law 2
Answer to Q1.(a)
Issue
The relevant issues in this case study are if any of the persons mentioned have breached the
duties of directors with reference to Corporations Act 2001 (Cth).
Law
Part 2 D.1 states the duties of the directors of the company. Section 180 of Corporations Act
2001 states that it is the responsibility of the directors of the company to discharge their duties
and exercise their powers prudently and carefully. The duty of the directors is to make judgments
for a proper purpose and in good faith. They should not be involved personally with the subject
matter of the judgment. Their judgment should be in the best interest of the company1.
Additionally, section 181 states that it is the civil obligation of the directors discharge their duties
and to execute their powers in good faith and in the best interest of the company. They should
discharge their duties for an appropriate purpose. Section 182 states that the directors are
prohibited to use their position for gaining an advantage for themselves and for some related
party which could be detrimental for the company. Section 183 states that they are restricted
from using any information which is obtained by them as a consequence of their position with
the company for personal interests. They cannot misuse the information thereby causing harm to
the company. In AWA Ltd v Daniels t/as Deloitte Haskins and Sells2, it was held that it is an
equal duty of care for executive and non-executive directors . They should be conversant with
the commercial affairs of the company3.
Thus under the Common Law, the directors are responsible for owing a duty of care to the
company. It has been reinstated by section 180(1) of the Corporations Act (Cth). The Business
Judgment Rule states that while deciding whether a director has breached any of his duties, the
courts apply the business judgment rule made by the directors. It is applicable with regards to the
1 William Roberts Lawyers , Directors' Duties(2018) <
https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties>
2 (1992) 7 ACSR 759
3 Lisa Barnes,’ The Albatross Around The Neck Of Company Directors: Journey Through Case Law, Legislation And
Corporate governance’(2013) 12(1) Journal Of Law And Financial Management ,3.

Business and Company Law 3
adoption of the statutory duty of prudence and care by the directors. It applies to the duty of
diligence and care of the directors as mentioned in Section 180(1). In ASIC v Rich4 - One. Tel, it
was decided that the non-executive directors failed to act with due care and diligence and it also
deals with business judgment rule.
The Statutory business judgment states that if the directors and other officers of the company,
making the judgment, are taken to meet the requirements of section 180(1) if they make the
judgment for a proper purpose and in good faith. They are not personally interested in the
content of the judgment. They should have the conviction that the judgment is in the favor of
the company and inform them about the subject matter to the extent it is proper . In Jubilee
Mines NL v Rile5 , the findings were that consistent disclosure should be not equliased with
misleading or deceiving conduct . The principles of ‘when in doubt disclose’ should be reflected
and the company should not misguide the market with incomplete information6.
Application
In the given case, Dion has failed to inform the members of the Board of Food Works Ltd. in
which he is an executive director, about the sourcing of organic business from Europe and
transacting it in Australia which would be a lucrative business. The reason was his belief that
some of the members would not be interested due to the high sourcing cost. But at the same time,
he managed to transact with Organica Limited for his own venture Lifestyle Today Pty Ltd. due
to which he gained a lot of profit from his own company while Food Works Ltd. was struggling
to survive.
It is purely a matter of contravention of section 180 to section 182 of the Corporations Act 2001
(Cth). Section 180 of the Corporations Act 2001 states that the directors are responsible for the
duty of care. Here, Dion and Larry have failed to observe the duty of care because he was not
interested in informing the board members about the prospects of new business.
Furthermore, he had not disclosed his interest in Lifestyle Today Ltd. and his contract with
Organica Ltd.
4 (2009) 44ACSR 341; 21 ACLC 450
5 (2009) 253 ALR 673; 69 ACSR 659
6 Wai Yee Wan ,’Directors’ defense of reliance on professional advisers under Anglo-Australian law’ (2015 ) 44(1)
Common Law World Review, 71, 93.

Business and Company Law 4
Both Dion and Larry did not consider the advice given by Peter, the non-executive director
which was about the crisis of capital faced by the company. All this attracts the contradiction of
Section 180-183 of the Corporations Act 2001.
Conclusion
Hence to conclude, it can be said that there is a breach of the duties of directors as stated in
section 180-183 of Corporations Act 2001.

Business and Company Law 5
Answer to Q1(b)
Issue
If there are any defenses available to the directors who have breached their duties.
Law
Section 1318 of the Corporations Act 2001(Cth) provides some safeguards for the directors of
the company against the results of a breach of duty in some circumstances. In Edwards v
Attorney General (NSW),7 it was held that court must equalize the balance between allowing the
entrepreneur of the directors and liable to the directors for their mistakes. In relation to this,
Section 180(2) of the Corporations Act 2001 states that directors and officials making the
business judgment should meet the requirements of the statutory duty to exercise with due
diligence and care. However, it is not necessary that the business judgment requires the exercise
of discretion and acquittal of the decision of the directors. Section 1318 presumes that director’s
liability depends upon the case. It also provides partial flexibility. In Scott v Williams 8 the
director was partially successful as per section 13189.
Application
The directors can be safeguarded under section 1318 which states that it is not necessary that the
business judgment considers the exercise of discretion and acquittal of decision of the directors.
It also presumes that the liability of Dion and Larry would be provided partial flexibility as per
the decision of the court.
7 (2011) NSWSC 478
8 (2002) 224 LSJS 393
9 Louise Gullifer and Jennifer Payne , Corporate Finance Law: Principles and Policy(Bloomsbury Publishing,2015)
100.

Business and Company Law 6
Conclusion
As per section 1318 of the Corporations Act, the directors Dion and Larry have been given
partial flexibility as per the decision of the court.

Business and Company Law 7
Answer to Q1(c)
Issue
The type of penalties (under the Corporations Act 2001 (Cth) and common law remedies which
are available if a breach of directors’ duties is found
Law
All the provisions of the Corporations Act 2001 lead to civil penalties in case of breach of duties
by the directors as per section 1317 E of the Act. It can impose a fine of up to $200000 as per
section 1317G of the Act and disqualify the director from regulating the management of the
company as per section 206C as per the provisions of the Act. Section 588G(1) of the Act
enforces a duty on the directors to prevent the company from trading while it is insolvent or
becomes insolvent due to the execution of that transaction. Furthermore, the directors had
reasonable grounds of suspecting this.
In addition to the application of civil penalty orders, the Court has been granted the power as per
section 588J of the Act to pass orders relating to the disqualification of the person from
managing the corporates and requiring him to pay a compensation which is equal to the loss or
damage suffered by the company10.
Application
Dion would be liable to penalized for an amount of $200000 under section 1317 E and 1317G of
the act along him disqualifying him to regulate the management of the company as per section
206 C of the act. Furthermore , at the board meeting it was recommended by Vance that in order
to improve profitability the company should invest $100000 on its promotional activities but in
reality, it was found by Peter, the non-executive director of the company that company was
already facing a cash crunch. He even informed it to the non-executive directors of the company
10 Stephen Bottomley , The Constitutional Corporation Rethinking Corporate Governance(Routledge,2016) 100.

Business and Company Law 8
but they were too optimistic regarding its solvency. But later on, it was found that it had been
insolvent.
This is a contravention of Section 183 which restricts the directors from utilizing any information
obtained by them as a result of their position with the company for personal interests. They
cannot misuse the information thereby causing harm to the company. It also attracts the
contravention of section 588G(1) which enforces a duty on the directors to prevent the
company from trading while it is insolvent or becomes insolvent due to the execution of that
transaction11. They have reasonable grounds of suspecting this. As a result, the directors are
liable for under section 588J for their disqualification from managing the affairs of the
corporates and they would have to pay a compensation which is equal to the loss or damage
suffered by the company12.
Conclusion
As per section 1317 E and 1317G of the Corporations Act 2001, Dion would be penalized for
$200000 and he would be disqualified from regulating the management as per section 206C of
the act. Dion, Larry and Vance would be liable under section 588J as they ignored the advice
given by Peter the non-executive director and it resulted into the monetary crisis confronted by
the company.
So they would be disqualified from managing the affairs of the company and they would have to
pay the compensation which is equal to the loss suffered by the company.
11 Legal Services Commission, General Duties of Directors - Corporations Act 2001 (Cth)(2018) <
https://www.lawhandbook.sa.gov.au/ch05s04s02.php>
12 O’Brien Palmer , Directors Duties(2014)< http://obp.com.au/director-duties/>

Business and Company Law 9
Answer to Q2.
Issue
The issue pertains to the availability of remedies to the members as per Corporations Act
2001(Cth) in cases of :
(a) The approval of the rise of pays for Ben and David who hold 80% of the shares.
(b) The company would not declare dividends for two years and would continue to do so in
this
the year even after being in a profitable condition.
(c) The approval of the sale of the four outlets of the company to Carpets Galore Pty Ltd. in
which Ben is a founder and director. Furthermore, no independent valuations are
obtained and the sale price was less than the market price.
Law
Part 2F.1 of the Corporations Act 2001 evaluates the development of the statutory remedy to
restrict the oppression of the minority group of members of the company. It comprises section
232-235.
Under section 233 of the act, the action must be associated with the affairs of the company as per
section 232(1) of the act. Section 53 illustrates that the affairs of the company must not be
limited to the internal management and proceedings of the company. The control, establishment,
business, transactions and trading and ownership in the shares of the company are also involved
in the affairs of the company. Lastly, the members are also concerned with the ascertainment of
the person having a financial interest in the success or failure of the company or control the
policy of the company. As per section 234 of the act , if the application is related to the act or
omission against the member other than a capacity as a member or another member as their
capacity as a member, then they can apply for the same.
The examples of oppressive and unfair conduct include:

Business and Company Law 10
 The issuance of shares with an intention of dominating and diluting the voting rights of
the minority13.
 It also includes the non-payments of dividends to shareholders and excess payments to
directors when the verdicts are not justified as per the situation of the company and excluding the
directors for representing the shareholders from the management of the company.
 The application of the funds of the company for the beneficial interests of some of the
shareholders.
 Refusal to call the meetings of the company to avoid the minority shareholders from
participating in the affairs of the company . In Mopeke Pty Ltd v Airport Fine Foods Pty Ltd 14 it
was held that exclusion from the management is an example regarding the unfair or oppressive
conduct of the company.
In RBC Investor Services Australia Nominees Pty Ltd v Brickworks Ltd 15 it was held that when
the directors act in the best interest of the company, the court would not intervene.
As per section 233 of the Corporations Act, 2001 suggests that it is the discretion of the court to
grant solutions for the purpose of discharging the minority shareholders from the impact of
oppression. It includes an order to purchase the share of the minority at a price which is
evaluated by the court. The company can also purchase the shares of the minority. A receiver and
manager should be appointed and a person can order to perform a particular act such as
unwinding the raising of the capital. The last resort is to wind up the company or it can be
prohibited to perform a certain act.
The director shareholders who are involved in oppressive misconduct can be ordered to buy the
shares of a minority without any control over their prices.
In Foss v Harbottle16 , the court stated the two rules of proper plaintiff rule and internal
management rule.
13 Shanthy Rachagan and Aiman Nariman Mohd Sulaiman ,’Controlling Shareholders: Issues and Challenges for
Shareholders’ Empowerment in Directors’ Remuneration in Corporate Malaysia’(2015) 9 (1) Asian Journal of
Comparative Law 267.
14 (2007) NSWSC 153
15 (2017)FCA 756
16(1843) 2 Hare 461.

Business and Company Law 11
Application
It has been mentioned in the case study that Caitlin and Sarah, the minority directors has been
excluded from the approval of pay rises for Ben and David. They have also decided to not to
pay the dividends even though the company is in a profitable condition. The dividends have not
been declared for two years. The four retail outlets of the company have been decided to sell to a
company in which Ben is a director with no independent valuations been done.
It attracts the provisions of Section 232 of the Corporations Act 2001 which states that
oppression pertains to the absence of fair dealings and righteousness. The minority shareholders
are being treated in a harsh, wrongful and burdensome way. In order to safeguard the interests of
the minority shareholders, the court grants some remedies as per section 233 of the act17.
It states that the organization may be wound up or the constitution might be revoked or modified.
The shares of the minority shareholders may be purchased by other members. In Profinance
Trust SA v Gladstone 18 it was held that the shares in a going concern would be valued at the date
on which it is ordered by the court to acquire the shares.
Conclusion
Hence to conclude it can be said that the rights of the minority shareholders are to be protected
by the court by providing the remedies as per section 233 of the Corporations Act 2001.
17 Jeffrey Frederick Fitzpatrick, Christopher F. Symes, Angelo Veljanovski and David Parker, Business and
Corporations Law (LexisNexis Butterworths, 3rd ed., 2016) 100.
18 (2002) 1 BCLC 141