Corporations Law Case Study: Director's Duties and Potential Breaches

This case study examines a scenario involving DEF Ltd and its directors: Rocky (CEO), Clubber (Chair), and Drago (CFO), focusing on their potential breaches of director's duties under the Corporations Act 2001 (Cth). The case revolves around the company's mining and exploration activities, which, after initial investment and exploration, yielded uncommercial results. Despite this, Rocky, driven by optimism, pushed for continued exploration against the advice of Clubber and Drago, leading to the exhaustion of the company's capital. The analysis addresses three key issues: whether the directors breached their duties, whether they have any arguable defenses (specifically, the 'best judgment rule' and the discretionary powers of the court under sections 180(2) and 1317S), and whether the same standard applies to Drago as CFO. The case highlights the directors' fiduciary responsibilities to act in good faith, exercise due care, and act in the best interests of the company, as established in relevant case law. The conclusion is that the directors, including Drago, likely breached their duties, and the case explores potential defenses available to them. The case underscores the importance of responsible corporate governance and the consequences of failing to act in the company's best interest.

Running head: CORPORATIONS LAW
Corporations Law
Name of the Student
Name of the University
Author Note

1CORPORATIONS LAW
Issue
The first issue arising from the given scenario is whether Rocky, Drago and Clubber have
breached any directors' duties. The second issue arising from the given scenario is whether
Rocky, Drago and Clubber have an arguable defence. The third issue arising from the given
scenario is whether the same standard will be applied to Drago, as the company's chief
financial officer.
Rule
Under the Corporations Act 2001 (Cth) as well as under the common law, directors are
considered to have a fiduciary relationship with that of the company. The same can be
illustrated with the case of Mills v Mills (1938) 60 CLR 150. The directors are required to
ensure the matters, which are beneficial for the company and refrain from indulging into
matters that will cause detriment to the company. The same can be illustrated with the case of
Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193.
Under section 180(1) of the Act, the directors of a company are imposed with duty to
exercise their powers as a director with the application of proper and just care and ensure
their actions to be carried out diligently. The same can be illustrated with the case of
Australian Securities and Investments Commission v Healey. [2011] FCA 717. The standard
of care that a director is required to exercise is to be assessed with respect to the actions of a
reasonable man when put in similar circumstances. The same can be illustrated with the case
of AWA Ltd v Daniels (1992) 7 ACSR 759.
Under section 181 of the Act, the directors are required to ensure good faith in acting for
the company and all the actions of the directors needs to be for the best interest pertaining to
the company. Under this section, the directors are also required to make their actions in

2CORPORATIONS LAW
conformity with the proper purpose. The same can be illustrated with the case of Darvall v
North Sydney Brick and Tile Co Ltd (1988) 6 ACLC 154.
Section 182 of the Act would restrain any act of the directors that are solely committed for
the purpose of accruing personal benefit to the directors and does not cause any benefits to
the company and cause detriment to the company. The same can be restricted with the case of
Walker v Wimborne (1976) 137 CLR 1.
In the present situation, the directors of a company, under the Corporations Act 2001
(Cth), are required to exercise their powers as a director in compliance with duties mention
by the Act. However, any director, who has been alleged to have acted in contravention of the
duties as a director, can avoid liability, if he can establish his acts to be in compliance of
section 180(2) and section 1317S of the Act. These sections contains defences that are
available to the directors of a company in case they have been alleged to have acted in a
manner, that is in violation of their duties that they have under the Act (Omar 2018).
Section 180(2) of the Act provides for the best judgement rule. This can be considered to
be a defence that a director alleged to have violated his duties may seek resort to. For the
purpose of taking resort under this defence, the director needs to prove that the breach that
has been committed was a consequence of an action that has been carried out by him in a
good faith and he has tried to ensure that his acts are for a proper purpose. He also needs to
establish that there was no material benefit that he might have accrued in the personal
capacity from the decision that he has taken. The directors, seeking resort under this section,
is also required to establish that he had a genuine belief that the decision he has taken is the
most appropriate one in the given circumstances. For seeking resort under this section, he
also need to establish that he has acted in a rational manner and his main objective was to
ensure the interest of the company. Section 1317S of the Act confers discretionary power

3CORPORATIONS LAW
upon the court to waive the liability of the directors who are alleged for the contravention of
their duties as a director. However, there are certain standards of measures the courts are
required to consider while accepting such waiver of liability. While applying the defences
under this section, the court must ensure that the director has acted honestly. The courts are
also required to ensure while applying this defence that the circumstances and the situation
that the directors were put into while making such an unjust decision has directed towards the
consideration of that decision to be the most appropriate decision that the director could have
taken in a given set of circumstances (Keay 2016).
The Corporations Act 2001 (Cth) has defined the term directors in the section 9. Any
person who has been employed as a director by the company would be treated as a director
for purpose of the Act. This definition would also consider any director who has been
employed as an alternate director. It also includes any person who has been carrying out their
duties as a director irrespective of the position for which they have been employed for. Any
person who although has not been expressly appointed as a director may treated as a director
if he has been presiding in the company as a director. When the person has been extending
orders and instruction to the other directors and the director are required to abide by the same,
that person irrespective of his position in the company would be treated to be a director of the
company. However, any person who has been extending advice in a status of a professional
cannot claim to be a director for the purpose of this Act, even if the directors of the company
are abiding by the same. For the purpose of this Act, an officer of the company who has been
acting as a director would also be construed to be a director under this Act. Irrespective of the
name of the position in the company, a person presiding as a director would be construed to
be a director. Any person who has been considered to be director of the company, would be
required to exercise the duties of a director under this Act (Bird and Gilligan 2016).

4CORPORATIONS LAW
Application
In the present situation, Rocky, Drago and Clubber are the directors of the DEF Ltd
involved in mining and exploration activities in the Northern Territory. Rocky is the
company's chief executive officer. Clubber is the company's chair. Drago is the company's
chief financial officer. This requires them to ensure the matters, which are beneficial for the
company and refrain from indulging into matters that will cause detriment to the company.
The same can be illustrated with the case of Elders Trustee & Executor Co Ltd v EG Reeves
Pty Ltd (1987) 78 ALR 193.
The company began exploration activities in July 2011. After drilling a number of sites, a
geological survey was commissioned and the results from the mine wells were tested. The
results from the survey reveal that the mining site has low levels of gold deposits and is
considered to be uncommercial. This required the directors to not proceed with the same as it
would be likely to cause detriment to the company.
The company has already spent $5 million. At a recent meeting, the board considers
whether to abandon its mining activities and return the company's remaining capital back to
its shareholders. This can be construed to be a proper step to be taken to ensure the best
interest of the company.
Rocky is an eternal optimist and never knows when to quit. He argues that the company is
on the verge of a major discovery and should continue with its exploration activities. Clubber
and Drago are less optimistic and suggest that the company's remaining capital should be
returned back to investors. To avoid another heated confrontation, they agree with Rocky that
the company should continue with its drilling program. At the completion of the drilling
activities in 2018, all of the company's capital has been exhausted and there have been no
major discoveries. Rocky’s contention is not for a proper cause and the other directors are

5CORPORATIONS LAW
also under an obligation to oppose the same, which they fail to ensure. This makes the
directors’ actions to which be in breach of the duties that they were supposed to ensure under
section 180(1), section 181 and section 182 of the Act.
DEF Ltd was incorporated on January 2011 and was floated on the ASX in March 2011,
having raised $20 million from investors. The company is primarily involved in mining and
exploration activities in the Northern Territory. DEF Ltd have three directors: Rocky, Drago
and Clubber. Rocky is the company's chief executive officer. Clubber is the company's chair.
Drago is the company's chief financial officer. The company began exploration activities in
July 2011. After drilling a number of sites, a geological survey was commissioned and the
results from the mine wells were tested. The results from the survey reveal that the mining
site has low levels of gold deposits and is considered to be uncommercial. The company has
already spent $5 million. At a recent meeting, the board considers whether to abandon its
mining activities and return the company's remaining capital back to its shareholders. Rocky
is an eternal optimist and never knows when to quit. He argues that the company is on the
verge of a major discovery and should continue with its exploration activities. Clubber and
Drago are less optimistic and suggest that the company's remaining capital should be returned
back to investors. To avoid another heated confrontation, they agree with Rocky that the
company should continue with its drilling program. At the completion of the drilling
activities in 2018, all of the company's capital has been exhausted and there have been no
major discoveries. This can be construed to be a breach of duty that has caused detriment to
the company and the defences that are available them are the best judgement rule and the
discretionary power of the courts that has been provided under section 180(2) and section
1317S of the Act.
In the present situation, Drago is the company's chief financial officer. Drago has been
attending the meetings of the company as a director. This would render him to be director

6CORPORATIONS LAW
irrespective of the name of the position he holds in the company. Hence, he will be
considered to be a director of the company under the definition provided in section 9 and
would be required to exercise the duties of a director under this Act.
Conclusion
Hence, it can be concluded that Rocky, Drago and Clubber have breached any directors'
duties. The defences that are available them are the best judgement rule and the discretionary
power of the courts that has been provided under section 180(2) and section 1317S of the
Act. The same standard will be applied to Drago, as the company's chief financial officer.

7CORPORATIONS LAW
Reference
Andrew. Keay, L.L.B., 2016. Directors'duties. Jordan Publishing Limited.
Omar, P.J. ed., 2018. Directors' duties and liabilities. Routledge.
Bird, H. and Gilligan, G., 2016. Deterring corporate wrongdoing: penalties, financial services
misconduct and the Corporations Act 2001 (Cth). Company and Securities Law Journal, 34,
p.332.