Analysis of Director's Duties: Sparkling Pty Ltd Contract Law Case

This report analyzes a contract law case involving Sparkling Pty Ltd and its managing director, Sarah. The assignment addresses the legal implications of Sarah's actions, particularly concerning her duties and liabilities as a director. The report examines whether Sarah breached her duties by exce...Read More

RUNNING HEAD: LAW OF CONTRACT
Law of Contract
Name of the student
Name of the University
Author Note

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LAW OF CONTRACT
Issue:
The primary concern, in this case, is to discuss the outcome of the case and the consequences of
the act of Sarah. The secondary issue is a discussion about the consequences if the loan officer
was aware of the expiration of Sarah’s appointment and if the loan was
given in favour of the other two outlets.
Rule:
Australian law enforces several obligations and duties upon numerous people those
employed by, and those perform on behalf of any Australian company(Langford and Ramsay
2015). The specific role or duty of an individual depends on that particular person within the
company.
Role of the Directors:
The function of the board depends on the situation of a company, which includes:
 Reward and appoint the company’s CEO
 Approve business plan, formulate the strategy and to set goals for the company.
 Plan for the key management decisions and to approve the annual budget
 Monitoring the business results and the performance of the management.
 To review policies for communication to members and to supply them with a report.
 To review and set the conformance strategies and budgetary control(Hayne 2014).

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According to the directors act jointly as a board, every director is subjected individually to
common law duties, which includes the best interest and good faith of the company along with
reasonable diligence and care.
Liability of good faith:
Directors must utilise their controls and in the same way, should discharge their role and
responsibilities or the duties in good faith along with the best interest of the organisation as a
whole. The minimum requirement for the director's duties is to act honestly for the best interest
of the company according to their belief (Anderson 2014). Additionally, the conduct of Director
can be judged objectively for reference to being a reasonable director and the consideration of
the best interest for the company.
Liability of diligence and care:
Directors must utilise their controls and in the same way, should discharge their role and
responsibilities with a sufficient amount of diligence and care that a sensible individual should
follow if:
 They were the director of an organisation in a similar circumstantial influence
 They perform the same responsibility as the director of a particular organisation
occupying the same office.
The behaviour required to conduct this duty depends on the organisational circumstances and
the responsibility and position a particular director (Barber 2014). Every director, including the
executive directors, should have a special experience and skills to be in a greater standard. For
example: a finance director due to lack of sufficient diligence in the field of finance matter or

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LAW OF CONTRACT
any funding matter may breach his liability or duty even an equal behaviour by a director who is
non-executive may not establish a breach. In a similar situation if any special responsibility held
by the board may cause a lack in their duty of care(Keay 2014). A similar case of
Commonwealth Bank of Australia v Friedrich 5 ACSR 115; 9 ACLC 946 the court held that
director was liable personally for acquiring debts in the name of the company as the loan was
found to be fraudulent. The director should not have signed the report (annual report) along with
the listed asset that was not owned by the company (Anon, 2019).
The conduct of a director shall not be excused due to the absence of experience and skill.
Every director should set up themselves with to meet up the minimum standard of the objective.
Section 180 of the Corporation Act 2001 deals with the diligence and reasonable care on the
performance of a director. Section 181 of the Corporation Act 2001 deals with the proper
purpose and good faith which on breaching can make a director personally liable.
Application:
(a) The legal outcome of this case will be, as the director, Sarah has not performed the duties
and obligations with diligence and care she may be charged under section 180 of the
Corporation Act 2001 and section 181 of the Corporation Act 2001.
The act of Sarah as a Director was wrong in legal consent, and the consequences for that
particular act may be:
 Penalty up to $200,000
 Jail time up to five years
 Debar form managing an organisation
 To pay off the debts will be personal liability

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(b) The outcome of the case should be, Sarah was not supposed to exceed the borrowing
transaction limit of $20,000 according to the contract made by the company. Sarah has
performed a breach of duty as she had exceeded the limit without any sound approval
from the board of directors or without any reference from the board.
(c)
(i) The outcome would be the same as the company has set up the transaction limit of
$30,000 for the directors of the company, even if the loan was for the refurbishment of
the two Sparling’ clothing shop.
(ii) The outcome of the case would be different if the loan officer knew that Sarah was
out of favour as she has exceeded the limit of transaction guided by the company and was
negotiating for a new job as her appointment as a director was expired. Costello Bank
would not have provided $30,000 to Sarah if they had proper knowledge about the
contract limit set up by the company to the director.
Conclusion:
Therefore it can be concluded that Sarah has not performed the duties and liabilities of a director
with diligence and care. It cannot be said that Sarah, as a reasonable director of an organisation.

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Reference:
Langford, R.T. and Ramsay, I., 2015. Directors' Duty to Act in the Interests of the Company:
Subjective or Objective?. Journal of Business Law, pp.173-182.
Keay, A., 2014. The public enforcement of directors' duties: a normative inquiry. Common-Law
World Review, 43(2), pp.89-119.
Anderson, H., 2014. Directors' Liability for Fraudulent Phoenix Activity—A Comparison of the
Australian and UK Approaches. Journal of Corporate Law Studies, 14(1), pp.139-173.
Bakermckenzie.com. (2019). [online] Available at:
https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesof
directors_dec17.pdf?la=en [Accessed 17 Aug. 2019].
LegalVision. (2019). Consequences for Breaching Directors Duties | LegalVision. [online]
Available at: https://legalvision.com.au/consequences-for-breaching-directors-duties/ [Accessed
17 Aug. 2019].
Barber, F., 2014. Indirectly directors: duties owed below the board. Victoria U. Wellington L.
Rev., 45, p.27.
Hayne, K.M., 2014. Directors' duties and a company's creditors. Melb. UL Rev., 38, p.795.

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Laing, G., Douglas, S. and Watt, G., 2015. Aspects of Corporate Delegation, Reliance and
Financial Reporting: Lessons from Australian Securities and Investments Commission v Healey
(2011) 29 ACLC 11-67. Canberra Law Review, 31(1), pp.16-27.

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