Business Law: Director's Duties and Company Contracts

This business law assignment analyzes the duties of company directors, particularly under section 180 of the Corporation Act 2001, focusing on diligence, care, and potential breaches. It examines the application of the business judgment rule and relevant case law, such as ASIC v Forrest and Fortescue and ASIC v Adler. The assignment further explores the validity of contracts entered into by companies, referencing section 126 and 127 of the legislation, and the principles established in cases like Royal British Bank v Turquand. The scenario involves a company's directors, their actions, and the legal implications regarding a lease agreement, determining whether the directors fulfilled their duties and if the contract is binding on the organization. The analysis delves into independent judgment, informed decision-making, and the application of legal principles to a practical business situation, offering insights into corporate governance and director's responsibilities. The assignment concludes with an assessment of whether the directors breached their duties and the enforceability of the lease agreement.

Running Head: BUSINESS LAW
BUSINESS LAW
Name of the Student:
Name of the University:
Author Note

BUSINESS LAW 1
Answer one
Issue
Whether the diligence and care duty of section 180(1) have been breached or not?
Rule
The term director means an individual who is provided extreme control for managing the task of
the company for whom they work. There are some rules that have been laid down by the
common law for equitable directors duties and statutory duties have been imposed on the
directors have been given via the relevant sections of the Corporation Act 2001 (Cth).
The meaning of a director has been provided in section 9 of the Corporation Act 2001. A director
is a person who is participating in making the decision of the organization or influencing the
process.
The initial duty of the directors that have been given by the application of Corporation Act 2001
is witnessing diligence and reasonable care by managing the purposes of the company. Under
section 180 of the Act, this duty of the directors has been provided. Further, this section has been
split in 2 sub-parts. The initial part of this section gives the rules by which it has been determined
that in which situation be the duty of diligence and reasonable care that held has been breached
by the director. The subsequent part of this section deals with the common law business
judgment rule in the legislation. This rule is that kind of defense on to which the company’s
director depends on so that they carry out their decision of the business effectively that also
involves taking of risks (French et al 2014).

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The provision in this section also states that any director of the company who is there to manage
the dealings of the company and observe care and due diligence by managing the organization.
The ability of a person to exercise the power and duties and to discharge them if that person is
the director or the officer of the similar company and handling the similar situation are
occupying the similar office and responsibility if he was the director of that company. Thus, the
consequences of the section that has been mentioned in relation to the corporation law are that
the requirement of the director is to express their exceptional skills by managing the functions of
the organization. According to the case of ASIC v Forrest and Fortescue [2012] HCA 39 it was
held that the director of the organisation has not fulfilled the provisions that have been given
under the section of 183 as they have violated the provision of section 1041H of the above-
mentioned act, making it deceptive and misleading contact with respect to the financial services.
In the above-mentioned case the court held that if the company’s director does not obey with the
requirements that are said to be legal, they cannot function carefully and diligently with respect
to managing the organisation as a director who holds similar office in the similar situation and
will not take the decision that involves the legal obligation.
The provisions of the section of 180 (2) of CA provides with the situation in which the
company's director might get away with the allegations with respect to the breach of the duty of
diligence and care. The court has said that the requirements that have been mentioned under the
section 180 (1) where the role of the business judgment has been satisfied by the directors of the
company’s director. In addition, the company's director must not have any interest in relation to
the decision of the subject matter. Under this rule, the duty of the directors is to inform about the
decisions before it is being made to meet the requirements. Further, there should be the rational

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belief of the director and the decision that has been made by them must be of the best interest of
the company.
As per ASIC v Sino Oil and Gas Limited [2016] , the director of the company were found to
violate the provisions of this section in this case as it has been recognized that the director of the
company did not make an informed decision with respect to the decision of the business that has
been made by them, he has not taken part in the board meetings that is required for carrying out
the activities of the business efficiently and has failed to monitor and manage their functions of
the organisation.
According to the case of ASIC v Adler (2002) 41 ACSR 72 , the judgment that has been
provided by the court that directors of the company are in a fiduciary relationship that is
accomplished by them. There is an obligation of the fiduciary agent to assure the company with
the best interest. Certain duties are there that is imposed on directors with respect to the position
that they hold in the company that has been managed by them.
In addition, the judgement of the court in the case of Australian Securities and Investments
Commission v Macdonald (No 11) [2009] NSWSC 287 held that the directors could not obey
with the requirements that have been mentioned in section 189 of the Corporation Act 2001 that
gives the director who depends on the advice that is provided by an individual who must be
having a sensible belief that it should be correct and competent. The directors must make their
own inquiries about the matter so that they can be satisfied with the advice quality. If those
requirements are not followed by directors of the organization it has been seen that they have not

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acted carefully and diligently while managing the functions of the company and have breached
the provisions of section 180 of the CA.
The belief must be rational unless there is no director that will get indulged in it. In the case of
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1, the rule of
business judgment has been used.
Application
It totally depends on how the directors of the organization have fulfilled the duties and made the
use of their powers so that it can be analyzed whether the provisions that have been given in
section 180(1) of the Corporation Act 2001 was violated or not. In the above-mentioned
company, Patel and Rick are the company’s director. Further, it has been given in the case that
Lana also takes part in the making of the decision of the organization that the process is
influenced and she is deemed to be the director of the company as stated in section 9 of the Act.
In the abovementioned situation, the name of the company is fruit. The business of this company
is not working well and therefore a decision has been taken by Rick to change the business place.
Rick has been searching a place for his business and while looking for it he found out a place
that was possessed by Watel Pty Ltd and he has found it to be perfectly alright. It has been seen
that the place’s rent is high enough and there are no other business competition. Rick has got an
idea that he will start serving coffee along with the fruits. Without the consultation of the other

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directors, Rick has signed the lease. In the above-mentioned situation intersection in section 180
(1) Rick has shown the similar skills that any other director would do by staying in the similar
company and in the exact position Rick would do. Therefore if the necessities of section 180(2)
do not seem to be applicable then the section 180 (1) has been violated by Rick. In addition, a
board meeting has been fixed by Rick where he has discussed with the other directors about the
deal and how beneficial it will be for the organization. Lana and Patel seem that Rick must have
discussed the other board directors before taking any decision and later on both of the directors
agrees to him. In the case of Australian Securities and Investments Commission v Macdonald, it
has been discussed by the court that it is essential for the company’s director to make their
judgement independently with respect to the functions of the organization and must carry
sensible belief before depending on the suggestion of another individual which seems to be
informed and correct. Therefore, no such exercise of the independent judgment had taken place.
This duty might be violated by Patel and Lana under the section 180(1) of the CA. Under the
section 180(2), the application of the provisions must be there to regulate the duties which are
under the section 180(1) has observed or not. Another duty of director, in relation to testing that
is under the section of 180(2) is to notify them of the matter of the subject by taking the
judgement for the organization. There were certain situations that made the business fall. The
actions will not have complied if the director will not take the decision in relation to the risk that
is induced. Certainly, there is no such risk that has been that has been seen in the condition and
therefore, Rick has to comply with the necessities that have been mentioned in section 180(2) of
the Corporation Act 2001. Therefore, in the above given case, Lana did not got involved in the
making of the decision and might not fulfill the provisions that have been mentioned in section
180(2) of Corporation Act 2001.

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Conclusion
Therefore, it has been stated in the above-mentioned discussion that Rick and Patel, the
company’s directors have breached the necessities that have been mentioned in the section of
180(2) of Corporation Act 2001. They have the right to claim the security that has been set under
the rule of business judgment. Thus, Lana could not fulfil the provisions that have been set under
the section of 180(2) of the above-mentioned act as she did not get involved in making the
decision of the company.
Answer two
Issue
Is the lease in which Rick has entered is binding upon the organization?
Rule
The provisions that have been mentioned in section 126 of the legislation states that a person can
exercise the company’s power to discharge, vary, rectify, and get into a contract, by acting upon
the expressed or implied authority that has been given by the organization. This authority or the
power kindly function by an individual without making the use of the common seal of the
company. In addition, it is stated in the section that it does not have any influence on any
procedure that may be needed with respect to the contract.
A company can execute any document or deal without using its common seal as it has been
given by the provisions of section 127(1). It can only be done if it is signed by both the directors
of the organization and the company secretary.

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When a person enters into a contract with the organization, she has the right to assume that the
company's agent must act in accordance with all the rules and regulations of the company and it
has been discussed in the case of Royal British Bank v Turquand (1856) 6 E&B 327.
The difference between the execution of the document that has been mentioned under section
127 and the contract that he has entered upon as what is Section 126 has been explained as per
the case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 As
there was no second signature and the contract has been signed by a single director which has
been seen in the above-mentioned case. No other party has been entitled depending on the
assumptions that have been mentioned in section 129 when the organization has entered the
contract. Further, the other party does not have the right to depend on the assumptions that have
been mentioned in section 129 when he enters into the contract by the company.
Application
There has been a contact between Watel and Rick whereby the latter rents the property of the
former.. The document is signed only by Rick. It has also been said that the execution of the
document can be done if it has been signed by both the directors of organization and then there is
no need for the company’s common seal. There is no need for the common seal of the
organization only if it has been signed by both the directors. Such execution has not taken place.
If the execution of the document has not been done according to the section 127(2) then the next
party cannot depend on the assumptions that have been made under the section 129 as discussed
in the Knight case. Rick is provided the power to act on behalf of the company be section 126 of
the CA. Although as per the constitution rick can only get into a contract alone below a specific
amount as per section 124 the act does not become void merely because it is not within the

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powers provided by the constitution. Therefore Rick has signed a legal contract as the agent of
the organization. An individual who is dealing on behalf of a company complies with all the
rules and regulations of the organization as per the Turquand case. Thus there is a contract
between Fruut and Watel.
Conclusion
Therefore, it is seen in the above discussion that the company named Watel Pty Ltd and Rick has
entered into a legal contract fruut is bound as per the section 126 although the execution was not
done as per the s. 127 of the CA.

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References
ASIC v Adler (2002) 41 ACSR 72
ASIC v Sino Oil and Gas Limited [2016]
Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Corporation Act 2001 (Cth).
French, D., Mayson, S., Mayson, S.W. and Ryan, C.L., 2014. Mayson, French & Ryan on
company law. Oxford University Press, USA.
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103
Royal British Bank v Turquand (1856) 6 E&B 327.