Business Law Report: Analysis of Director's Duties and Corporate Law

This business law report analyzes the case of FODARE PTY LTD SHEARN (2011) NSWSC 479, focusing on the breach of duties by a director under the Australian Corporations Act, specifically sections 181 and 588G. The report discusses the director's fiduciary duty to act in good faith and in the best interests of the corporation, as well as the implications of insolvent trading. The case highlights the misuse of company funds for personal purposes and the director's liability for failing to prevent the company from trading while insolvent. The analysis references relevant legal principles and case law, including Russell v Wakefield Waterworks Co (1875). The report emphasizes the importance of directors fulfilling their duties to safeguard the company's interests and adhere to the Corporations Act.

Running head: BUSINESS LAW
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FODARE PTY LTD SHEARN (2011) NSWSC 479 deals with the breach of duties by
directors and involves section 181 and 588 G of the Australian Corporations Act (Keay, 2016).
According to Section 181 of the Corporations Act 2001, a director has to exercise his powers in
good faith and in the best interest of the corporation (Tricker & Tricker, 2015). The Director has
to keep in mind that his activities are for a purpose and to execute that purpose he has to act in a
bona fide interest. In the case of FODARE PTY LTD SHEARN (2011) NSWSC 479, the director
of Fodare, Ms Shearn was accused of breaching her duties and acting in contravention of the
provisions of The Corporations Act. Ms Shearn was the sole director of the company and she
was held to be in breach of the duties that she owed to the company. It was alleged that the trust
fund was used by Ms Shearn for her personal purpose which is against the principles of the
Corporations Act. As was held in the case of Russell v Wakefield Waterworks Co (1875) LR 20
Eq 474 at 479 that the money of a company shall be considered the property of the trust fund.
The money of the trust fund shall be used up by the company only for the fulfillment of a special
purpose. Applying the same logic in the case of Fodare, the Court held that being the sole
director it was her duty to safeguard the interests of the company. Using the money for personal
purpose is a breach of the duty that the director owes to the company. The director shall exercise
his fiduciary duty and shall use the money only for corporate purpose (Langford & Ramsay,
2015). Hence the Court held that Ms Shearn did not apply proper duty of care that a director is
expected to carry out and has affected the company by depriving them of the money that they
legally deserved.
Section 588G of the Corporations Act establishes that a company will not trade while it is
insolvent, also called insolvent trading. It is the duty of the director to make sure that the
company does not trade while it is insolvent. A director shall be held personally liable in cases

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when the director indulges the company to trade while it is insolvent (Barker, 2016). While the
director was accused of trading while the company was insolvent, a claim was made by Ms
Shearn that no trading happened and that the company had no assets. The director also claimed
that the only role of the company was to act as a trustee of the Alexandria Trust. The case
involved the breach of duties that the director owed to the company and therefore was held
liable. It was held that being the director, she was expected to act in the best interest of the
company.

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Reference
Barker, R. (2016). The Duties and Liabilities of Directors—Getting the Balance Right. The
Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-
for-Profit Board Members, 249.
Keay, A. (2016). Wider representation on company boards and directors’ duties. International
Banking and Financial Law, 530.
Langford, R., & Ramsay, I. (2015). Directors' Duty to Act in the Interests of the Company:
Subjective or Objective?.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.