Commercial and Corporations Law: Director's Duties Case Study Analysis

This case study examines the duties of directors in a commercial and corporations law context. The scenario involves directors of DEF Ltd, a mining company, facing potential breaches of their fiduciary duties. The analysis addresses three key issues: whether the directors (Clubber, Drago, and Rocky) contravened their duties, the availability of defenses for the directors, and the potential liability of Drago as the Chief Financial Officer. The case explores the application of the Corporations Act 2001, specifically sections 180(1), 181, and 182, along with relevant case law. The directors' actions regarding an uncommercial mining venture are scrutinized, considering their decisions, the geological survey findings, and the expenditure of company funds. The analysis concludes that the directors likely breached their duties and may not have access to available defenses.

Running head: COMMERCIAL AND CORPORATIONS LAW
Commercial and Corporations Law
Name of the Student
Name of the University
Author Note

1COMMERCIAL AND CORPORATIONS LAW
Issue 1
Whether any of duties as a directors has been contravened by Clubber, Drago and Rocky.
Rule
The directors of a company are construed to be the agents of the company and owes a
relationship of fiduciary nature towards the company. This can be supported with the case of
Lagunas Nitrate Company v. Lagunas Syndicate, [1899] 2 Ch. 3921. This implies a
relationship of trust that a director has with the company and under this, they are required to
ensure the matters that are beneficial for the company. This can be illustrated with the case of
United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 3472. This has
been imposed by the director both by virtue of the common law as well under the provisions
of the Corporations Act 2001 (Cth)3 (CA). Under this duty the directors should ensure their
conducts to be in conformity with benefits of the company and it should by every means
refrain from indulging in any activity, which has the effect of causing impairment to the
company. This can further be supported with the case of Parkdale Custom Built Furniture
Pty Ltd v Puxu Pty Ltd [1982] HCA 444.
The directors pertaining to a company is required to ensure their conduct in the
furtherance of exercising their functions as directors to be effected of a proper purpose, it
have been carried out with utmost care and there needs to be a reflection of diligence in the
actions of the directors. This duty pertaining to the directors has been provided in section
180(1) of the CA5. This can be illustrated with the case of Australian Securities and
Investments Commission v Project Management (Aust) Pty Ltd [2019] FCA 476. The extent
1 Lagunas Nitrate Company v. Lagunas Syndicate, [1899] 2 Ch. 392
2 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347
3 The Corporations Act 2001 (Cth)
4 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44
5 The Corporations Act 2001 (Cth), s. 180(1)
6 Australian Securities and Investments Commission v Project Management (Aust) Pty Ltd [2019] FCA 47

2COMMERCIAL AND CORPORATIONS LAW
of the standard relating to care that the director is required to extend while conducting his
functions as a director is to be construed with respect to the conscience of a reasonable
individual who has been subjected to the similar situation. This can be backed by the case of
Hawes v Dean [2014] NSWCA 3807.
The existence of good faith in the actions of the directors are also required to be ensured in
the conduct of the directors with respect their functions as a director in the company. This
good faith requires the director to act in a way that will guarantee the best concern with
respect to the company. All their acts are required to be carried out in pursuance of a proper
cause. Section 181 of the CA8 contains This comes in line with the case of ASIC v Sydney
Investment House Equities Pty Ltd [2008] NSWSC 12249.
The directors are under an obligation to refrain from indulging into any activity that has
the chief motive of earning personal advantage to them without effecting any advantage to
the company. This can be explained with the case of ASIC v Managed Investments Ltd & Ors
(No. 9) [2016] QSC 10910.
Application
In the instant scenario, DEF Ltd was the mining as well as exploration based company in
the Northern Territory. Its directors are Clubber, Drago and Rocky. Rocky holds the position
of the Chief Executive Officer of the company. Drago is a chairman of the company. Dragon
held the position of the Chief Financial Officer of the company. This can hold them to be the
directors of the company and they are under an obligation to guarantee their actions while
conducting the business of the company to be beneficial to the company and they should
undertake all means, which is fair to restrict any detriment being caused towards the
7 Hawes v Dean [2014] NSWCA 380
8 The Corporations Act 2001 (Cth), s. 181
9 ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224
10 ASIC v Managed Investments Ltd & Ors (No. 9) [2016] QSC 109

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company. This can be supported with the case of United Petroleum Australia Pty Ltd v
Herbert Smith Freehills [2018] VSC 34711.
After the initiation of the company’s exploration activities and after number of sites being
drilled, a geological survey has been commissioned resulting in the mines being tested. It has
been disclose from the survey that the mines were uncommercial, as they have a very low
level of gold deposits. This can be constituted by the director as a venture that might lead to a
detriment being caused to the company. Directors are required to refrain from continuing
with such an activity.
Again, $5000000 has already been spent by the company for this venture. The directors
were considering to put a stop to this activity and pay the capital that has remained to the
shareholders. This can be treated as a proper action to be taken in a particular situation to
guarantee benefits to the company.
Rocky wanted to continue with the venture anyway and has been optimistic regarding the
exploration. Drago and Clubber, although not sure about the exploration, but the accepted the
will of Rocky for the purpose of avoiding a heated confrontation. This can be constitute as a
contravention of the directors duties as Rocky needs to ensure that his actions are for proper
cause and Drago and Clubber needs to have stopped him from continuing with the work as
they knew it to have dire consequences.
In this furtherance, the continued the mining and exhausted all the capital belonging to the
company. This makes the directors to have contravened their duties that has been provided
under section 180(1), 181 and 182 of CA.
Conclusion
Whether the duties as a director has been contravened by Clubber, Drago and Rocky.
11 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347

4COMMERCIAL AND CORPORATIONS LAW
Issue 2
Whether Clubber, Drago and Rocky has the option of seeking any resort under any
defence that might have been available to them for the contravention of their duties as a
director.
Rule
The directors pertaining to a company are required to abide by the duties that they have in
the company by virtue of their position as a director. Any contravention in ensuring the same,
would lead to liability being incurred by the directors of the company. However, in case of
director has been in breach of their duties under this Act as well as under the common law,
they will be considered to have incurred liability. Again, the directors who have violated the
duties, they have under this Act has the option of availing defence under section 1317S and
180(2) of the Act12.
The first defence, in this regard, that is available to a director is the best judgement rule.
This defence has been provided in section 180(2) of the Act. This requires the directors to
show that their activity, which has the effect of violation of the duties under the Act, has been
undertaken for a proper purpose and in carrying out the same he has been ensuring good
faith. He also needs to establish that he had no interest of personal nature involved in such a
activity, which is in violation of the duties he has being the director of the company. The
directors need to prove that his actions has been taken under proper cause and in taking such
an action, he has a belief, which is reasonable that the action he has taken is the most
appropriate one under the given circumstances. Under this section, the directors are also
required to ensure that their actions has been sought for the purpose of guaranteeing the
benefits of the company. In this furtherance, they have acted rationally.
12 The Corporations Act 2001 (Cth), s. 180(2) & 1317S

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Directors who are alleged to have contravened the duties under this Act, has the option of
availing defence under section 1317S of the CA13. In this section, the courts are conferred
with the power of discretion in rendering the directors to be not liable for the contravention of
their duties under this Act. Again, in extending this defence the courts need to ensure that it is
just and proper to render the director not liable. In applying this section, the first thing that
the court is to ensure is that the director’s action has been carried out with honesty. It needs to
be ensured by the court that the action or the conduct the director has exhibited in a particular
set of situation can be construed to be the best one in the given set of situation available to the
directors. The same can be illustrated with the case of Hawes v Dean [2014] NSWCA 38014.
Application
In this case, Clubber, Drago and Rocky are the directors of the company. Rocky holds the
position of the Chief Executive Officer of the company. Drago is a chairman of the company.
Dragon held the position of the Chief Financial Officer of the company. This can hold them
to be the directors of the company and they are under an obligation to guarantee their actions
while conducting the business of the company to be beneficial to the company and they
should undertake all means, which is fair to restrict any detriment being caused towards the
company.
After the initiation of the company’s exploration activities and after number of sites being
drilled, a geological survey has been commissioned resulting in the mines being tested. It has
been disclose from the survey that the mines were uncommercial, as they have a very low
level of gold deposits. This can be constituted by the director as a venture that might lead to a
detriment being caused to the company. Directors are required to refrain from continuing
with such an activity.
13 The Corporations Act 2001 (Cth), s. 1317S
14 Hawes v Dean [2014] NSWCA 380

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Again, $5000000 has already been spent by the company for this venture. The directors
were considering to put a stop to this activity and pay the capital that has remained to the
shareholders. This can be treated as a proper action to be taken in a particular situation to
guarantee benefits to the company.
Rocky wanted to continue with the venture anyway and has been optimistic regarding the
exploration. Drago and Clubber, although not sure about the exploration, but the accepted the
will of Rocky for the purpose of avoiding a heated confrontation. This can be constitute as a
contravention of the directors duties as Rocky needs to ensure that his actions are for proper
cause and Drago and Clubber needs to have stopped him from continuing with the work as
they knew it to have dire consequences.
Hence, it can be stated that the decision of Rocky has been backed by his stubborn desires
and cannot be construed to be a just one. And the suppression of opinion by the other two
directors are also not backed by honesty. Hence, are defences are not available to him.
Conclusion
Clubber, Drago and Rocky does not have the option of seeking any resort under any
defence that might have been available to them for the contravention of their duties as a
director.
Issue 3
Whether Drago will also be held liable for the breach of duties as a director being the chief
financial officer of the company.

7COMMERCIAL AND CORPORATIONS LAW
Rule
The definition of the director of a company has been provided under section 9 of the CA15.
Under this section, the director implies all the persons who has been employed in the capacity
of the director. The person who has been appointed as a director would also be construed as a
director under this section. Even if the person who has been acting has a director did not
really being appointed as a director, will automatically be conferred with the status of a
director under this section. Any person will be considered to be a director in case he has been
acting as a director. This acting as a director would require him to give instruction to other
directors who were under an obligation to ensure the abidance of the same. However, this
would not include the professional advice. The officer of a company, conducting as a director
would be construed as a director.
Application
In the present case, Drago held the position of the Chief Financial Officer of the company.
He has been acting as a director in attending the meeting and involved in the decision making
process. Moreover, it has been expressly stated in the scenario that Drago is one of the
directors. Hence, he will be required to be rendered a director under section 9 of the Act. In
this regard, his being the chief financial officer will be irrelevant with respect to his liability
incurred for the alleged breach of his duties as a director.
Conclusion
Drago will also be held liable for the breach of duties as a director being the chief financial
officer of the company.
15 The Corporations Act 2001 (Cth), s. 9

8COMMERCIAL AND CORPORATIONS LAW
References
ASIC v Managed Investments Ltd & Ors (No. 9) [2016] QSC 109
ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224
Australian Securities and Investments Commission v Project Management (Aust) Pty Ltd
[2019] FCA 47
Lagunas Nitrate Company v. Lagunas Syndicate, [1899] 2 Ch. 392
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44
The Corporations Act 2001 (Cth)
United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347