Commercial Law: Analysis of Director's Duties and Breaches

This report provides a comprehensive analysis of the duties of company directors under Australian commercial law, specifically referencing the Corporations Act 2001 (Cth). It examines both common law and statutory duties, including the duty to act in good faith, exercise care and diligence, avoid conflicts of interest, and refrain from using information or position improperly. The report analyzes a case study involving a director, Juliette, and assesses whether her actions constituted breaches of these duties. It discusses relevant legal principles, such as the business judgment rule, and cites key case law to support its arguments. The report concludes that Juliette violated multiple duties under the Act and common law, highlighting the importance of informed decision-making and adherence to legal and ethical standards by company directors. Finally, the report includes a bibliography of cited sources.

Running head: COMMERCIAL LAW
Commercial Law
Name of the Student
Name of the University
Author Note

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Part A
Issue
The question that needs analysis in relation to the given study is that whether the
common law duties owed by the directors to company along with the statutory duties as provided
by the Corporation Act 2001(Cth) have been violated by Juliette in relation to her actions
Rules
The directors of a company own a duty to the organization at common law as well as
under the provisions of enacted legislations of the parliament. The legislation governing the
actions of the directors operating within Australia is the Corporation Act 2001 (Cth)
According to the CA section 9 the duties provided by the Act is applicable on the
directors and other officers of the company. In addition there is a fiduciary relationship of
directors with the company1.
At common law the duties of the directors include
1. Duty to use the powers for a proper purpose
2. Duty to retaining discretion
3. Duty of acting in good faith towards the company’s interest
4. Duty to observe Skill, Care and Diligence in relation to their company
5. Duty of avoiding conflict of interest
The statutory duties of directors as provided through the relevant sections of the CA includes
1 Corporation Act 2001 (Cth) at Section 9

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1. Section 180- Duty to observe Skill, Care and Diligence in relation to their company
2. Section 181- Duty of acting in good faith towards the company’s interest
3. Section 182- Duty not to use position in an improper manner
4. Section 182- Duty not to use information in an improper manner
5. Section 191-194 – Duty to make proper and timely disclosure
6. Section 588G – Duty not to indulge in Insolvent trading
The directors have a statutory as well as a common law duty to act bona fide and towards a
proper purpose for the company under Section 181. This means that when the powers are
discharged by the directors it needs to be in good faith, in the best interest and for a proper
purpose in relation to the company2.
The question in relation to this duty had been discussed in the case of Re Smith v Fawcett3.
In this case it had been ruled by the court the directors owe the duty to the company and the
company may directly sue the directors in relation to the breach. The directors must have a
genuine belief that they are acting in the best interest of the company.
Whether the responsibility has been conducted properly is analyzed in an objective manner
by applying the objective test. This means that a reasonable director is placed in the same
position and it is analyzed that whether the same course of action would have been taken by him
as provided in the case of Darvall v North Sydney Brick & Tile Co4.
The directors of the company have this duty towards the company as a whole as discussed in
the case of Piercy Vs Mills & Co5.
2 Corporation Act 2001 (Cth) at Section 181
3 Ltd [1942] 1 All ER 542
4 [1989] 16 NSWLR 26
5 [1920] 1 Ch 77

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The court also analyzes the purpose for which the power has been exercised by the director in
order to analyze compliance with the duty as stated by the case of Society v Wheeler [1994] 12
ACLC 67.
The directors have the duty to retain discretion in relation to their activity as provided in the
case of Thorby v Goldberg [1964] 112 CLR 59. This means that the directors have to retain their
discretion in relation to the power provided to them and cannot avoid the duty. They can
however delegate their powers to others.
In the case of Omnilab Media Pty Ltd v Digital Cimina Network Pty Ltd6 the director was
held liable of diverting a corporate opportunity which belongs to the company.
Any director or officer of an organization has to use their power and discharge the
responsibilities imposed on them by observing diligence and care which would have been done
by a reasonable person if they were the directors of a company in the same situation or occupied
the same position and had the same duty as the director in context as stated by the provisions of
Section 180(1) of the CA7.
In the case Re City Equitable Fire Insurance Co Ltd8 it was provide by the court that there
was although there was no finding in relation to the misconduct and negligence in the part of the
directors, the court ruled that the directors may not exhibit high degree of diligence and care in
relation to their duties, but they have to exhibit standards which a reasonable person would have
done in the same situation.
6 [2011] FCAFC 166
7 Corporation Act 2001 (Cth) at Section 180(1)
8 [1925] Ch 407

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In the case of Daniels & Ors v Anderson & Ors9 it was held by the court that the directors
owe a common law duty of care to the company which is in compliance with the equitable duty
of care. It was also ruled that even where the directors possess only a certain area of expertise it
is their duty to represent the business more than their mere area of expertise.
The business judgment rules as provided in Section 180(2) acts as a form of defence
available to the directors of a company in relation to the breach of statutory or common law
duties10. Harlowe Nominees P/L v Woodside (Lakes Entrance oil Co NL11 applied the business
judgement rule in Australia. The defence can be availed of the decision of the director was made
in good faith and towards a proper purpose, they did nit gave any personal interest in the
decision, they informed themselves about the decision taken by them and they have a rational
belief that the decision taken by them is towards the best interest of the company.
In the case of ASIC v Rich12 it had been ruled by the court that the director who fails to or
neglects a certain matter which would safeguard the interest of the company is the not in fact
making a business judgement.
As stated by Section 183 of the CA a director of the company may not use the information
obtained from the other company for the benefit of any third party or himself13.
Application
It has been provided in the given situation that the Sumo Ltd is a company which is
registered in Australia and therefore its affairs would be governed by the provisions of the
9 [1995] 13 ACLC 614
10 Corporation Act 2001 (Cth) at Section 180(2)
11 [1968] 121 CLR 483
12 [2009] NSWSC1229
13 Corporation Act 2001 (Cth) at Section 183

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Corporation Act 2001 (Cth) Juliette is one of the directors of the company and therefore would
be subjected to the statutory duties and well as the common law duties of directors.
The organization wants to expand the business and conducts surveys in relation to whether
they should carry on manufacturing of Scottish tartan looking rugs and carpets or countrystyle
timber floorings. Juliette has no expertise in relation to both the plans and therefore took little
interest in the meeting conducted by the company in relation to the matter. She was busy in some
other work and towards the end of the meeting provided a passionate speech in relation to the
matter and made a vote in favor of rugs and carpet project. Although she had no knowledge
about the matter the board of directors agreed with her as they presumed her to be correct. The
board based on her decision ignored the fact there was little research conducted in the feasibility
of Scottish tartan rugs and carpets.
There are several areas of concern which have been identified in relation to the actions of
Juliette. According to the provisions of the Re Smith case Juliette owes a duty to act in the best
interest the company which if breached she can be sued by the company Sumo Ltd.
Whether Juliette has breached the duty or not would be analyzed in an objective manner
through comparing her actions with a reasonable director as per the Darvall case.
In the give situation no reasonable director for the best interest and proper purpose of the
company would have taken a decision without having herself informed about it appropriately,
thus the common law duty of best interest as well as section 181 of the CA have been breached
by Juliette.
According to the provisions of the Piercy case Juliette has a duty towards Sumo as a
whole. In addition it was the duty of Juliette to retain discretion under common law which she

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did not by not informing herself about the decision individually and thus she has beached this
common law duty as per the Thorby case.
Juliette had the duty to observe care and diligence towards her responsibilities in relation
to the company which would have been done by a reasonable person in her position and the same
situation under section 180(1) of the CA. However it is clear that she has not complied with the
duty as a reasonable person would never take such a decision which could considerable affect the
interest of the company without informing herself about the subject matter of the decision.
In addition as per the provisions of Re City Equitable Fire Insurance Co Ltd it was the
duty of Juliette to observe a reasonable degree of diligence and care towards her duties which
would have been done by a reasonable person which she failed by not informing herself about
the decision, not concentrating on the meeting and without any evidence selecting a proposal for
the company.
In the given situation it has also been provided that Juliette has resigned from Sumo and
joined another company belonging to her brother. She used the information from the surveys
conducted by Sumo and took a decision to go forward with manufacturing of countrystyle timber
floorings. In the given situation she is libel to divert opportunity from her previous company to
another as per the principles of Omnilab Media Pty Ltd case. In addition as she has used the
information obtained from sumo to benefit the other company and therefore is also liable for the
breach of section 183 of the CA.
When it comes to defense provided under the business judgment rule as per section
180(2) of the CA it can be stated that Juliette will not be able to take the defense provided by the
section. This is because she did not indulge in informed decision making, it can also be argued

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that she did it to benefit her brothers company and thus had personal interest , the judgment was
not in good faith and proper purpose and she did not have rational belief that the decision was in
the best interest of the company.
Conclusion
Therefore it can be concluded that Juliette has violated Duties under section 180(1), 181
and 183 of the CA along with similar duties under common law.

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Bibliography
ASIC v Rich [2009] NSWSC1229
Corporation Act 2001 (Cth)
Darvall v North Sydney Brick & Tile Co [1989] 16 NSWLR 26.
Harlowe Nominees P/L v Woodside (Lakes Entrance oil Co NL [1968] 121 CLR 483
niels & Ors v Anderson & Ors [1995] 13 ACLC 614
Omnilab Media Pty Ltd v Digital Cimina Network Pty Ltd [2011] FCAFC 166
Piercy Vs Mills & Co [1920] 1 Ch 77
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
Re Smith v Fawcett Ltd [1942] 1 All ER 542
Society v Wheeler [1994] 12 ACLC 67.
Thorby v Goldberg [1964] 112 CLR 59