Fodare Pty Ltd v Shearn [2011] NSWSC 479: Director Duties Case Study

This case study examines the Fodare Pty Ltd v Shearn [2011] NSWSC 479 case, which involved a breach of director duties under the Corporations Act 2001 (Cth). The case centers on Shearn, the sole director of Fodare Pty Ltd, who diverted company funds for personal and family benefit. The court found Shearn in breach of multiple director duties, including duty of care and diligence, good faith, and proper use of position, leading to penalties. The analysis details the facts, the duties breached (specifically sections 180, 181, and 182 of the Corporations Act), and the court's decision, emphasizing the importance of acting in the company's best interests. The case highlights the significant responsibilities of directors, especially sole directors, and the consequences of prioritizing personal gain over corporate obligations. It also underscores the potential for equitable liabilities for those who benefit from such actions, as seen with Shearn's daughter. The document references key legal resources like Austlii and CCH Australia, providing a comprehensive understanding of the case's legal and practical implications.

Fodare Pty Ltd v Shearn
[2011] NSWSC 479
(Group Details: )

Introduction
 The Corporations Act, 2001 (Cth) and the
common law, imposes certain duties and
obligations on the directors of all the
companies in Australia, irrespective of
the state or territory, due to the
applicable statutory instruments having
jurisdiction of the entire nation.
 Not following the statute and the
common law can prove quite costly for
the directors.

Brief of Fodare Pty Ltd v
Shearn
 One of the recent cases where the
question was raised on the breach of
director duties was the case of Fodare
Pty Ltd v Shearn [2011] NSWSC 479.
 This case had a single director who
was found to have been in breach of
director duties, which resulted in the
director having to face penalties for
this contravention (Moores, 2014).

Facts of the case
 Shearn- sole director- Fodare Pty Ltd.
 Liquidator of the company asked the
company to sue Shearn.
 Fodare attained certain property in its
capacity of being trustee of Alexandria.
 Later on, this property was sold by Shearn
to independent purchaser.
 This is the sale which formed the essence.
 Case made in the Supreme Court of New
South Wales (Case Law, 2011).

Facts of the case
 Shearn diverted funds and had also cleared registered
mortgages to value of nearly four hundred thousand
Australian dollars in the private account held by her.
 She also diverted approximately two and a half
hundred thousand Australian dollars for payment and
discharge of mortgage of property which was in
possession of her chid.
 While going through the liquidation process, the
liquidators came across this transaction.
 Even the child of Shearn faced claims being made
against her owing to constructive trustee’s scope
(Insol, 2012).

The duties which were
breached
 Section 180(1) of the CA: Duty of Care
and diligence
 Section 180(2) of the CA: Business
judgment rule
 Section 181(1) of the CA: Duty of good
faith
 Section 182(1) of the CA: Duty of proper
use of position
 Section 182(1) of the CA: Civil penalty
provisions

Decision given by the court
 The director of the company owed a big amount to
one Mr. Dennis, and this debt was owed by the
director and her daughter.
 Further, the child/daughter of the director did know
that the company was indebted by this amount
owed to Mr. Dennis.
 The court took this factor into evidence and did
consider it (Jade, 2011).
 This resulted in the court holding that Shearn had
to use the funds of the company properly for the
company liabilities to be discharged as the reasons
for these transactions were entirely corporate base.

Decision given by the
court
 The sum paid by Shearn to her family as a gift
essentially meant that a benefit had been attained
by herself.
 If the wordings of the statutory instruments are
clearly evaluated, this proves to be a clear breach of
director duties covered in the previous segment.
 As a result of Shearn not discharging the duties owed
by her in a proper manner, she was held liable for
breaching the statutory provisions (Austlii, 2011).
 Reasons: Company property was used for wrong
purpose, in a careless, non diligent manner and
against the best interest of the company.

Relevance and impact of this
case
 Sole directors have a higher duty base towards
the company.
 There was clear evidence in this case to prove the
breach of duties against Shearn in this case and
acts as an example that giving preference to
personal profits and benefits proves to be costly
affair.
 Most importantly, not only such acts prove costly
for the directors but also for the ones who benefit
from such affairs, as was seen through daughter
of Shearn bearing equitable liabilities owing to her
knowledge in this matter (CCH Australia, 2011).

References
 Austlii. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479 (25 May 2011). [Online]
Available from:
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/479.html?
stem=0&synonyms=0&query=Fodare%20Pty%20Ltd%20v%20Shearn [Accessed 13/05/18]
 Case Law. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479. [Online] Available from:
https://www.caselaw.nsw.gov.au/decision/54a635133004de94513d87f6 [Accessed
13/05/18]
 CCH Australia. (2011) FODARE PTY LTD v SHEARN, Supreme Court of New South Wales, 25
May 2011. [Online] Available from:
https://iknow.cch.com.au/document/atagUio1908378sl305332445/fodare-pty-ltd-v-shearn-
supreme-court-of-new-south-wales-25-may-2011 [Accessed 13/05/18]
 Corporations Act, 2001 (Cth)
 Fodare Pty Ltd v Shearn [2011] NSWSC 479
 Insol. (2012) Duties Of Directors – A Holistic View. [Online] Available from:
https://www.insol.org/emailer/Jan2012_downloads/India_Duties%20of%20Directors.pdf
[Accessed 13/05/18]
 Jade. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479. [Online] Available from:
https://jade.io/article/217574 [Accessed 13/05/18]
 Moores. (2014) The Directors Series: Part 2 - Fiduciary Duties. [Online] Available from:
http://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties [Accessed
13/05/18]