Case Study: Director's Duties and Liabilities at Golden Adventure Ltd

This case study examines potential breaches of director's duties at Golden Adventure Ltd, a travel agency. It focuses on Derek, the company secretary, who allegedly misused company information after resigning and joining a competitor. The analysis covers Derek's actions regarding two projects: an Asian land and cruise package and a South American holiday package. The study applies relevant sections of the Corporations Act 2001 and common law principles to determine if Derek breached his duties of care, good faith, and misuse of information. It also explores whether shareholders can bring statutory derivative or oppression actions against the directors for failing to pursue the South American holiday package project. The document also discusses potential grounds for legal action and possible defenses available to the directors. Desklib provides various study tools and resources for students.

Running Head: BUSINESS AND CORPORATION LAW 0
Commercial and Corporation Law
1/8/2019
Student’s Name
Total Word Count- 3802 words

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Contents
Report..............................................................................................................................................2
Issue 1 2
Rules 1 2
Application 1 6
Conclusion 1 7
Issue 2 8
Rule 2 8
Application 2 13
Conclusion 2 15
Bibliography..................................................................................................................................16

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Report
To, Date: 08-01-2019
Andrew Dixon,
Managing Director,
Golden Adventure Ltd
Sub:- A report on director duty breach in the company
Respected Sir,
Kindly find the following report. All the issues asked by you are discussed hereunder.
Issue 1
The issue of the case is to check that whether Derek, being an officer of the company has
breached his duties under common law as well as under Corporations Act 20011?
Rules 1
According to the legal precedent given in the case of Salomon v A Salomon & Co Ltd [1896]
UKHL 1, [1897] AC 222, a company is considered as a separate legal entity. In addition to being
a separate legal person, a company is also an artificial person. Directors and other officers are
there to act for a company. As these people have a different identity form a company and cannot
be held liable for the affairs of the same, hence there is always a possibility that these people can
misuse the separate status of a company. Therefore, to prevent the misuse of this feature of a
1 Corporations Act 2001 (Cth)
2 [1896] UKHL 1, [1897] AC 22

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company, some duties of directors and officers of the companies are mentioned under common
law as well as under CA. Here, this is necessary to know that what the term officers stand for.
Section 9 of CA provides the definition of an officer. According to this section, following people
comes under the category of an officer:-
 A secretary or director of the company
 Any person who takes the decisions which affect the business of the company as a whole
or a part thereof
 A Person who can affect the financial standing of the company in a significant manner
and
 A person who has the capability to regulate the behavior and decisions of directors3.
It means the duties prescribed under CA for an officer of the company will equally be applicable
to the company secretary. Moving the discussion towards the prescribed duties under CA this is
to mention that these duties consist the general duties as well as the duties of director and
officers in some specific circumstances. The general duties mentioned under CA are more often
similar to the duties prescribed under common law as they have been developed based on the fact
that a director/officer of the company has a fiduciary and trustworthy relationship with the
company. Sections 180-183 of the act carry these general duties. The explanations of these
sections are given hereunder.
Section 180:- This section makes every director as well as other officers of the company liable to
perform their obligations with an amount of care and diligence similar to a reasonable person4. In
3 Austlii.edu.au, Corporations Act 2001 - SECT 9 (2018)
<http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html> .
4 Williamroberts.com.au, Directors' Duties (2018) <
https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties>.

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addition to this subsection 2 of this section states that while making any business judgment,
every director and officers of the company are required to ensure that they are taking this
decision in the best interest of the company for a proper purpose. Further, they are also required
to check that their personal interest is not involved while making any business judgment. Here
for the purpose of this section, a business judgment means a decision to take or not to take a step
regarding a matter of business.
Section 181:- This section provides that an officer and director of the company is required to
perform their duties which are in the best interest and good faith of the company5. In conjunction
with this, the actions taken by the directors/officer must be for the proper purpose. There are
examples of some cases where the court held directors liable for not performing their duties in
the best interest of the company. ASIC v Adler [2002] NSWSC 1716 is one of the important cases
where a person misused the financial information of a company for his personal benefits. The
court made him liable for the breach of duties under CA. Similarly in the case of Bailey v
Mandala Private Hospital Pty Ltd (1987) 12 ACLR 647, the court held that an act will not be in
the best interest of the company where a director does the same for his/her personal interest. If to
talk about the term “for a proper purpose”, this is to mention that it is not necessary for an act to
be for the proper purpose of the company if the personal interest of director is not involved as
given in the case of Hogg v Cramphorn Ltd [1967] Ch 2548.
Section 183:- According to the provisions of this section, a director/officer has a fiduciary duty
to not to misuse the information of a company9. The situation becomes critical when a person
5 Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related
regulations (CCH Australia Limited, 2011)
6 [2002] NSWSC 171
7 (1987) 12 ACLR 64
8 [1967] Ch 254
9 Legislation.gov.au, Corporations Act 2001 (2018) <https://www.legislation.gov.au/Details/C2013C00605>.

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acts in the capacity of director/officer of more than one company. In such a situation, it becomes
the liability of a person to not to disclose information related to one company to another
company. The case of Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 23810 is necessary
to review here. According to the facts and decision of this case, a past employee can use the
skills and general information of employer for the benefit of his/her present employer. However,
such employee cannot share the crucial information of business such as trade secrets. The same
is also applicable to directors/officers of a company.
Duties under common Law: - As mentioned earlier that a director and officer of the company has
duties under statutory as well as common law. These duties are very much similar to the duties
The duties stated under legislation have been discussed in the above discussion. Now, the duties
under common law as mentioned as follow:-
 Duty to act in a bona fide manner
 Duty to perform for a proper purpose
 Duty not to abuse business opportunities
 The duty of diligence and care
 Duty to retain discretion
 Duty to avoid and prevent conflict of interest.
 Duty not to share confidential and crucial business information11
10 (1987) 10 NSWLR 238
11 Etraining.communitydoor.org.au, A guide to directors’ duties and responsibilities for non-listed public companies
and proprietary companies in Australia 2018
(2018)<https://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf>.

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After the above-mentioned discussion, it is clear that not only the directors but also the officers
of the company have their certain duties and obligations under statue as well as under common
law.
Application 1
In the provided case, Golden Adventure Ltd (the company) wanted to expand its business by
starting two new projects. For both of these products, different ideas were there. Project one was
intended to take up Asian land and cruise package and to remove the existing New Zealand
package of the company from the market. The other project was to expand the business by
introducing South American holiday packages. The board of directors assigned the company
secretary of the company, Mr. Derek to conduct the research on both of the projects. For project
two, Derek has conducted very little research. He completed the research and sent his reports via
e-mail before the meeting, the projects were expected to discuss, decide, and approve.
In the subjective board meeting, boards of directors of the company have decided that they will
take Asian land and cruise package and will remove the New Zealand package. For the second
project board of directors had a discussion and concluded that the company should not go for the
South American package. In the reasoning, they have stated that for many of the Australians,
South American package would be expensive from the perspective of time and money. The issue
of the case has been started when Derek resigned from the company and joined another company
named Asia Travel Pty Ltd. where his son was managing director. He used the crucial
information of the previous employer i.e. Golden Adventure Ltd for his personal benefit. He
assisted the tendering process in the later company and because of that; the same acquired the

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Asian package business. Derek knew the tender price of the previous company and when he
joined the Asia Travel Pty Ltd., he submitted the lower bid, because of which previous company
got the place of the second preferred tenderer. Here, Derek breached the statutory as well as
common law duty. Applying the provisions of the case of Riteway Express Pty Ltd v Clayton, he
breached the duty mentioned under s. 183 of CA as he made improper use of the company’s
significant information. Further, as per the decision of ASIC v Adler, he also breached the duties
mentioned in s. 181 of CA as his conduct was not in the best interest of the company. By sharing
the information of the previous employer, he also breached the duties under common law, as he
has not done an act in the bona fide manner. Further, he failed to avoid the conflict of interest in
his conduct and consider his personal interest. He also breached the common law duty namely
not to abuse business opportunities.
Moving towards the failure of duties by him in respect of the second project, this is to mention
that he breached the duties under S. 180 of CA. In general, directors/officers are required to
apply their best sense while taking the decisions on behalf of the company. Here, in the case,
Derek did not make proper and deep research on the South American Project. Based on the
report provided by him, directors of the company took the decision not to initiate the South
American package. He did perform his duty with due care and diligence as similar to a
reasonable person. He was required to make thorough research as he was aware with the fact that
based on his report, directors of the company would take the decision. In such a manner, he
failed to perform the duty of taking care and diligence under common law.
Conclusion 1

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In conclusion, this is to mention that yes, Derek breached his duties under CA 2001 as well as
under Common Law.
Issue 2
The key issue is whether the shareholders can bring a statutory derivative or oppression action
against the directors of Golden Adventure for their failure to proceed with the South American
holiday packages project. Another issue is what are the possible grounds for legal action against
the directors and whether any possible defenses available to the directors.
Rule 2
Shareholders are the owners of the company; however, they are not responsible for managing the
operations of the company. The directors manage a company’s operations, and they are
responsible for taking business decisions. Shareholders cannot enforce provisions on directors to
provide how they should manage their business operations and take business decisions; however,
they have the right to hold them liable for violating their duties if they failed to take decisions for
the benefit of the company. Directors can be held responsible for their wrongdoings based on
which they can be held liable for violating their duties regarding effectively managing the
company’s operations.12 While filing a suit against third parties, the directors act on behalf of the
company, and they can file a suit against the third parties. However, in case the directors are
responsible for violating their duties, then the shareholders have the right to hold them liable for
violating their duties. Violation of director duties and the consequences which they face are
necessary to be evaluated in order to protect the rights of shareholders. In this context, the
statutory derivative action is used by shareholders to protect their rights. This principle was
included in the Corporations Act 2001 on 13th March 2000. The introduction of this principle
12 Shelley Marshall and Ian Ramsay, ‘Stakeholders and directors' duties: Law, theory and evidence,’ (2012) 35
UNSWLJ 291.

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resulted in changing the way director duties were enforced.13 In simple words, the introduction of
this concept in the CA resulted in providing a right to the individual shareholder (or a class of
shareholders) to enforce the director duties against the directors of the corporation.
This principle was identified by the court in the judgment of Foss v Harbottle.14 It is a famous
English case, and its decision becomes a precedent in corporate law. In this case, two members
of the Victoria Park Company brought a suit against the five directors of the company and other
shareholders. In the suit, the members claimed that the directors and other shareholders took
certain actions in order to defraud the corporation. These actions include selling land at an
increased price. It was held that the directors should be the ones who should call for a general
meeting in order to make a claim rather than the claimant.15 This was established by Jenkins LJ
based on the example of the judgment given in the case of Edwards v Halliwell.16 In this case, it
was held that the decision taken by the majority shareholder is enforceable on the minority
shareholders. Moreover, it was held by the company should be the only one that can sue
shareholders or a particular class of shareholders. The members should also not be sued for their
actions; instead, the issue should be resolved through an ordinary resolution passed in the general
meeting.17 However, implementation of this principle was considered as too harsh in the case of
Foss v Harbottle. In order to reduce the harshness, certain exceptions were identified by the
court which is focused on protecting the right of minority shareholders. The court provided an
exceptive that if the company has been harmed and the board of directors has refused to take any
13 Andrew Keay, ‘Assessing and rethinking the statutory scheme for derivative actions under the Companies Act
2006,’ (2016) 16 (1) Journal of Corporate Law Studies 39-68.
14 (1843) 67 ER 189
15 Hui Huang, ‘Shareholder derivative litigation in China: Empirical findings and comparative analysis,’ (2012) 27
(4) Banking & Finance Law Review 619.
16 [1950] 2 All ER 1064
17 Mohammad Rizal Salim and Deborah Gurdial Kaur, ‘The Statutory Derivative Action in Malaysia,’ (2012) 24
Bond L. Rev. 125.

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action after having an opportunity to do so, then the shareholders can seek permission in the
court to bring a statutory derivative action on behalf of the corporation. This rule is identified
under section 236 (1) of the CA
A good example was highlighted by the court in the judgment of Cook v Deeks.18 In this case,
there were four directors, and each of them has 25 percent shares in the company. The directors
knew that a specific contract would be beneficial for the company; however, they formed their
own company in order to sign the contract. One of the directors filed a suit against other three
directors, and the court provided that they have misappropriated the company’s property (the
opportunity) based on which they were held liable.19 The court ordered them to surrender the
profit which they generated through the unfair medium. While filing a statutory derivative
action, the director can obtain leave under section 237 (2) of the CA. Section 237 (2) provides
that the court can grant a leave after it is satisfied that
(a) it is probable that the company will not itself bring the proceeding,
(b) the applicant acted in good faith,
(c) it is in the best interest of the corporation,
(d) there is a serious question to be tried and
(e) before 14 days of giving the application, the applicant must give written notice regarding
disclosing his/her intention to apply for leave.20 As per this section, the leave can be granted by
18 [1916] 1 AC 554
19 Saleem Sheikh, A guide to the Companies Act 2006 (Routledge, 2013).
20 Alison Robertson, Leave under section 237: derivative actions in receiverships - the new black? (2011)
<https://www.lavan.com.au/advice/recovery_reconstruction_insolvency/
leave_under_section_237_derivative_actions_in_receiverships_the_new_black>.

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the court if the applicant has acted in good faith and had no material interest and they have
informed themselves to a reasonable extent regarding the subject matter.
Moreover, shareholders can file a suit against the director in order to hold them liable for
oppression or unfair conduct. This provision is given under section 232 of the CA. As per this
section, an order can be given by the court under section 233 if the conduct of a company’s affair
is contrary to the interest of its members as a whole. While implementing this principle, the court
evaluates that the actions must be considered as unfair objectively in the eyes of a commercial
bystander that a reasonable director who would have acted fairly in the particular scenario. The
recent judgment given in Re Optimisation Australia Pty Ltd21 case is a good example to
understand this provision. In this case, the court found that the affairs of Optimization were
conducted in a manner which is considered as oppressive to or unduly prejudicial to an employee
who was also a minatory shareholder of the company. The employee was deprived within a fair
offer to acquire his share. The court held the directors liable for the actions taken by the company
along with majority shareholders. It shows that the directors are expected to maintain a high
standard while discharging their duties to ensure that their conduct did not harm the interest of
the company.22 In case they failed to comply with these guidelines, then they can face serious
financial consequences. The shareholders of a company have the right to apply for section 233.
A remedy against these consequences is present for directors under section 232 of the Act. In the
case of Australian Securities Commission v Lucas23, the court provided that section 53 of the act
provides actions which come within the scope of affairs of the corporation which include
21 [2018] NSWSC 31
22 Mike Edmondson, Oppressive behaviour as a director will bite you in the wallet (2018)
<https://www.rsm.global/australia/insights/consulting-insights/oppressive-behaviour-director-will-bite-you-wallet>.
23 (1992) 36 FCR 165