Corporations Act and Director's Duty: Termite Resources NL Case

This case study analyzes Termite Resources NL (in liq) v Meadows, focusing on director's duties under the Corporations Act 2001. The case involves allegations of directors breaching their duties through the implementation of a Distribution Policy and the use of reserve funds. The analysis covers the relevant sections of the Act, including sections 180-183 and 1317H, examining the directors' actions in light of these legal provisions. The court's analysis highlights the directors' failure to exercise due diligence, especially concerning the volatile nature of iron ore prices. The judgment found the directors in breach of their duties, entitling Termite Ltd to a claim of $7 million for losses incurred due to the company's insolvency, stemming from the exhaustion of the reserve balance and the Distribution Policy.

Running Head: Director’s Duty
Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2)
[2019] FCA 354 (Director's breach of duty)
Name of the Student
Name of the University

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DIRECTOR’S DUTY
Introduction:
Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq)
(No 2) [2019] FCA 354 is a case regarding the breach of director’s duty wherein the defendants
were alleged to have breached the director’s duties by implementing the Distribution Policy and
using the reserve money for the payment of the expenses regarding the same.
Issue:
The issue in the case is whether the Directors are liable for the breach of their duty and
compensation to claim under 1317H of the Corporation Act 2001.
Laws applicable in the Scenario:
Section 180-183 of the Corporation Act 2001 deals with the directors duty towards the
company to act in good faith, honesty and secrecy towards the company and its intricate matters.
In other words, duties of the directors have been explicitly laid down to act in good faith and
honesty towards the company, not to make improper use of the position of the directorship of the
company for personal gains (ASIC vs. Adler [2002] 41 ACSR 72), not to make improper use of
the details of the company which is gained by the directors by way of their position as a director
(ASIC vs. Flugge [2017] ALR 1). Section 180 explicitly lays down that the directors of the
company should act with care, skill and due diligence towards the matters of the company (ASIC
vs. Maxwell [2006] NSWSC 1052). However, the duties are also dependent upon the size and
nature of the company in accordance to its Constitution and hence the duties can be varied
depending on the Company Constitution and related factors to the size and nature of the

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company (ASIC vs. Mariner Corporation Limited [2015] FCA 589). Thus, being the
managers of the company, the duty forms the founding stone for the good faith and honesty
towards the interest of the company.
Section 1317H of the Act states the scheme for the civil penalty orders by the court.
Application of Laws to the Case:
It has been alleged by Termite Ltd that the director owed duty of care and due diligence
under section 180 towards the company as a whole. The company has also alleged that the
directors owe general duties as laid down in the common duties of the directors as laid down in
section 181 to 183 of the Act but the acts of the directors has amounted to the breach of such
duties. However, referring to McGrath: HIH Insurance Ltd [2010] 266 ALR 642, it has been
explained by the defendants that the directors of the company are a member of a corporation and
hence, they owe their duties to a particular corporation and not to the company as a whole. Thus,
the company appointing such directors for management and governance is entitled for their
duties and not the whole group of company.
Termite has further pleaded that following actions of the directors has amounted to the
breach of their duty:
 Distribution policy entered into by the company
 Permitting the company to act according to the Distribution policy to making payments
 Failure to review, revoke or revise the Distribution Policy

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The Defendants explained that the reserve maintainable balance was 3 million$ and hence,
they had to take a ring-fencing decision to protect the assets and at the same time not accrue
liabilities out of the same.
Applying ASIC vs. Adler, it can be analyzed that the decision of the directors were not
for their personal gain but to revive the company of its liabilities. Applying ASIC vs. Flugge, it
can be analyzed that the directors did not make improper use of their position as the directors.
Instead, in complete good faith towards the company, the directors adopted the policy to ensure
the Cairn hill mining operation was successful so that the loses can be revived. However, the
policy turned out to use the reserve money and hence, led to the insolvency of the corporation.
Applying ASIC vs. Maxwell, it can be explained that the directors though acted in the good faith
towards the interest of the company, they failed to exercise care and due diligence towards the
decision. The directors were pre-informed and warned by other directors of Termite Ltd., but
they failed to exercise due diligence towards the warning and hence, compromised to solvency of
the company. However applying ASIC vs. Mariner Corporation Limited, it can be explained
that the duties were dependent upon the volatile pricing nature of iron ore and hence, the
directors failed to exercise care while they knew the prices are volatile and may lead to extreme
crisis for the company’s solvency.
Court’s Analysis:
It was analyzed by the court that the miners like the Termites were susceptible to
business engagements depending upon the iron ore prices and the directors are engaged in
decision making processes for much complex and strategy related issues of various kinds. The
court relied upon the decision of Grimaldi vs. Chameleon [2012] FCAFC 6, to imply that the

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directors have performed their duty with respect to the reserve money. However, the focus of the
director’s arguments were more towards the justification of the reserve money than the
circumstances under which the reserve money was taken for the payments. The court has also
confirmed that the new operation venture of the Cairn hill mine was expensive and hence, the
directors had an idea of the risk of insolvency being involved with such venture. The directors
also had the knowledge of the volatile nature of the price of iron ore. As per section 181 of the
Act the Directors should have acted in good faith of the company and considering the past
experience of the company in 2012, when the price of the iron ore fell below the considered
price, the directors should have been more realistic while attaining capital from various ventures
with different entities so as not to risk the existence of the company. Owing to section 180 of the
Act, the directors should have exercised care and due diligence which was breached by their
actions. Therefore section 180 and 181 was breached. Management of the parent company,
Termite had already warned the directors that the reserve amount was not enough to meet the
crisis, if arises due to such decision, but the directors chose to ignore the suggestion. Section 183
of the Act states that the director should not make improper use of the information. Herein, the
director did not make proper use of the information provided and hence, section 183 was
breached. The court analyzed and stated that the reserves could have been maintained for further
operations if such Distribution Policy was not entered by the directors in spite of continuous
warning from the directors of Termite Ltd. hence, on this basis, the company’s claim for the
deficiency money on liquidation is considered by the court. Other damages were rejected by the
court on ground that the Termites are seeking to revive their liabilities with the name of the
creditors and the defendants were looking for minimizing that disputed liability. Hence, the

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Termite ltd was entitled only to the claim of 7 million $ that arises out of the exhaustion of the
reserve balance and that of the accrued amount with respect to the Distribution Policy.
Hence, the court was convinced that the directors decision related to the business and the
policy was not favor of the Termite and the interest of the company because the decision of the
directors was not for the proper purpose which is a duty of the director to ensure decisions are
taken for the proper purpose of the company which was in breach of section 182 of the Act.
Thus, the directors should have a taken an alternative approach which may have been rigorous
and conservative in nature but would have yielded better returns, especially when the company
in concern deals with the volatile conditions of the market.
Conclusion:
It was held by the Court that the act of the directors amounted to the breach of their duty
and hence, the Termite Ltd are entitled to the claim of 7 million$ under section 1317H of the
Corporation Act 2001 against the loss incurred by the company leading to insolvency.

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REFERENCE:
ASIC vs. Adler [2002] 41 ACSR 72
ASIC vs. Flugge [2017] ALR 1
ASIC vs. Maxwell [2006] NSWSC 1052
ASIC vs. Mariner Corporation Limited [2015] FCA 589
McGrath: HIH Insurance Ltd [2010] 266 ALR 642
Grimaldi vs. Chameleon [2012] FCAFC 6