Actions for breach of duties

Issue:

1. Whether jack takes any action against the three directors in context of the breach of duties?
2. Whether jack can take any other action which is different from breach of duties against the three directors?
3. Whether any other person can take action against the three directors, apart from jack?

Section 180 of the Corporation Act 2001 impose duty on director to act with due care and diligence that would be taken by any reasonable person if such person is the director or officer of the company or occupied the office of the director or the officer and bear same responsibilities.

Section 181 of the Act states that director or officer of the company is under obligation to perform their functions and use their power in the best interest, in good faith, and for proper purpose of the company.

Section 182 of the Act further imposed duty on directors or officer of the company that is not to use their position in improper manner for the purpose of getting benefit for them or cause any damage to the organization.

This can be understood through case law ASIC v Adler (2002), in which Court stated that directors of the company was held liable for breaching their statutory as well as general duties.

Section 191 of the Act impose duty on director of the company to inform the other directors of the material personal interest at the time when conflict arises, and this means that in case any director of the company have any material personal interest in the company’s matter then such director must give notice to other directors of the company. All the directors of the company are under obligation to disclose their material personal interest that the director has in context of the company’s matters. In other words, whenever directors become aware of the conflict of interest, then they must notify the board about such conflicts. However, some certain notice requirements and voting restrictions are there in which director of the company has material personal interest in the company’s matter, such as when the director of the company get any personal benefit from the company’s matter under section 191-195 of the Corporation Act 2001. In case law Cook v Deeks snd Hines [1916] 1 AC 554, [1916] UKPC 10, Court stated that three directors breached their duty towards the company because they failed hold the contract for the benefit of the Toronto Construction Company, and also fails to protect the interest of the company. In this case, Court further stated that ratification of the breach was not possible because three directors cast vote for ratifying this breach.

There are number of remedies which are available in conflict of interest such as:

Remedies available

Recession- In case law Transvaal Lands Co v New Belgium (Transvaal) Lands and Development Co [1914], Court stated that directors breach their duty by not disclosing their interest and because of this it was possible to order rescission of the contract.

Injunction- in this Remedy court issue the injunction for the purpose of restricting the action conducted by person, and in case of conflict of interest, court can issue injunction (Parke v Daily News Ltd 1962).

It must be noted that Shareholders and ASIC also take action against the directors of the company if directors breach any of their statutory and general duty under the Corporation Act 2001, and third party can also take action against the directors in case of insolvency (ASIC, n.d.).

In the present case, all three directors that are Tom, John, and William breach their statutory as well as general duty under section 180, 181, 182, and 191 of the Corporation Act 2001, and jack holds the power to take action against the three directors under these sections. All three directors of the Bliss Consulting Ltd. fails to take reasonable care while signing the contract and establishing new company for this purpose, and they also fails to act in the best interest of the company and for proper purpose which result in breach of their duty under section 182. Tom, John, and William also breach their under section 182, as all three directors misuse their position for their own personal benefit and does not consider the benefit of the company.

1. In the present case, all three directors of the company breach their duty under the conflict of interest because these directors choose to make personal benefit while in the fiduciary capacity and under section 191 of the Act also by not disclosing their material personal interest to Jack. One more case law is also there Boardman v Phipps [1967] 2 AC 46, in which court stated that defendant breach their duty under the conflict of interest because he chooses to make personal benefit while in the fiduciary capacity. Therefore, Jack can file case against the three directors under section 191 of the Act also and in lieu of conflict of interest. In this case directors cannot ratify their breach because ratification   of the breach is not valid if resolution related to this ratification is passed by the directors in capacity of shareholders. Therefore, jack can seek different remedies such as recession, declaration of trust, and injunction.
2. In the present case, shareholders and ASIC of the company can take action against the three directors of the company because all three directors breach their general as well as statutory duties under the Corporation Act 2001. In this case, if decision of the directors go wrong and any situation of the insolvency arise then third party holds the right to take action against the directors of the company, and such situation directors of the company are personally liable.

Conclusion:

All three directors that are Tom, John, and William breach their statutory as well as general duty under section 180, 181, 182, and 191 of the Corporation Act 2001.

Shareholders, third party, and ASIC of the company can take action against the three directors of the company.

Part A

Whether directors of the company breach any of their general or statutory duty under Act by donating the property to the local council?

Section 181 of the Act states that director or officer of the company is under obligation to perform their functions and use their power in the best interest, in good faith, and for proper purpose of the company. Rule related to the proper purpose stated that in case director use their power for any reason other than the benefit of the company then it is considered as the improper purpose. In case law ASIC v Rich [2003] NSWSC 85, court stated that directors fail to act for improper purpose.

Statutory and general law also impose obligation on directors of the company in context of the conflict of interest, and as per this directors must inform about the material personal interest if   they believe that there is any conflict of interest. Directors of the company cannot prefer their personal interest over the organization interest because they are in the fiduciary relationship with the company. In case law Greenhalgh v Arderne Cinemas Ltd, court stated that any special resolution which provide advantage to any particular group of the company and cause damage to another group then such resolution was not valid.

Section 588G of the Corporation Act 2001 states that directors of the company attract personal liability if they fails to prevent the company to conduct any trading at the time of insolvency. It is considered as the fundamental duty of the director to ensure that company does not trade while it is insolvent. This can be understood through case law Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115.

Case study involving breach of director’s duties

In case director’s breach their duties hen following remedies are available:

Ratification- decision of the directors can be ratified by the shareholders by passing resolution.

Recession- In this court can order to cancel the contract or any deal conducted by the director.

Injunction- Section 1324 imposes right in the ASIC or any person’s whose interest is affected to seek injunction from the court if director of the company breach their duties under this Act.

In the present case, directors breach section 588g of the corporation Act by donating the property of $ 5000 to the local council at the time of insolvency. In this Directors know that the company is not able to pay its debts and still directors of the company conduct trading. Therefore, in this directors of the company breach their general as well as statutory duty. Directors also breach their duty under section 181 of the Act because they act for improper purpose and fail to act in the best interest of the company. In this case directors cannot ratify their breach because ratification of the breach is not valid. Court has power to cancel the contract or issue injunction as remedy.

Conclusion:

Director breach their fundamental duty under section 588G and 181 of the Act.

Issue:

Whether all three directors of the company breach any part of their duty or not?

Law:

Section 180 of the Corporation Act 2001 impose duty on director to act with due care and diligence that would be taken by any reasonable person if such person is the director or officer of the company or occupied the office of the director or the officer and bear same responsibilities. This Section impose liability on the directors to get aware about the actions of the company, and directors cannot get rid from the liability by stating that they are not aware about the facts.

Section 181 of the Act states that director or officer of the company is under obligation to perform their functions and use their power in the best interest, in good faith, and for proper purpose of the company.

Section 588G of the Corporation Act 2001 states that directors of the company attract personal liability if they fails to prevent the company to conduct any trading at the time of insolvency. It is considered as the fundamental duty of the director to ensure that company does not trade while it is insolvent.

Consequences of breach of duties

Calvin- In the present case, Calvin breach section 180 of the Act because he fails to complied with the minimum standard of care as he is expected to. He is not familiar with the business of the company and fails to protect the business. In case law ASIC vs Adler, William (managing director) was held liable because he fails to protect the company. However, non-availability of the information cannot be used as defense for breach of section 588g and because of this Calvin is liable for insolvent trading also.

Fiona- Breach section 181 of the Act because any reasonable person would not buy raw material in the similar situation. Fiona fails to make individual assessment of the business and because of this breach both section 181 and 588g of the Act.

Nick- he is aware about the company’s financial situation and know very well that company becomes insolvent, still he take no action to prevent the insolvent trading and because of this he is liable for insolvent trading under section 588g of the Act. Nick also breach section 180 as he fails to take reasonable care while conducting business.

Conclusion:

Calvin- Breach section 588g and 181 of the Act.  

Fiona- Breach section 181 and 588g of the Act.

Nick- breach section 180 and 588g of the Act.

Issue:

Whether Calvin, Nick, and Fiona breach any duty as director?

Law:

Section 180 of the Corporation Act 2001 impose duty on director to act with due care and diligence that would be taken by any reasonable person if such person is the director or officer of the company or occupied the office of the director or the officer and bear same responsibilities.

Section 181 of the Act states that director or officer of the company is under obligation to perform their functions and use their power in the best interest, in good faith, and for proper purpose of the company.

Calvin- Calvin fails to take due and reasonable care while conducting the business of the organization, as he does not have any knowledge about the organization business. Calvin breach section 180 of the Act.

Nick & Fiona- both fails to Act in the best interest of the company and give preference to their personal profit, and because of this both breach section 181 of the Act.

Conclusion:

Calvin breach section 180 and Nick and Fiona breach section 181 of the Act.

References:

ASIC v Adler (2002)

ASIC v Rich [2003] NSWSC 85

ASIC. Director’s responsibility. Available at: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/. Accessed on 14^th June 2018.

Boardman v Phipps [1967] 2 AC 46.

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115.

Cook v Deeks snd Hines [1916] 1 AC 554, [1916] UKPC 10,

Corporation Act 2001- Section 1324.

Corporation Act 2001- Section 180.

Corporation Act 2001- Section 181.

Corporation Act 2001- Section 182.

Corporation Act 2001- Section 191.

Corporation Act 2001- Section 588g.

Greenhalgh v Arderne Cinemas Ltd (No 2) [1946] 1 All ER 512; [1951] Ch 286

Parke v Daily News Ltd 1962.

Transvaal Lands Co v New Belgium (Transvaal) Lands and Development Co [1914],