Case Study: Fodare Pty Ltd v Shearn

Every corporation is an artificial body. The same cannot act similar to a natural person (Blackstone, 2009). This is the reason that in every company, some individuals are there who looks after the day-to-day affairs of the company and act on behalf of the same. Such persons are commonly known as directors or officers of a company. As they act on behalf of a company, this can be understood that they are basically an agent of a company. In addition to being an artificial person, a corporation is a separate legal entity too. It means a corporation can run a business by it is own name (Sutton, 2013). Further, a company can do all the business transaction with its name and can develop contracts with the outsiders.

A company remains dependent on the officers and directors and in such a situation; it becomes the responsibility of such persons to act in the best interest of their company. It was given in the decision of the case of king V. A king & co. (1897) 14 TLR 98 that every director/officer of a company must perform their duties in a manner, which brings the best positive results to a company. Every nation has it is own legislation, which governs the business of companies in that country. Similarly, in Australia, Corporations Act 2001 (Cth) (hereinafter mentioned as “the act”) is there. This is a federal legislation, which applies to the whole of Australia. Some of the sections of this act provide the duties of directors and officers of a company. Every director and officer of a company registered in Australia must comply with the provisions of this act.

The case selected for this report is Fodare Pty Ltd v Shearn [2011] NSWSC 479. In this case, the main parties to the case were Fodare Pty Ltd and it’s director Ms. Shearn. Fodare Pty Ltd. (the company) was registered in the year 1989. The sole object of this company was to act as a trustee of a trust known as “The Alexandria Trust for Fodare Pty Ltd”. This trust was a family trust, which has been created for the personal benefits of Ms. Shearn as well as of her other family members. Ms. Shearn holds the directorship of this company during the period of 18 May 2011 to 22 August 2006. The issue of the case has started when one of the properties of the company named “Menangle Park property” has been sold out and the director Ms. Shearn kept more than half amount of sale consideration for the personal interest and benefits.

General Duties of Directors and Officers

When Ms. Shearn has done all such unethical acts, there were pending debts on the accounts of the company, which the same was required to pay. If Ms. Shearn would not have to use the sale consideration for her personal benefits and paid the debts of the company, then the company might not have seen the process of liquidation. As company failed to pay it is debts, the same went into liquidation. When the proceedings of liquidation of the company were going on, Ms. Shearn did one more act which was in against of the provision of corporations Act 2001. The liquidator has asked the books of accounts and other financial reports of the company which Ms. Shearn has not provided (Moores, 2018). Ms. Shearn breached her duties under Corporations Act 2001 and did not perform her role in the best interest of the company. In the end, the company being a separate legal entity initiated a case against it is a director, Ms. Shearn for the breach of duty.

Under Corporations act, 2001, many of the duties are prescribed which a director or officer of a company must keep into their kinds. However, such people have many more duties, which are not limited up to any section of the act, yet some of the sections are necessary to study. Division 1 of chapter 2D the act states the general duties of director/officer of a company.

Section 180 of the act says that every director and officer of a company must perform their duties with diligence and due care similar to a reasonable and responsible person (Kakabadse, 2009). Section 181 is another section that covers the duty of a director and officer. According to the provision of this section, every director and officer of a company must discharge his or her duties for a proper purpose (Australia, 2011). This section also says that the director and officer of a company are required to perform the given duties in the good faith and the best interest of the company. The decision of the case of Cassegrain v Gerard Cassegrain & Co Pty Ltd (2012) is an important one to review. It was given in the decision of this case that the responsibility of director and officer of a company to discharge their duties in a proper manner cannot be overturned by the objective of their personal benefits.

The relation of a director/officer and a company is fiduciary in nature. This is the reason that these people are required to act in the best interest of the company and are not advised to be involved in any fraudulent activities. The act expects from such people that they will always work for the benefits of the company while keeping their personal interest aside (Department of the premier and cabinet, 2016).

Section 180: Duty of Care and Diligence

Section 182 of the act provides that a director or officer must not use their position in an improper manner to seek personal benefit or to provide harm to the company (Austlii,   2018). Similarly, section 183 requires the director and officer of a company to not to use the available information for personal benefits (Australian Government, 2018). The rationale behind section 182 and 183 is that the position of officer and a director is very crucial. These people know every bit about the decision and financial position of the company and therefore there are always chances that these people can use their position or information available with them for the personal benefits.

Apart from the division 1 of chapter 2D the act, Section 286 puts another obligation. This section provides that every company must keep the proper books of accounts and such accounts must reflect true and fair financial situation of a company (Australian Securities and Investments Commission, 2018). As the company is an artificial person, this section prescribes liability for a director/officer of the company and not for the company in actual. Therefore in a summaries manner, this can be stated that a director and officer of a company many duties with respect to the company itself and some other stakeholders of the company. It was given in the case of Diakyne Pty Ltd v Ralph [2009] FCA 721 that a director will also be liable in those cases where he/she acts genuinely, of their acts brings any negative impacts to the company.

In the taken case, the company has sold it is an asset for a consideration worth $1,200,000 and in exchange, the same received three cheques. The company has purchased this property at Mengale Park as a trustee. One out of these cheques worth $634,957.79, was made in the name of the private trust of Ms. Shearn i.e. Alexandria Trust”. As Ms. Shearn had a common interest in the company and Alexandria Trust and deposited the cheque to different accounts. The

This account was operating on the name of “Doris Shearn – The Alexandria Trust for Fodare Pty Limited”.  By doing such a transaction, Ms. Shearn has breached her duty under section 182. The reason behind was, that she took unfair advantage of her position in the company. She used the value of a cheque for her personal benefit, wherein actual, the company was entitled to get the value of property sold. The seller made following three cheques to pay out the consideration 

Account Name	Value
Citibank Pty. Ltd.	$251488.85
The Alexandria Trust for Fodare Pty Ltd.	$383468.94
Perpetual Trustees Austrlia Ltd	$423862.12

Section 181: Duty to Act in Good Faith and for Proper Purpose

The subject matters of the issue were first two cheques. Daughter in Law of Ms. Shearn, Ms. Hirtzell used the money of one of the cheques Witten in the name of Citibank Pty Ltd i.e. $251488.85 in paying off the mortgages amount of a house owed by her. It was a personal use of fund by Ms. Hirtzell. Further, the value of another cheque i.e. $383468.94 has been deposited to the bank account of Ms. Shearn because no bank account was opened there in the name of the company ever. Because of such authorized and unplanned use of funds, the company failed to make the payment of it is indebtedness that results to the liquidation of the company.

Later on, in the proceedings, Ms. Shearn stated that she believed that property situated at Menangle Park does not belong to Alexandria Trust. In the liquidation process of the company, liquidator asked for books of accounts of the same but Ms. Shearn did not provide anything. In reply to the query of the liquidator, she simply stated that no liability or asset was there in the company as the same was not engaged in any trading and working as trustee of Alexandria Trust. By doing all these tasks, Ms. Shearn breached the duty imposed by sections 180, 181 and 182 of Corporations Act 2001 as she has not acted in the best interest of the company and her acts were not for the proper purpose. In addition to this, by not providing proper financial statements, she also breached her duty under section 286 of the act.

In the decision of the case, the court held Ms. Shearn liable to pay all the equitable compensation to the company. Further, in addition to the compensation, the court also gave order Shearn to pay the interest of related period to the company. Ms. Shearn and Ms. Hirtzell were required to pay the cost of proceedings to the company (Wolters Kluwer, 2018).

In the studied case, Ms. Shearn has breached many of duties under Corporations Act 2001; hence court has given the decision in against of her and imposed civil penalties under section 1317DA of the act.

The decision given in the case is far significant. In the case, the director of the company breached her duties under section 180, 181, 182 and 286 of the act. In the decision of the case, the court has punished the guilty directors. It has been noted that after this case, directors and officer of a company in Australia became more conscious about their duties. The decision of this case brought fear to them and now they are performing their duties with more care. Further, as directors are now acting in a more responsible manner, therefore, the affairs of the companies are being more regulated and they adhere to follow good corporate governance.

Section 182: Duty Not to Abuse Position and Information

In addition to this, the decision of the case also provided a lesson to those people who have a common interest in more than one entity. Now, after the decision of this case, directors and officers are taking reasonable steps to disclosure their interest in a business transaction in order to avoid penalties as given in the case of Fodare v Shearn.

Conclusion

The case studied hereby is a leading case of Australia in which a director breached her duties. Ms. Shearn was required to act in the best interest of the company but she did not do so. In fact, she has done many of the acts for personal benefits. Being a director of the company, it was her duty to keep her personal interest set aside while dealing on behalf of the company. It was also her duty to maintain proper books of accounts of the company and to furnish the same to liquidator on being asked but she also failed to do so. Court has given a decision in against of her. Now, the case is counted under significant cases in the area of breach of director duties and giving lessons to others.

References

Austlii. (2018) Corporations Act 2001 – Sect 180. [online] Available from: https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html [Accessed on 29/09/2018]

Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.

Australian Government. (2018) Corporations Act 2001. [online] Available from: https://www.legislation.gov.au/Details/C2018C00031 [Accessed on 29/09/2018]

Australian Securities and Investments Commission ,(2018) Your company and the law [online] Available from: https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/your-company-and-the-law/#dishonest-directors  html [Accessed on 29/09/2018]

Blackstone, W. (2009) The Commentaries of Sir William Blackstone, Knight, on the Laws and Constitution of England. Chicago, Illinois : American Bar Association.

Cassegrain v Gerard Cassegrain & Co Pty Ltd (2012)

Corporations Act 2001 (Cth)

Department of the premier and cabinet. (2016) Corporations Act 2001 (Cth) (the Corporations Act) [online] Available from: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 29/09/2018]

Diakyne Pty Ltd v Ralph [2009] FCA 721 

Fodare Pty Ltd v Shearn [2011] NSWSC 479

Kakabadse, A. (2009) Global Boards: One Desire, Many Realities. NY : Palgrave Macmillan.

king V. A king & co. (1897) 14 TLR 98

Moores. (2018). The Directors Series: Part 2 – Fiduciary Duties. [online] Available from: https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties [Accessed on 29/09/2018]

Sutton, G. (2013) Run Your Own Corporation: How to Legally Operate and Properly Maintain Your Company Into the Future. Nevada :  RDA Press, LLC.

Wolters Kluwer.(2018).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 on 29/09/2018]