Case Study 1: Uninest Limited and Neales’ liability

Issue

Whether the directors of Uninest have breached any of their general law directors’ duties and also their directors’ duties under the Corporations Act 2001 (Cth). Whether Neales would have any liability.

Rule

The definition of the word director in respect of a company or any other body is provided in the Corporations Act 2001. The person who has been appointed in the position of the director any other body is named so. The Act also provides provision for persons appointed in the position of an alternate director carrying out duties in the capacity of a director. It is regardless of the name of the position of such person. A person may not be appointed as a director but can be considered so if he is acting as such. In case a person is instructing the directors and the directors are acting accordingly, then such person is also regarded as a director. However, when a person is giving mere advices to the directors with respect of their performance as a director under their professional capability, he will not be regarded as a director. The word directors comprises of director, receiver, company secretary, manager, administrator or liquidator. 

The common law generally provides for three kinds of duties that must be followed by the directors of the company. Such duties are as follows:

• to act in good faith to secure the best interest of the company
• to refrain from making any personal gain against the interest of the company and to disclose any gain, which they have received while acting as directors.
• to carry out their duties and functions with due care, diligence, and skill in an efficient manner.

Section 181 of the said act provides the responsibilities of the directors and other officers of the company to perform their duties and exercise their powers in good faith, honestly to ensure the best performance of the company. They must ensure that they have been acting for the proper purpose. In the case of Asic v Adler and 4 Ors, it has been held that the directors should ensure that their actions has been carried out for a proper cause and for the benefit of the company.

In the case of ASIC v Hellicar, it has been contended by the court that the directors are required to act in good faith while discharging hi functions as a director. He should also act in a way which would be guarantee the benefits of the company.

In the case of ASIC v Rich, it has been discussed that if the director has failed to ensure the best interest of the company, such action would invite a civil penalty for the director.

Application

In the instant situation, Urbanlodge Limited (‘Urbanlodge’), a competitor of Uninest is planning a takeover of Uninest. This is because the current management of Uninest is underperforming, its share price is declining and it is experiencing cashflow problems. Uninest’s shares are valued at $10.00 per share. Urbanlodge makes an offer of $12.00 per share. The board of directors of Uninest is aware that Urbanlodge intends to replace the entire management team (board of directors) at Uninest with a new management team, if Urbanlodge is successful in its takeover bid. It is evident from the situation that this takeover will ensure the best interest of the company as the present management are not ensuring the best interest of the company due to its incompetence.

Case Study 2: Primo Construction Limited and Breach of Director’s Duties

Neales acts as a consultant for Uninest and has negotiated on behalf of Uninest in a number of important transactions in the past, including the acquisition and development of new properties and the negotiation of long leases. Due to her experience in the field, Neales has been given great autonomy in decision making in Uninest and the board of directors always follows her directions. This makes him a director under the definition of directors provided under the Corporations Act and the statutory and common law duties that are applicable to a director are also applicable to him.

The strategy that has been devised by Neales to stop Urbanlodge from taking over the company is for the benefit of the shareholders and the directors and not for the benefits of the company. The takeover will replace the management, which has already been underperforming and the replacement of the management would be for the benefit of the company. The actions of Neales in saving the management would ensure the best interest of the management and not the best interest of the company. Hence, Neales can be said to have breached his statutory duties that has been prescribed under section 181 the Corporations Act. Therefore, applying the principle laid down in the case of Asic v Adler and 4 Ors, it can be said that Neales has failed ensure that his actions has been carried out for a proper cause and for the benefit of the company and is in breach of the directors’ duties.

Conclusion

The directors of Uninest have breached their general law directors’ duties and also their directors’ duties under the Corporations Act 2001 (Cth). Being a director under the definition of directors Neales also has a liability regarding the said breach.

Issue

Whether Shane has breached any of his general law and/or statutory duties as a director. Whether there are any remedies and/or penalties, which would apply, if both the general law and statutory director’s duties were breached.

Rule

It is necessary that the directors are needed to follow the duties of the common law. The common law generally provides for three kinds of duties that must be followed by the directors of the company. Such duties are as follows:

• The directors must act in good faith to secure the best interest of the company while exercising their powers.
• The directors are prevented from making any personal gain against the interest of the company. They are under the duty to disclose any gain which they have received while acting as directors.
• The directors must carry out their duties and functions with due care, diligence, care and skills in an efficient manner.

Section 182 prevents the directors or other officers of the company to take undue advantage and benefits by using their position and power for personal benefits. They may not act in such a manner that will result in the loss of the company.

Section 183 inhibits the director or any other officer of the company from using any information which he got for holding such position in the company, for any personal reason, by causing detriment to the company.

Under section 191 of the Act, the director who has been accruing certain personal benefits from the affairs of the company is under an obligation to disclose the same to the other directors.

The duties given by the statute and common law are binding on the directors. If they violate such duty, they may be subjected to civil penalty under section 1317E of the said act. In case, the violation is serious such that the directors did it intentionally, it would be treated according to the provisions of section 184. Section 184 provides criminal sanctions for the directors. The case of ASIC v Adler illustrates the provision where a director was subjected to civil penalty due to breach of director’s duty. 

Case Study 3: Dronebotics Limited and Liability of Directors

Remedies

The duties given by the statute and common law are binding on the directors. If they violate such duty, they may be subjected to civil penalty under section 1317E of the said act. In case, the violation is serious such that the directors did it intentionally, it would be treated according to the provisions of section 184. Section 184 provides criminal sanctions for the directors. In another case of ASIC v Flugge & Anor, the directors were sentenced to imprisonment for 10 years for the breach of their duties.

Application

In the present situation, Shane is the director and the shareholder of the Primo Construction Limited (‘Primo’), which is an industrial construction company. Primo performs construction work for Landstock on an ongoing basis and being the director of the Primo, Shane has a knowledge that Landstock is going to call for tenders from various company for a new construction contract to build an industrial warehouse near a major port. Shane also knew that Primo has a likelihood to be awarded with the tender.

Shane has formed a new company called the Iconstruct, Limited before the process of the tender could begin. In that company, Shane is the managing director and the shareholder of the company. The existence of Iconstruct was outside the knowledge of the other directors and the shareholders of Primo. It was in the knowledge of Shane that the tender submitted by Primo will be based on the construction cost. Iconstruct has submitted a tender for the contract with Landstock for a lower tender price than Primo’s tender price. This was a breach of the duty of the director provided under section 182 of the Act, as Shane has taken undue advantage and benefits by using his position and power in Primo for his personal benefits and has acted in such a manner that will result in the loss of the company. Shane has also caused a breach of his duty as a director as contained in section 183 by using the information which he got for holding such position in the company, for a personal reason, by causing detriment to the company. This is because Iconstruct has been awarded with the tender by for submitting a tender of lower price than Primo by using the information Shane has obtained being the director of Primo. The director will also be held liable in this case under section 191 of the Act for not disclosing the personal benefits he has been accruing from the company.

Therefore, Shane will be liable to be subjected to civil penalty under section 1317E of the said act. As the violation is serious and Shane did it intentionally, it would be treated according to the provisions of section 184. Therefore, applying the principles established in the case of ASIC v Flugge & Geary [2016] VSC 779, it can be said that Shane will be liable and needs to be subjected to section 184 of the Act.

Conclusion

Shane has breached his general law and/or statutory duties as a director. Shane needs to be subjected to section 184 of the Act.

Scenario A

Issue

Whether Frank, Diane, Ron and/or Kelly have breached any of their general law and/or statutory directors’ duties.

Rule

According to section 180(1), the director is required to apply due care and diligence while using his powers and duties entrusted to him being the director of the company. The standard of care and diligence is to be such that as maintained by a reasonable man holding that position. They must ensure that they have been acting for the proper purpose. In the case of Asic v Adler and 4 Ors, it has been held that the directors should ensure that their actions has been carried out for a proper cause and for the benefit of the company.

In the landmark case of ASIC v Cassimatis, the court observed that the directors namely Mr. and Mrs. Cassimatis are liable for the breach of the duties as given in section 180(1) and sentenced them accordingly. 

In the present situation, the expert report has concluded that it would not be feasible for the proposed task to be successfully executed by the autonomous drone system with its existing software. Frank and Diane has denied to attend the meeting as they were not satisfied with the expert report. They have persuaded the other directors to vote in favour of the proposal to enter into the contract with CorpGrain. This cannot be treated to be in the best interest of the company. The responsibilities of Frank and Diane as the directors of the company to perform their duties and exercise their powers in good faith, honestly to ensure the best performance of the company has been violated. They have not ensured that they have been acting for the proper purpose. The decision was taken only of their stubborn and domineering personalities. This is a violation of the directors. Being a director Ron and Kelly were not supposed have agreed with Frank and Diane for the proposal. They have also breached the directors duties.

Conclusion

Frank, Diane, Ron and/or Kelly have breached their general law and/or statutory directors’ duties.

Issue

Whether any statutory defences could be raised by the directors in the circumstances.

Rule

The Corporations Act provides for certain defences which the directors can avail of if they violate any duty entrusted to them. The defences available to the directors are given in section 180(2) and section 1317S of the said act.

Section 180(2) provides for the following defences, which the directors can use when they are accused of breach of their duties. He can prove the following facts:

1. He has acted honestly in good faith and he had a proper reason to do it.
2. He has not incurred any personal gain for doing such act.
3. The director has an honest belief that he has acted for the benefit of the company.
4. He has worked for the best interest of the company.

Section 189 of the Act allows the director to base his decision upon the opinion provided by the expert or professional with respect to a certain matter. However, this defence is only available to the director if he has enough reason to believe that the expert or the professional has the competence to extend advice on that particular matter. 

Section 1317S of the Act empowers the court with a discretionary power of allowing the director to be excused for the breach of his duty. However, court must not use such discretionary power arbitrarily. While applying such power, court must ensure that the following conditions are satisfied. They are:

• The court must ensure that the director has acted honestly.
• The court after analysing the situation has genuine ground to believe that it is fair to excuse the director.

In the given situation, the results of the expert report instead indicate that the autonomous drone system in fact has the capability to complete the task required by CorpGrain and that it would be feasible to successfully execute the task. Dronebotics is therefore in a position to enter into a very profitable contract with CorpGrain. The directors voted in the favour of the contract. However, after purchasing the autonomous drone system, CorpGrain experiences ongoing technical difficulties with the system and is unable to use it for the inspection of its grain silos. CorpGrain states that its own expert can produce evidence that the existing software is not adequate and it intends to claim substantial damages from Dronebotics. In this case, the directors has the defences, which they utilise of avail immunity from this situation.

The directors in this case has acted honestly in good faith and he had a proper reason to do it. They did not incur any personal gain from the institution of the contract. They had an honest belief that the contract would ensure benefit of the company. They have worked for the best interest of the company. However, the defences to be availed is the discretion of the court. There the directors can raise the statutory defences provided under section 180(2) of the Act. Moreover, the actions of the director in this case has been based upon the professional advice of the expert and the director can seek resort to section 189 for the availing immunity for the defects of the expert advice.

Conclusion

Statutory defences could be raised by the directors in the circumstances under section 180(2) of the Act. 

References

The Corporations Act 2001 (Cth)

Asic v Adler and 4 Ors [2002] NSWSC 171

Australian Securities and Investments Commission v Flugge & Anor [2016] VSC 779

Australian Securities and Investments Commission v Cassimatis (No 9) [2018] FCA 385

ASIC v Hellicar [2012] HCA 17

ASIC v Rich (2003) 44 ACSR 341