Case Introduction

Research on an Australian case involving breach of company director’s/officer’s duties. Write a report outlining the following:

1. Case introduction.

2. Outline the duties/responsibilities breached and explain why the duties were breached.

3. Discuss and critically analyse the court/tribunal decision and the reason for the decision in view of the Corporations Act.
 

Harburn Group Australia Pty also known as the popular Harburn Group was an Australian Company which rendered share broking, financial and mortgage broking services. The director of Harburn Group Australia Pty was Mr. Harburn. The said company had a single shareholder namely the Harburn Investments Pty Ltd (Deegan and Shelly 2014). Thus, all the important decisions and overall working of the company was managed and look after by the sole director of the Harburn Group Australia Pty who was Mr. Harburn. In the year 2007, Mr. Harburn was over loaded with work and decided to reduce his work stress by selling the Harburn Group Australia Pty financial services business client list. The said sale of the business client list was settled and completed on 12 June 2007 (Lowry 2012).

On July 2007, Mr. Harburn decided to gift his wife named Ms Chivers an expensive boat. Thus, on 19 July 2007, Mr. Harburn entered into a sale contract with a boat vendor for a purchase of an expensive boat costing $385,219.35. The said amount was paid in four installments all throughout the months of July and August in 2007. With the completion of payments for the said boat, Ms Chivers become a registered and the sole owner of the said expensive boat.

In the year 2008, Mr. Harburn took another business decision and move to a different company after subletting the premises of the Harburn Group Australia Pty. In the year 2011, the Harburn Group Australia Pty went into liquidation eventually (Hill 2014).

When the said company was undergoing the liquidation procedures, liquidators were appointed who accused Mr. Harburn, the director of the Harburn Group Australia Pty and Ms Chivers who was his wife for unethical and unreasonable transactions made on behalf of director of a company which intentionally gave reasons to the Court to declare and order the said transaction voidable and revert back he said transaction money to the company. Additionally, the liquidators of the Harburn Group Australia Pty also accused the director of the Harburn Group Australia Pty who was Mr. Harburn to have violated his duties as a director of the said company violation section 181 and 182 of the Corporation Act 2001 in Australia (Du Plessis, Hargovan and Bagaric 2010). 

The Duties and Responsibilities That Were Breached by Mr. Harburn

The Corporation Act in Australia was introduced in the year 2001 which was majorly inspired from the United Kingdom Company law. Thus, in 2011, the Australian Parliament created a single legislation which governed the entire business laws and companies operative in Australia. Section 181 of the Corporation Act 2001 requires every director of a company which is operative in Australia to exercise his powers and duties as a director in good faith and in the best interest of the company. The said section also requires the directors to act in good faith for the correct purpose in the interest of the company. Section 182 of the Corporation Act 2001 states that a director of a company operative in Australia should not use his position in an improper manner to derive any personal advantages for himself or someone else which can be detrimental to the interest of the company (Klettner, Clarke and Adams 2010).

Thus, in the present case, the liquidators of the Harburn Group Australia Pty provided evidence in the form of company’s accounts, income and liabilities stating that the time the expensive boat was purchased, the company’s financial position was disturbed and said company was about to experience insolvency in a period of few months (Hill 2010).

The section 588FDA of the Corporation Act 2001 which discusses unreasonable director related transactions was considered to be breached by Mr. Harburn. The purchase of boat by Mr Harburn was considered to be in violation of the 588FDA of the Corporation Act 2001 because of the following reasons:-

• The purchase was made with company funds
• The use of company funds was for a close associate of the company’s director
• A prudent and the reasonable individual would have avoided similar transactions or purchase in the current financial position of the company (Du Plessis 2010).

Thus, the Court stated that the said purchase of an expensive boat by Mr. Harburn to his wife was of no significant value to the Harburn Group Australia Pty and the Harburn Group Australia Pty did not benefit with the said purchase. In return, the said purchase proved detrimental to the financial position of the Harburn Group Australia Pty making Mr. Harburn and his wife Ms Chivers, the sole beneficiaries of the said purchase from the company funds. Thus, the Court concluded that a reasonable and a prudent director would have refrained from making such purchase from the company accounts when the financial position of the sad company was not secured (Lowry 2012).  The defense which Mr. Harburn used to defend him and his wife was stated by mentioning that the boat was as a dividend to him as a director. However, no evidence was shown to prove that such dividend was planned on being awarded.

Court’s Decision

Another defense used by Mr. Harburn to defend him and his wife from the accusation which were made by the liquidators against them was that due to the financial position of the said company, the obligation and duty to serve the best interest of the creditors and the company as proportional to serving the best interest of Mr. Harburn himself. The said defense by Mr. Harburn was also rejected by the Court stating that there was lack of evidence that the sole shareholder which was Harburn Investments Pty Ltd has given its permission for he said transaction (Marshall and Ramsay 2012). Thus, the Court held that Mr. Harburn has breached his duties as a director of Harburn Group Australia Pty violating section 181 and 182 of the Corporation Act 2001.

The Court in the said case considered the purchase of an expensive boat using company funds by the director Mr. Harburn of Harburn Group Australia Pty as a gift of very huge magnitude to his wife Ms Chivers. The said gift in the eye of law had no valid and reasonable justification and the defenses made by Mr. Harburn as mentioned above were rejected by the Court. Moreover, there was no evidence which showed that the sole shareholder of the company had consented to the said purchase of the boat for which company fund was used (Redmond 2012).

Thus, the Court concluded that the individuals who are responsible for the administration and management of a company are not allowed to use the corporation’s funds and property considering that the same belongs to them as their own. Thus, the final conclusion of the court on appeal was that Mr. Harburn, the director of Harburn Group Australia Pty had breached his duties as a director and violated the section 181 and 182 of the Corporation Act 2001. Section 181 was breached by Mr. Harburn as he failed to exercise his duty as a director for a proper purpose which would be beneficial for the company. He instead made use of company funds in an improper manner ignoring the best interest of the company. Section 181(1) of the Corporation Act 2001 was additionally breached as Mr. Harburn at the time of purchasing the expensive boat for his wife was aware of the weak financial position of his company and still proceeded to purchase the same from company funds. Thus, Mr. Harburn used his position as a director y improper use of his position as a director ignoring company’s best interest violating section 181 of the Corporation Act 2001 and doing the same he acted for his personal advantage violating section 182 of the Corporation Act 2001 (Giordano 2011).

Thus, at the trail court, the order was in favor of Mr. Harburn and the Court concluded that he has not violated any director’s duties or any section of the Corporation Act 2001. However, on appeal, Mr. Harburn and his wife were considered guilty of violating director duties under section 181 and 182 of the Corporation Act 2001. Thus, the Court ordered Mr. Harburn to compensate the company by paying a sum of $385,219.35 and interest for breach of director’s duties.

Additionally, the wife of the director of Harburn Group Australia Pty, Ms Chivers was ordered to pay a sum of $385,219.35 along with interest for violation of section 588 FDA of the Corporation Act 2001 for unreasonable director related transaction (Edwards et al 2012). 

Reference List

Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to legislate. Journal of Business Ethics, 121(4), pp.499-526.

Du Plessis, J.J., 2010. A comparative analysis of directors’ duty of care, skill and diligence in South Africa and in Australia. Acta juridica, 1(1).

Du Plessis, J.J., Hargovan, A. and Bagaric, M., 2010. Principles of contemporary corporate governance. Cambridge University Press.

Edwards, M., Halligan, J., Horrigan, B. and Nicoll, G., 2012. Public sector governance in Australia. ANU Press.

Giordano, F., 2011. Company Secretary: Financial Reporting Duties of Directors-Ten Corporate Governance Lessons from Centro for Non-Executive Directors of Listed Public Companies. Keeping good companies, 63(7), p.390.

Hill, J.G., 2010. The rising tension between shareholder and director power in the common law world. Corporate Governance: An International Review,18(4), pp.344-359.

Hill, J.G., 2014. Evolving Directors’ Duties in the Common Law World.RESEARCH HANDBOOK ON DIRECTORS’DUTIES, A. Paolini, ed., Edward Elgar Publishing: Cheltenham, pp.3-43.

Klettner, A., Clarke, T. and Adams, M., 2010. Corporate governance reform: An empirical study of the changing roles and responsibilities of Australian boards and directors. Australian Journal of Corporate Law, 24(2), pp.148-176

Lowry, J., 2012. The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), pp.249-260.

Lowry, J., 2012. The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), pp.249-260.

Marshall, S.D. and Ramsay, I., 2012. Stakeholders and directors’ duties: Law, theory and evidence. U of Melbourne Legal Studies Research Paper, (411).

Redmond, P., 2012. Directors’ duties and corporate social responsiveness.UNSWLJ, 35, p.317.