BREACH OF DIRECTOR’S DUTIES ANALYSIS
Director’s Breach of s (180)1
Question 1
Director’s Duties
Little Gold Pty Ltd has three directors. Johan is the managing director, Bina, a specialized gold miner with a PHD in the geology of gold deposits, and Levi, a former investment banker for a large multinational bank. The duties binding all directors of proprietary companies are set out by the Corporations Act 2001, together with the general law. The general responsibilities of a director include;
- Acting with care and diligence-a A Breach of this duty occurs when a director engages in risky financial transactions that may harm the financial position of a company without a benefit to the company.[1]
- Using the position of a director properly is a breach of this duty when the director uses their position of power to take advantage of another person in the company or detriment the company.
- Acting in good faith for the best interest of the company-directors should avoid conflict of interest and should inform the company when such a case arises. It is the same as the fiduciary duty based in the statute law[2]
- The use of information gained during duty properly-directors should not use information about the company for personal gain, alter detriment to the company or sabotage other companies[3]
- Directors should avoid conflicts of interest. This is a fiduciary duty that directors are bound to according to the statute law[4]
- Directors should keep records about the company’s financial position, which enables the company to make the proper decisions about financial matters.[5]
- Directors should not trade when the company is insolvent-the ASIC regulatory guide 217 is a guide for directors based on their duty to prevent insolvent trading.[6]
When directors breach these duties, a liquidator is appointed as an agent of the company or ASIC to begin proceedings against the director.
Directors of Little Gold Breach their Duty Under s (180)1
Section 180 (1) of the Corporations Act 2001 relevant tree provides that the director should exercise their power and discharge their duties with a certain degree of care and diligence which is reasonable another person would use that if they had the same position and same responsibilities as the director of the corporation under the same circumstances. This creates an objective test where all applicable standards include an ordinary reasonable person with the experience of a director placed in the same office with the same responsibilities and similar circumstances.[7] This mandates that a director should execute competence in their duty with reasonable ability to manage the company with due diligence and optimum care.
The duty of diligence demands that directors should take responsible steps when putting in the position to manage the company. In the approval of financial matters, more is required than just going through the paces. Directors are required to take a keen interest in the information presented to them to understand and apply the inquiring mind to responsibilities at hand. This arises in the given context for approving financial matters of acquiring new mining tenements. This is a matter of great importance; hence the directors of Little Gold should have understood the content of the financial statements and make further inquiries before making their business decisions.
The directors would have been able to balance the foreseeable risks versus the potential benefit that would have accrued to the company before buying the gold tenements. The statutory duty of diligence was breached in this context in the matter of purchasing the tenements was taken lightly. Only one director went through the report from Big Geo, and only read a part of it. Johan, the managing director, relied upon non-information of word-of-mouth from Bina and made a decision that was not consensual. He did not consider the statistics concerning the gold tenements.
Levi was not involved in going through the report from Big Geo, yet he was a director. The directors also ignored the fact that the Big Geo had never undertaken and assessment for a potential goldmine before, yet they hired them for this job regardless. They realized later that gold could not be mined from the tournament due to topographical issues in the area, and hence we can only sell the tenements at a significant loss. This shows that the directors are responsible for breaching their duties under s (180)1 of the Corporations Act 2001.
Consequences of Breach of Director’s Duties under s (180)1
There are severe consequences after it has been established that a director has breached their duties. This includes; civil sanctions, criminal sanctions, disqualification from director position, and financial outcomes.
Guidance from the Federal Court and Potential Defence of the Directors
In the court’s judgment, full guidance of interpreting s (180) 1 of the Corporations Act 2001 (Cth) is given.
- S (180)1 creates a standard of the degree of diligence and care required of directors; hence an objective test will be applied.[8]
- There will be a consideration of all facts to determine whether the standards are met.
- S (180)1 set off when a director discharges a duty and fails to exercise power, as seen in the case of Little Gold.
- The appellants of Little Gold have failed to act as a reasonable director would have worked occupying the same office.
- The directors would have raised an issue of the foreseeable risk of infringement of 945A(1)(c), s912A(1)(b)),945A(1)(b), and 912A(1)(a).[9] This exposed the company to a potential loss of its financial investment and potential harm to its existence: PJ [103] to [110] of the given reasons.
- The directors did not rely on the business judgment rule in their decision-making.
The responsibilities of the director also include whatever duties and encompassed by s (180)1 and statutory obligations, which obligate direct us to do everything expected of them reasonably. The court also sets out the consequences of a breach of s (180)1 since it is a civil penalty. Directors of Little Gold defied the rational belief based on what a reasonable person in their position would do. They also challenged s190 and s198D based on delegation of power of duties as the issue of buying the gold tenements never involved all directors.[10]
There are possible remedies when there is a breach of directors’ duties. The company can claim against the director, who has caused the company to suffer a loss. The director can be made to surrender their gain of profit from the company to compensate for the loss. Any agreement entered into by the director in Breach of duty will turn out to be void whereby only the company can ratify such a contract.
The company can also seek an injunction of the directors in seeking compensation where a director is negligent in restoring the company’s property. A federal court can grant permission to pursue the claim of breach of the contract if it decides that there is a possibility of a prima facie case to be answered.[11] Shareholders of Little Gold will suffer a drop in the value of their shares, although they have no direct right to the directors of a public company. Hence only the company can complain of any breach of duty by a director. The directors held responsible for the loss cannot recover the loss of value of the shares of the shareholders. Therefore, its shareholders can force the company to seek redress. Any recovery is passed on as a benefit to the shareholders in the form of dividends.
Question 2
Directors of Regal Cinematic (Burleigh) Ltd Breach of s (180)1, Insolvent Trading and Primary Obligations
The directors of Regal Cinematic never exercised their power in due discharge of duties. They did not take into account their duty of care and due diligence for the company’s interest. The non-executive directors of Regal Cinematic became shareholders of the solvent company; however, their conduct as directors contravened s180(1) of the Corporations Act 2001.[12] Their conduct as directors breached their duty of due care and diligence as they assumed Patra would alert them of anything; hence, they never reviewed financial reports. These three directors consequently breached their duty of primary obligations as directors.
Patra lied that the company was doing just fine, yet she was post- dating cheques which bounced back due to lack of adequate finances. Patra’s conduct cannot be excused under s1317S of the Corporations Act 2001 since the reputation was a big hit to the company and also due to her misleading and deceptive conduct.[13] She did not inform the other directors about the call she got from the Manager of Regal’s Bank, where overdraft facilities would be withdrawn because of the company’s financial position. She decided to lease two new cinemas at Burleigh Heads and then called for a board meeting to inform them about the revolutionary idea. She convinced them that it would increase the company’s revenue and make it a potential takeover target for its competitor.
Yu, Yan, and Rebecca gave in to this idea without further thought and left it to Patra to finalize the transaction. The directors never analyzed the foreseeable risk of harm to the company’s financial decision and its magnitude. They only relied on potential benefits accruing from Patra’s assessment. She approached a commercial leasing agent alone to lease the two cinemas. She inspected them with her friend, Farid. The directors must manage the affairs of a company; hence the Corporation Act 2001 was contravened.[14] This decision was not professional and consensual since no details were considered, such as the number of fire exits in the buildings.
Yu, Yan, and Rebecca had already invested in the two cinemas; hence they were shareholders among other unrelated shareholders. The shareholders of the company, together with the directors, did not determine the risk they put the company into while pursuing profit. The ratification of the directors’ act was implicit since three of the directors were also shareholders. The Gold Coast council halted the operations of the two cinemas as they had a faulty sprinkler system and inadequate fire exits. The company would not cater to the $5million for these repairs; hence it was placed into voluntary administration and finally into liquidation.
The company has an interest in pursuing proceedings against the directors due to Breach of their duty of care, skill, and diligence and also insolvent since the breaches of the company harm the shareholders. The company had no prospect of recovering from loss. Regal Cinematic had debt at Regal Bank of overdraft facilities, and they were to be suspended due to a weak financial position. Patra overlooked this and decided to purchase two cinemas at lease. The company was insolvent because it had incurred debt, and there are reasonable grounds to assert that it was bankrupt at this time. The corporations’ act was, therefore, hindered under section 588G.[15] The company’s directors are liable for a breach of insolvent trading.
The directors are also liable for Breach of s190 as the directors were not responsible for Patra’s conduct as the managing director. Patra did not act in good faith and reasonable grounds of Regal Cinematic. Yu, Yan, and Rebecca defied s190 (2) as they relied solely on Patra’s information, the managing director who keeps on post-dating cheques, and some are even bouncing back. Patra defies s189 as she relies on data from a third party, Farid, an accredited residential building inspector. The directors made no independent assessment of the two cinemas.
Advice to the Directors of Regal Cinematic (Burleigh) Ltd according to their Respective Situations
If the company decides to take proceedings for the directors’ breach of due diligence and care and insolvent trading, the directors can defend themselves under section 588H of the Corporations Act. The directors can prove that there were reasonable grounds to believe that the company was solvent at the time of purchasing the to see members and also incurring the debt. The directors can also assert that the person who surveyed the company’s solvency was competent and reliable.
Patra, who was the managing director, can show that she was not managing the company at the time the debt was incurred due to reasonable circumstances such as illness. The directors can also defend themselves that all reasonable steps are taken to prevent the company from incurring debt. The court can relieve the director of Breach of duty to insolvent trading if they are unsatisfied that the director was honest in responsibility using sections 1317S and 1318.[16] This is usually discretionary, but they are just excusing to remove the Breach. The defenses in section s588H can be used by Patra, who did not follow the statutory business judgment rule and hence never followed the criteria of the relief provisions.
The Breach of duty of care, diligence, and skill will be used as a claim by the liquidator as a benefit of creditors, and hence it will be part of the company’s assets.[17] Yu, Yan, and Rebecca will have a prima facie case as they were acting in good faith and for the interest of the company. The resolution made will be in favor of the directors. The four directors should not wait for the court proceedings before seeking protection from the court. They can be exempted from liability of the whole issue by bringing their actions for a court order.
Bibliography
Australia. Australian government gazette, No21, 499, 2017.Administrative Law.
http://nla.gov.au/nla.news-title1286.
Australian Constitution.
Chapple, E. Company law: an interactive approach, (Wiley Australia, 2nd ed, 2016)
Competition and Consumer Act, 2010 (Cth)
Creyke, Robin, David Hamer, Patrick John O’Mara, Belinda Smith, and Taylor. Tristan S.
Laying down the law. (Lexis Nexis, 10th ed, 2018).
Saunders, Cheryl, and Adrienne Stone. The oxford handbook of the Australian constitution. (The
Law Book Co, 2nd ed, 2018).
Western Australia. The Criminal Code,2010, (NT).
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[1] Saunders, Cheryl, and Adrienne Stone. The oxford handbook of the Australian constitution. (The Law Book Co, 2nd ed, 2018) 132.
[2]—Australian Constitution s22.
[3]: competition and Consumer Act 2010 (Cth) s29.
[4]—Criminal Code (Western Australia) s7.
[5] Saunders, Cheryl, and Adrienne Stone. The oxford handbook of the Australian constitution. (The Law Book Co, 2nd ed, 2018). 145.
[6] Australia. Australian Government Gazette, No 21, 499, 2017, 200.
[7] Chapple, E. Company Law: An Interactive Approach (Wiley Australia, 2nd ed, 2016) 350.
[8] Chapple, E. Company Law: An Interactive Approach (Wiley Australia, 2nd ed, 2016) 362.
[9] Chapple, E. Company Law: An Interactive Approach (Wiley Australia, 2nd ed, 2016) 364.
[10] Australian Constitution s34.
[11] Criminal Code (Western Australia) s8.
[12] Australia. Australian Government Gazette, No 21, 499, 2017, 212.
[13] Creyke, Robin, David Hamer, Patrick John O’Mara, Belinda Smith, and Taylor. Tristan S. Laying down the law. (Lexis Nexis, 10th ed, 2018)124.
[14] Ibid, 156.
[15] Saunders, Cheryl, and Adrienne Stone. The oxford handbook of the Australian constitution. (The Law Book Co, 2nd ed, 2018) 154.
[16] Ibid, 162.
[17] Criminal code (Western Australia) s10.