Law Of Business Organizations: Morton And Eric Essay

Question:

Discuss about the Law of Business Organizations for Morton and Eric.

Answer:

This particular question is related to the breach of director duties which relates to the duty of directors to use the information of the company for proper purpose, particularly the information which they have obtained by holding a key position in the company in a manner which is detrimental for the company or where an advantage if attained for themselves or for someone else, under the general law and as per the statutory law of Corporations Act, 2001 (Cth), specifically its section 183. Under section 182 of this act, a similar prohibition has been placed on the misuse of position held by the director. This question is also related to the breach of director duties which relates to the duty of directors to act in good faith, for proper purpose and in the best interest of the company under the general law and as per the statutory law of Corporations Act, 2001 (Cth), specifically its section 181.The main issues of this case relates to the breach of director duties by Morton and Eric.

As the non-executive directors of the company, it was the duty of both these directors to work towards the benefit of the company. It was the duty of Eric to disclose that there was a conflict of interest and not to misuse the information and position which he had by being a non-executive director of GoldCoin Bank Ltd. In ASIC v Stephen William Vizard [2005] FCA 1037, Vizard dealt with the company’s shares and obtained a personal advantage for himself as he used the confidential information of Telstra which he had gained by holding the position of director in it. As a result of this, a penalty of $390,000 was imposed on him and he was also disqualified from managing the affairs of the company for ten years. It is very clear in this case that Eric misused the information which he got by holding the position of non-executive director in the company. He used his position to persuade the other directors to get the deal signed with Tricky Partners. By doing so, he caused detriment to the company and gained advantage for himself thereby breaching his director duties under the general law and the one under the statutory law. Based on the quoted case, he could be disqualified and penalised.

He had to disclose material personal interest per section 191-195, which was again not done. When it comes to Eric, it was his duty to act in the best interest of the company. When he was aware of, or had suspicion about the conduct of Morton, he should have gone to the board and raised this issue. It was his duty to work in the best interest, which he failed to do. By skipping the meeting, he further breached his director duties.

On this basis, it can be concluded that there had been indeed breach of director duties on part of Morton and Eric.

This particular question is related to the breach of director duties which relates to the duty of good faith and avoiding conflict of interest, apart from not misusing the crucial information of the company based on the general law and under section 181 and 183 of the CA. Apart from this, the question also has the traits of oppressive conduct on part of the three directors against Oistrakh. The key issue of this case relates to the misuse of position in the company and conflict of interest on part of three directors of the company and regarding the oppressive conduct by the three directors.

Section 232 of CA gives the option to the minority shareholders of the company to apply for relief before the court where the conduct of the directors can be deemed as oppressive, discriminatory, or prejudicial. And the remedies can be claimed under section 233 of this act where the order can be made by the court which includes remedies like winding up the company, modification of constitution, appointing a receiver, and the like. In Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73 it was held that the conduct of the board was oppressive toward the minority shareholders, as a result of which, the company had to be wound up and the sale proceedings to be distributed.

The given case study shows that a conflict of interest was not avoided by the three directors in addition to the misuse of information of the company, resulting in breaches of section 181 and 183. This meant that a breach of director duties did take place for Oistrakh’s colleagues. The conduct of the three directors was oppressive towards Oistrakh as he was a minority shareholder who was sidelined in the meetings and not informed about the key projects of the company. As a result of this, Oistrakh can apply for section 233 remedies. He can get the company to be wound up owing to this breach of director duties towards the shareholder and also as they had misused the information of the company to gain personal advantage, in addition to not working in the best interest of the company. Thus, the three directors breached their duties for which Oistrakh can apply for remedies particularly based on the quoted case.

On this basis, it can be concluded that there had been indeed breach of director duties on part of Oistrakh’s colleagues owing to the oppressive conduct.

This particular question is related to the breach of director duties which relates to the duty of the directors to not involve in any such activities which can result in the company being insolvent or undertake any transaction when the company is already insolvent based on the common law and section 588G of the CA. The key issue of this case relates to the possible breach of the quoted section by Hawker under the general or statutory law.

For successful application of this section, there is a need to show that the person had been a director when the debt was incurred by the company; that the company was already insolvent or became insolvent after incurring these debts; and had reasonable grounds for suspecting the insolvency of the company. As per Woodgate v Davis (2002) 55 NSWLR 222, this duty is meant to protect the welfare of the company’s stakeholders. Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 provided that expectation of solvency has to be showed beyond mere hopes and there have to be grounds to prove that company had been solvent at that time, in order for the defence under section 588H to apply.


In the given case, Hawker had the doubt that the company might be put under administration by the 50% shareholder of AvantGarde. And to safeguard her reputation, she indulged in a conduct which breached her director duties mentioned in the previous segments. She failed to act in best interest of Comet and just wanted to protect her own image. This was a breach of her director duties under section 181 as she failed to work in the best interest of the company. Also, this breached the general law duty as she gave supremacy to her interests before the company.

Apart from this, the director duty covered under section 588G can also be claimed to have been breached here. She embezzled the funds which led to the insolvency of the company, as the same was coupled with the other fiasco. The shortfalls created in cash reserve are indicator of the company going in financial crunch. However, for this breach, Hawker can claim defence under section 588H where she can show that she expected solvency. And this can be based on different proofs which she would have to present. She can also show that had the other fiasco not taken place, the company would have been solvent. So, the liabilities under section 588G may or may not apply, and would depend upon the material presented by Hawkes.

The duties owed towards AvantGarde were also breached as Hawkes was a director there and misused the position in the company and the information of AvantGarde and used it to her benefit in form of embezzling funds. So, her duties were also breached towards the other company.

To conclude from the facts given, it is clear that Hawkes, by embezzling funds, breached the director duty of good faith towards both the companies. And there is also a chance of raising a case of breach of duty under section 588G, which may or may not be successful.

This particular question is related to the breach of director duties which relates to the duty of applying care and diligence while the duties are being discharged and the powers are being used based on the general law and under section 180 of the Corporations Act, 2001. The key issue of this case relates to the breach of director duties by the COO of the company, along with the possible defences which can be used by him in this regard.

The duty which is owed by the directors towards the company has to be discharged in a careful and diligent manner. ASIC v Healey (2011) 83 ACSR 484 provides that each member of the board has a responsibility and the same cannot be delegated to others. When it comes to the directors holding special skills, there is a need to show a standard by such person who professes to have the particular skill. For instance, ASIC v Vines (2003) 48 ACSR 322 saw Vines being appointed for his special skill and when the same was not properly done, he was held liable.


Applying these rules to the case of COO, he was a person who had special skills in terms of being the operating officer. So, he had to be a specialist in the operations work. He had separate responsibility which cannot be fulfilled through delegation. So, when the report was prepared by the people appointed by him, he had the duty to check for the same. This is particularly because the duty of preparing the report was given to him by the board, which he had delegated. And as the report proved wrong, he would be deemed to have breached his director duties under section 180 owing to his special skill set.

Here, he can cite the defence under section 198D that he had delegated the duty. However, there is a need to highlight that the duty can be delegated but not the responsibility. His defence would be successfully only when he can show that he was at all times fulfilling the duties imposed on him and reasonably believed on the report after making relevant inquiries. However, this defence would fail owing to his special skill knowledge and nothing to show that he properly checked the report. There is nothing in the case study to show that he was reliable or competent when he delegated his duty to new graduates who lacked the relevant experience and thus required to be supervised. Key information had been negligently omitted, which was his duty to ensure that the report had.

On this basis, it can be concluded that there had been indeed breach of director duties on part of COO and the defences would not be able to help him owing to his special knowledge.

This particular question is related to the breach of director duties which relates to the duty of applying care and diligence while the duties are being discharged and the powers are being used based on the general law and under section 180 of the Corporations Act, 2001 and the defence available under section 189. The key issue of this case relates to the breach of director duties by the directors of the company, along with the possible defences which can be used by them in this regard.

Section 189 provides a leading defence to the directors when they rely upon the information which is provided by others. When reliance is made on report presented by person who is an expert, where the directors have reasons to believe that the given information is correct, than the directors cannot be blamed for a breach of their duties, owing to reliance made on good faith and reasonable reliance of the directors. Reliance has to be shown to having being made in good faith and only after making independent assessment. And till the time something contrary can be proved, the reliance is deemed to be reasonable. In this regard, there is a need to apply the case of AWA v Daniels (1992) 9 ACSR 383 which provides that a standard of care has to be applied by the directors as would be done by a reasonable person while doing their job and that there was no uniform standard for all directors.


Undertaking the investment after relying upon the report presented by the COO of the company, the company had to bear major loss. In this regard, the board can cite the defence that they relied on the information presented by the COO as a defence and be discharged from the liabilities arising from not being careful or diligent. AWA v Daniels shows that each director has to follow different standard. And so, the petroleum engineer and the geology expert directors would not have uniform liabilities, as was for other directors. This is particularly as these two directors held special knowledge, which had to be applied to analyse the report. Thus, these two directors would be liable. This is particularly because the shortfalls of the report would be obvious to a geologist or engineer who was reasonably competent.

On these bases, it can be concluded that save for two directors, all the directors would be deemed to have fulfilled their director duties; but the geology expert and petroleum engineer directors would be deemed to have contravened section 180.

This particular question is related to the breach of director duties which relates to the duty of the directors to not involve in any such activities which can result in the company being insolvent or undertake any transaction when the company is already insolvent based on section 588G of the CA. The question also focuses on the possible defences available with the directors. The key issue of this case relates to the possible breach of the quoted section by the directors under the statutory law.

As has been touched upon earlier, it is the duty of the directors to not indulge in such activities where the company becomes insolvent. The defences from the liability under this section are available under section 588H, where the directors have to show that they have reasons to believe that the company would be solvent after undertaking the particular transaction. Applying these sections to the case study, it would be deemed that the directors of ShaleRock had contravened their director duties as they allowed the company to continue running their operations even when the company was about to become insolvent. Instead of working on improving the position of the company, they chose to ignore the advice of CFO where it was clearly shown that the company was at a risk of insolvency and that there was a need to minimize the losses. The transfer of company funds to joint venture, which had been advised against by the executive chairman of the company was still undertaken. So, the company was already facing insolvency, the directors were aware of it and yet they incurred further debts for the company, which means section 588 was contravened.

The defence under section 588H would not be helpful as the directors had no grounds to believe on the solvency of the company. The funds were transferred when the CFO had informed the board about potential insolvent condition and when the executive chairman had advised against it. This means that the directors of ShaleRock failed in discharging their director duties properly and led to the company’s insolvent position. The executive chairman though can be safeguarded from the liabilities under section 588H as he had advised the board against such step and also, as he was not available at the meeting owing to health issues. However, even this defence of the executive director would fail based on Deputy Commissioner of Taxation v Clark (2003) 21 ACLC 1,063 as the health issue was more of cosmetic grounds instead of life threatening issue, as this was lack of “good reason”.

On these bases, it can be concluded that the directors of ShaleRock would be deemed to have contravened their director duties as they transferred the funds of the company when the company was already facing insolvency, thus breaching section 588G and the defence under section 588H would not help them.

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