The Duties And Liabilities Of Directors Essay

Question:

Discuss about the The Duties and Liabilities of Directors.

Answer:

Issue

  1. Has Julian committed a breach of common law duty and statutory duty?
  2. Did Daniel and Sol commit infringement of common law or statutory duty?
  3. Are there any defenses available to the directors for the commission of breach of the statutory or common law duties?

Rule

The Corporation Act 2001 provides rules and regulations in relation to the duties of directors of a company. The directors are also subjected to general duties under the provisions of common law (Bruner 2013).

It is the duty of directors to act bona-fide towards the interest of the company; they are also not allowed to abuse their powers in relation to the company. In the case of Chan v Zacharia 1984 it was ruled by the court that directors have to avoid situations where conflict of the interest of the company with their own interest may arise. In the case if ASIC V City Group Global Market Australia Pty Ltd 2004 the court ruled that directors must be sensible and careful towards discharging their duties towards the company (Baker et al. 2015).

According to Section 180 of the CA it is the duty of a director to act with utmost care and diligence towards the operations of the company. This duty is determined by analyzing what a reasonable person would have done in a similar situation (Hanrahan, Ramsay and Stapledon 2013).

According to Section 181 of the CA it is the duty of the directors of a company to make decision which is in the best interest of the company in good faith. This also includes the common law duty of avoiding conflict between the the directors personal interest and the interest of the company. This duty of trust is also known as fiduciary duty under the Corporation Act 2001.

The directors of a company are not allowed to make improper use of their powers under the provisions of Section 182 of the CA. They are not supposed to acquire any unfair advantage through the improper use of their powers for themselves or their relatives.

The directors are also forbidden to use information material information which they acquire through their position to gain any advantage for themselves or their relative or which might cause loss of any form to the company according to the provisions of Section 183 of the CA.

The directors of the company also have the obligation to disclose any personal interest which they have in relation to a particular transaction the company has or will engage with to the other directors of the company according to the provisions of Section 191 of the CA.

The directors of the company can attract both civil and criminal penalties if they breach the statutory duties provided by the CA. Section 1317G of the CA makes the directors of a company pay a fine up to $200000 in case they are found to breach the provisions related to the directors duties. Section 1317 H and 206C of the CA makes the directors liable to compensate the company for the loss caused to it and even leads to their disqualification respectively (Ramsay 2015).

The defenses available against such breaches are the best judgment rule for the breach of Section 180, Reliance on other directors and use of delegated powers can also be used as a defense for the breach of Section 181-183 of the CA (Varzaly 2015).

Application

In this case Julian has committed the breach of Section 183 of the Corporations Act 2001. Section 183 contemplates that a director of a company must not provide material information of the company (Barker 2016). Here, Julian was under the charge of the tender process of the company. It is his statutory as well as common law duty not to pass on the company’s relevant information to any third party, that too, without the consent of the remaining Directors. Other architectural firms were offering tenders to the company. However, Julian passed on the tender prices offered by other companies to his brother Raphael and he nether disclosed his relationship with Raphael nor he disclosed the fact Raphael was going to offer tender.

With respect to this Julian has also breached the provisions in relation to Section 182 of the CA as she has used her position unfairly in order to gain advantage to her uncle with respect to the purchase of land without notifying the other directors about the transactions.

The actions of Julian is also not in good faith and towards the best interest of the company as she could have looked for better plots which would have been more beneficial for the company instead of the plot belonging to her uncle and thus Section 181 of the CA has been breached by her.

Julian also committed the breach of Section 191 of the Act. The provision requires the directors of a public company who has a material personal interest in a particular matter relating to the affairs of the company, must disclose the same to the remaining directors before the directors’ vote on a particular resolution related to the material personal interest. Here, Julian wanted to help his uncle Gerald to pay off his bank loan. He recommended the other directors about purchasing the land owned by Gerald without making any disclosure about his relationship with him in Regal Hastings Ltd v Gulliver.

Although the company did not suffer any loss from the purchase even then, Julian as a Director of the company has committed a breach of his statutory duty. Julian has also committed an infringement of his duty of conflicting interest as he tried to help his uncle Gerald to pay his loan by selling off his land to the company. He also helped his brother to submit tender of the lowest price. Although neither his uncle nor his brother has asked for an award instead, even then the act of Julian amounts to a breach of his statutory duty.

The other two Directors of the company, Sol and Daniel have also committed a breach of their statutory duties as directors. The directors have committed a breach of their duty to act with diligence laid down under Section 180 of the Act. When Julian recommended them about purchasing Gerald’s land, they did not ask any questions related to the land neither did they ask for an independent valuation of the land nor they asked about the mode of financing the property purchased. Julian may use the defense stating that the decisions taken by him was in the best interest of the company

The defenses which are used against the breach of director’s duties would not be applicable in this case as the judgments made were not reasonable and there was no delegated power or reliance on others. Therefore they have to pay the penalties under section 206C, 1317H and 1317G

Conclusion

Thus in this case all the directors of the company have been involved in the breach of directors’ duty and therefore they are liable to be prosecuted under the Act.

References

Baker, H.K., Chenhall, R.H., Haslem, J.A. and Juchau, R., 2015. Disclosure of material information: a cross-national comparison.

Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, p.249.

Bruner, C.M., 2013. Is the Corporate Director's Duty of Care a Fiduciary Duty-Does It Matter. Wake Forest L. Rev., 48, p.1027.

Corporations Act 2001

Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.

Ramsay, I., 2015. Increased Corporate Governance Powers of Shareholders and Regulators and the Role of the Corporate Regulator in Enforcing Duties Owed by Corporate Directors and Managers. European Business Law Review, 26(1), pp.49-73.

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

Varzaly, J., 2015. The Enforcement of Directors’ Duties in Australia: An Empirical Analysis. European Business Organization Law Review, 16(2), pp.281-319.

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