“Business and Corporation Law”

This question is a tutorial and it is  related to the leacher BELOW;
In the answer you will need to sport it by by some sections from the Australian law which are related to the answer

Here is the CORPORATIONS ACT 2001

contract and as a:._resu’lt_ suffers “disastrous losses. A_s__ a-.res’uIt’ of the “loss a
large number of shares are sold and thereis a change in the board n”iem_be_-rs
of He!ido=n.’:_The’f_new”boardseéksi advice: a’s_’to_”w’h’et’he”r the” company can
-;i “take anyaction a.’ga:nst’Nic’k‘y, Monique and _Can‘iillei_‘


10.39 The directors of a company are in a fiduciary position with regard to
the interests of the company. In addition, the general law duties are backed

by similar duties in the Corporations Act. While they have the powers of

management vested in them, directors must exercise those powers in a
bona fide manner in the interests of the company as a whole: Re Smith and

Fawcett [1 942] 1 All ER 542. The powers must also be exercised for a proper

purpose: Mills v Mills (1 938) 60 CLR 150. These are specific examples of the
it; general duty of loyalty and good faith owed to the company.

Sources of Duty of Care, Diligence and Skill
General Law • • • Contract Negligence Equitable Obligations Statute Law

Section 180(1) of the Corporations Act (Civil Penalty Provision): A director or other officer of a corporation must exercise their powers and discharge their duties,

with the degree of care and diligence that a reasonable person would exercise if they: a) were a director or officer of a corporation in the corporation’s

circumstances; and b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer

S185 – Relationship between common law and statute law

Definition of Duty of Care, Diligence and Skill

– expected to use reasonable care, taking into account knowledge, experience and size of company – basic duty: guide and monitor management, be familiar/understand

company’s activities and financial status

• Diligence
– must attend all board meetings unless exceptional circumstances – be familiar with company’s business and financial status – conduct periodic review of company’s

financial statements

• Skill
– must be able to form a view as to the company’s financial state; other skills: dependent on knowledge and experience director held himself/herself out to have when



Objective standard expected
• Previously the standard expected was subjective – based on what could reasonably be expected from that actual director – Re City Equitable Fire Insurance Co Ltd

[1925]. • Currently the standard of care, diligence and skill is objective – what would a reasonable person in that position have done – see Daniels v Anderson (1995)



Delegation of Authority
What happens if the director has delegated his/her power to an agent to act on their behalf?
• directors have express statutory authority to delegate (s 198D) • directors are nevertheless responsible for actions of delegate (s 190(1)) • directors are not

responsible if they believed (in good faith, on reasonable grounds and after making proper inquiry) that: – the delegate would exercise the power properly and – was

reliable and competent (s 190(2))


Section 189 provides that directors may rely on information or professional or expert advice from: • • • • employees professional advisers or experts other directors

or officers or a committee of directors Was the reliance on such information or advice reasonable?

Yes – If such reliance was in good faith, and after making an independent
assessment of the information See Centro Case (p116-121) – directors not are expected to do more than mechanically rely on reports – they must assess the information

and accounting is not considered a specialised field that they cannot themselves understand.


Defence: Business Judgment Rule (s 180(2))
• The business judgement is a kind of defence for directors and is a US legal invention. The business judgement rule protects directors and officers against liability

for breach of the statutory duty of care (and equivalent common law or equitable duties) It is an effort to restore ‘balance’ and allow directors to take advantages of

commercial opportunities without fearing that they are breaching their duty The business judgement rule only applies to breaches of the duty of care (i.e. it does not

apply to breaches of loyalty and good faith or insolvent trading)


Defence: Business Judgment Rule (s 180(2))
If a business decision is: – made in good faith and for a proper purpose and – The director did not have a material personal interest and – informed themselves about

the subject matter to the extent they reasonably believe is appropriate and – rationally believe that it is in the best interests of the corporation That decision is

taken to be a “Business Judgement” and cannot be questioned by the court. Note: it does not cover breach of a duty of care and diligence to monitor the operations of a

company, as this is not a business decision (ASIC v Adler).


Ratification by general meeting: relevant issues
• A director may be relieved from liability for breaching a particular general law duty by having their conduct ratified by the company The company cannot ratify

breach of statutory duties (Angus Law Services v Carabelas (2005) (p103-104) Requires full disclosure to general meeting
Is ratification of action possible?

– If ratification would: be a fraud on the minority; prejudice creditors and
– Otherwise – yes

company nearing insolvency; defeat members’ personal rights; be oppressive (Part 2F.1); excuse breach of statutory duty


What happens if duties are breached?
Who can sue the directors? – the company – the liquidator of the company – ASIC (civil/criminal penalty provision) – a shareholder (but only in limited situations,

such as where a special fiduciary relationship exists or through a Statutory Derivative Action) – a creditor (but only in limited situations where the company is near

insolvency) • Directors can be sued for breaching their general law or statutory duties or both at the same time


What Sanctions can be Imposed for a Breach of Directors Duties?
a) Remedies Through the general law, the court can grant ordinary general law remedies such as: – damages/equitable compensation – account of profits – injunction –

declaration – termination of contract Through statute law, statutory remedies can be awarded such as: – Injunctions (s1324) – Compensation – winding up (s461)


What Sanctions can be Imposed for a Breach of Directors Duties?
b) Penalties (can only be sought by ASIC) i) civil penalties ii) criminal penalties i) Civil Penalty Provisions (listed in s1317E)

• Compensation to corporation (s1317H) • management banning order (s206) • pecuniary penalty of up to $200 000 (per offence) (s1317E and 1317G)
ii) Criminal Penalty Provisions (s184 (1), (2), (3) and s588G (3))

Criminal record Prison sentence


Statutory duty to prevent insolvent trading (s588G)
A person engages in insolvent trading in breach of s 588G (civil penalty provision) if: • the person is a director of a company when the company incurs a debt AND the

company is insolvent at the time of incurring the debt AND there are reasonable (objective standard) grounds for suspecting that the company was insolvent, or would

become insolvent at the time the debt was incurred AND

• •


Statutory Duty to Prevent Insolvent Trading (s588G) • the person is aware of such grounds, or a reasonable person in like position and same circumstances would be

aware AND • the person fails to prevent the company from incurring the debt • If the insolvent trading was intentional that breaches s588G (3), which is criminal

penalty provision. BJR does not apply.


Defences to Insolvent Trading (s 588H)
A director can rely on one or more of four possible defences (s588H):
• the director could and did reasonably expect, that the company was solvent at the time and would remain solvent, even if it incurred the debt OR • the director

expected that the company was solvent, on the basis of information supplied to her or him by a subordinate the director believed on reasonable grounds to be competent,

reliable and responsible for providing adequate information about the solvency of the company OR • the director, because of illness etc, did not take part in the

management of the company at the relevant time OR • the director took all reasonable steps to prevent the company from incurring the debt



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