Company Law 266 Assignment 2 Option 3

Topics: Board of directors, Executive director, Non-executive director Pages: 7 (1753 words) Published: January 27, 2015

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Company Law 266
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Assignment 2 (Option 3)
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28th January 2014
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Step 1: Identify area of law

The area of law relevant to this case study is directors’ duties of care and due diligence, of avoiding conflict of interest, as well as of good faith and proper purposes.

Step 2: Discuss relevant legal principles

Harris, Hargovan and Adams (2011, 485) states that directors owe a fiduciary duty to their company and as such, must act in the company’s best interests. ASIC v Adler (2002) NSWC 171 was a deciding case in dealing with breaches of directors’ duties concerning conflicts of interest, making secret profits and acting for improper purposes.

Directors—under section 181 of the Commonwealth’s Corporations Act 2001—owe the duty to act for proper purposes in the best interests of the company. Directors also have a duty to avoid conflict of interest, as per section 182 of the Corporations Act. This section disallows members from using their position to “…gain an advantage for themselves or someone else; or… cause detriment to the corporation.” Such acts may also be considered criminal offences if they are “…reckless; or…are intentionally dishonest,” as per section 184 of the Corporations Act.

Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1 was a case in which a senior manager’s position in a company allowed him to gain a secret profit for another company he had set up. The court held that because he had a conflict of interest, he was in violation of his fiduciary duty. Additionally, in Chew v R (1992) 173 CLR 626, it was decided that one must not necessarily achieve their intended purpose in order to be in breach of section 182, as long as there is proof of intention.

Section 191 of the Corporations Act requires directors to disclose any material personal interest they have that may conflict with their fiduciary duty. The court held in Regal Hastings Ltd v Gulliver (1967) 2 AC 134 that such parties may only escape liability if consent has been given by the shareholders of the company.

Section 180(1) of the Corporations Act obligates directors and officers to “…exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in the same situation would exercise.” Directors—following the case of Daniels v Anderson (1995) 37 NSWLR 438—are no longer allowed to defend against liabilities on the basis of ignorance or lack of inquiry. They are expected to have a reasonable degree of awareness of the goings on of the business and any misconduct that may occur within the company—regardless of whether they are of executive or non-executive status. The decision in ASIC v Rich (2003) 44 ACSR 341 held that non-executive directors owe the same duty of care that executive directors do and that they are obligated to use whatever skills they may have that may be of use to their company.

A director who is thought to have breached their duty of care may rely on the business judgment rule—under section 180(2) of the Corporations Act—as defence, if it can be proven that they “…made the judgement in good faith for a proper purpose; and…do not have a material personal interest in the subject matter of the judgment; and…inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and…rationally believe that the judgment is in the best interests of the corporation....
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