Uninest Directors' Breach Of Duties Under Corporation Act 2001 Essay.

1. Identify the risks of liability arising from diverse sources for both the company and its officers and, in particular, define directors’ duties and the consequences of breaching those duties;

2. Use skills, including analytical and deductive reasoning, in applying the above knowledge, rules and principles of corporations law to factual situations which could arise in practice, in order to solve a problem perceptively and creatively or to have sufficient understanding of the legal issues to know what questions to ask when referring the matter for legal advice
 

General and Fundamental Duties of Directors and Officers under Corporation Act 2001

Whether Uninest directors fail to fulfill any of their general law duties and also their duties stated under the Corporation Act 2001? These sections also discuss the liability of Neals in this context?

Corporation Act 2001 introduces different general and fundamental duties of the directors of the organization, and some of these general duties are stated below:

• Director is under obligation to use their controls and obligations with care and diligence that any other sensible person would perform.
• Directors of the organization are also under obligation to act in good faith and in the best interest of the company and for a proper purpose.
• It is the duty of director not to use their authority in indecorous manner which means for getting any advantage for themselves and for any third person, or to cause any damage to the organization.

Section 180 of the Corporation Act 2001 defines the provisions related to director’s duty to act with care and diligence. Clause 1 of this section states that any director or any other officer of the company must perform their functions and use their powers with due care and diligence that any reasonable person would perform if they were being as the director or officer of the company in similar situations, and occupied the office hold by director or any other officer and had similar responsibilities in the corporation.

Clause 2 of this section defines the Business judgment rule, and as per this clause any director or officer of the organization who take the business decision must comply with the requirements stated under clause 1, and also their corresponding responsibilities  stated under the common law if they:

• Take the decision related to the business in moral confidence and for a correct purpose.
• They must not have any material personal interest in the main matter of the business judgment they make.
• Directors must believe rationally that the business judgment made by them serves the best interest to the company.  

Directors and officers of the organization must ensure that the decision take by them is in the company’s interest and this believes is considered as rational believe only if any reasonable person in similar situation holds such believe.

Section 182 of the Act states the provisions related to the use of positions by the directors and other officers of the company. This section stated that director, secretary, and other officer of the company must not use their authority in the incorrect way for gettting advantage for themselves or any other person, or cause damage to the company.

This can be understood through case law Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023. In this case Federal court held that directors of   the financial services company failed to fulfill their duties imposed on   them by the Corporation Act 2001, because reasonable director in the company was reasonably aware that if they allowed the transaction than it contravenes the provisions of the Act and result in severe consequences for the company.

It must be noted that these provisions are also applicable on the officer of the company, and term officer include directors, secretaries, executive officers, and any person who is involved in taking the decisions which distress the entire, or a considerable part, of the business of the corporation. 

Case Laws to Understand the Application of Corporation Act 2001

In the present case directors of the Uninest breach both general and fundamental duties imposed on them by the Corporation Act 2001. They breach section 180 of the Act because any reasonable director in the similar situation would not accept the advice provided by Neals. They also fail to make proper business judgment because directors clearly have material personal interest in the failure of takeover bid. Therefore, they fail to make business judgment in decent confidence and also for correct purpose.

There is one more case law Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002). In this case Court held that Adler breached his duties as director of the company because any reasonable director in similar situation would not cause the payment of $10m by HIHC to PEE for the purpose of purchasing HIH shares. Court further stated that Adler also failed to make proper business judgment because Adler clearly had material personal interest as he had substantial shareholding in HIH. Therefore, Adler fails to made business judgment in good faith and also for proper purpose.

In this case, Neal is the officer of the company as he is the person who is involved in making or participating in taking the decisions which disturb the entire, or a considerable part, of the business of the corporation. Therefore, above stated provisions also applied on Neal as he fails to fulfill his duties under section 180 of the Act.

Conclusion:

Directors of the Uninest and Neal (as officer) fail to fulfill in the good faith and in the best interest of the company therefore, they breach section 180 of the Act.

Part A: Whether Shane breaches any general or fundamental duty as a director of the company?

Part B: what penalties would apply on Shane if he breach above stated duties as director of the company?

Common law impose duty on director to not use the information of the organization which they get while holding the office as director for gaining any advantage for their own or for any third person, or to cause any damage to the organization.

Section 183 of the Corporation Act 2001 defines the necessities related to the use of information. As per this section, if any person who gets the information in context of holding the position of director, employee, or organization of   the company must not use that information in improper manner for the purpose of getting benefit for their own or for any other person, or cause any damage to the organization.

Penalties Applicable for Breach of Duties under the Act

Clause 2 of this section states if any person who is in the contravention of clause 1 also contravenes this subsection.

Section 184 of the Corporation Act 2001 states that director or other officer of the company commits an offense if they are reckless and intentionally dishonest, and if they fail to perform their functions and use their powers and discharging their duties in good faith and in   the best interest of the company, or for proper purpose.

Clause 3 of this section states provisions related to the use of information. This clause stated that any person, who obtains information because such person holds the position of director, officer, and employee in the company, commits the criminal offense if they use such information in dishonest manner for the purpose of gaining direct or indirect advantage for themselves or cause any damage to the corporation. Person also commits criminal offense if they use the information in reckless manner because of which any other person gain direct or indirect advantage or cause damage to the company.

This can be understood through case law ASIC v Southcorp Wines 203 ALR 627. In this case, Court held that director contravened the rules related to continuous disclosure by communicating the information to analysts before giving it to the ASIC.

There is one more case law ASIC v Vizard 145 FCR 57: 219 ALR 714. In this case, director breach section 183 by indulged in the insider trading. Director obtained such information that was not publically available and uses that information for their own purposes for the purpose of purchasing shares in other companies.

It must be noted that, if directors breach their statutory and general duties imposed by Corporation Act 2001 then corporation act impose penalties on directors up to $200,000. In some cases,, directors of the company may also disqualified from the office.

 Section 1317E of the Corporation Act 2001 states that a person has contravened the civil penalty provision, and then such person must make the declaration related to the contravention. Subsequently, ASIC seek a pecuniary penalty order under Section 1317G and also the disqualification order under section 206C.

Section 1317G of the Act states the provisions related to the pecuniary penalty orders. Clause 1 of this section states that Court has power to order the person to pay the Commonwealth a pecuniary penalty of up to $200,000 if declaration of contravention is made against such person under section 1317E of the Act (contravention must be of corporation/scheme civil penalty provision), and the contravention adversely affect the interest of the Corporation and company’s capability to pay debts to its creditors, or is serious.  

Section 206 of the Act gives power to the court to disqualify the person from managing the corporation. 

In the present case, Shane breach the provisions of section 183 and 184(3) of the Act because they get the information related to tender price while holding the office of director in the organization and he use that information for his own benefit and this also cause damage to the company. Therefore, Shane breach section 183 which states if any person gets information in context of holding the position of director, employee, or organization of the company must not use that information in improper manner for the purpose of gaining advantage for themselves or for any other person, or cause any damage to the organization.

For breach duty under section 183 and 184(3) Shane is liable under section 1317E of the Act. Section 1317 G stated that Court has power to order the person to pay the Commonwealth a pecuniary penalty of up to $200,000 if declaration of contravention is made against such person under section 1317E of the Act. Provisions of section 206 also applied on Shane under which court has power to disqualify the Shane from managing the corporation.

Conclusion:

Shane breach both general and fundamental duties as directors of the company and he is liable under section 1317E and 206C of the Act.

Whether Frank, Diane, Ron and/or Kelly breached any of their general or fundamental duties imposed on them by Corporation Act 2001?

Section 181 of the Corporation Act 2001 states, director or other officer of the company must perform their duties in good faith and in the best interest of the company, or for proper purpose.

It must be noted that scope of this section is very wide, and this can be understood through case law Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1. In this case, Court stated that actions taken by directors of the company was not taken in good faith or for proper purpose for ensuring company’s benefit. Test applied by Court in this case is objective, and under this case Court stated whether any comparable person who possess same knowledge and skills as the director or officer of the company take similar actions or not.

There is one more case law Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 in which Court introduce two-step test for the purpose of determining whether a director had acted in improper manner.

In case law Australian Securities & Investments Commission v Adler (2002) 168 FLR 253, Court provides one more leading decision. In this case, court stated that directors of the company also breach their duties under section 181 of the Act by allowed the company to purchase high-risk assets at that time when the company wants to reduce its risk.

In this case all the directors breach their statutory duty under section 181 of the act because they fail to act in good faith and in the company’s best interest. Directors enter into contract for which their robots are not prepared. Objective test can be applied in this case, and on the basis of this test it is clear that no reasonable person will take similar actions in this situation. Therefore, directors breach their duty under section 181 of the Act as they fail to act in good faith and also fail to ensure best interest for the company.

Conclusion:

After considering the above facts it can be said that Directors breach their duty under section 181 of the Act.

Scenario B

Issue:

Whether directors have any statutory defense which they can raise in this situation?

Section 189 of the Act stated, if director of the company rely on any information or professional advice given by the professional adviser or expert in context of those matters which director’s believes fall under the core competence of that person, or the reliance was made in good faith, and after making the independent assessment of the information and advice provided by professional/expert.

Reasonableness of director’s reliance is determined by considering whether director performed his duty under this part or an equivalent general law duty. Director’s reliance on the information is considered as reasonable reliance unless contrary is proved. This can be understood through case law ASIC v Hellicar & Ors [2012] HCA17. 

In the present case, all four directors of the company rely on the report published by expert and on the basis of that report they enter in the contract with the Corp Grain. In this they can use the defense stated under section 189 of the Act because they rely on the information or advice given by the professional adviser or expert in context of those matters which director’s believe fall under the core competence of that person, or the reliance was made in good faith, and after making the independent assessment of the information.

Conclusion:

Therefore, directors can use the statutory defense provided under section 189 of the Corporation Act 2001. 

Case law

Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023. 

Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002). 

ASIC v Southcorp Wines 203 ALR 627. 

ASIC v Vizard 145 FCR 57: 219 ALR 714. 

Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1. 

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. 

ASIC v Hellicar & Ors [2012] HCA17. 

Website

Thomson reuters. Duties and powers, (2014) < https://legal.thomsonreuters.com.au/browse/law-annuals/pdf/corporations-legislation-2014-key-section-annotation-example-thomson-reuters.pdf>.

Cerlin Mulhorn, Directors Duties and ASIC v Adler, (2002). < https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/June_2002,_Lawyers_Education_Channel,_Directors_Duties_and_ASIC_v_Adler.html>.

ASIC, Directors - What are my duties as a director?, <https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/#1>. 

Cartr Newell, Consideration of Corporations Act - Fiduciary duties, duties of fidelity, and account for profits, (2000) < https://www.carternewell.com/page/Publications/Archive/Consideration_of_Corporations_Act_-_Fiduciary_duties_duties_of_fidelity_and_account_for_profits/>.