Understanding Australian Company Law: Director Duties And Penalties

Director Duties

The Corporations Act 2001 provides for the duties that a director of a company must discharge. The duties are enumerated in section 180, 181, 182 and 183 of the Corporations Act.

According to section 180(1) of the Corporations Act, a director must exercise its powers and discharge its duties conferred upon him by virtue of being a director with proper care and diligence. The care and diligence will imply the amount of care and diligence that a reasonable person would maintain under similar circumstances. The same can be supported with the precedent ASIC v. Rich.

According to section 181, the director of a company is under an obligation to exercise his duties and powers in good faith, which will ensure the best interest of the company. The actions of the directors must also be for a proper purpose.

According to section 182 of the Corporations Act, a director is prohibited to utilize their position in the company to serve their personal interest. The actions of a director should not be detrimental to the company. The same can be illustrated with the case of ASIC v. Hellicar.

According to section 183 of the Corporations Act, a director is restricted to make use of the information, which became accessible to him by virtue of his position in the company to serve personal interest resulting in detriment to the company. The same rule has been discussed in the case of ASIC v. Vizard.

The directors of a company are under an obligation to abide by the duties conferred upon him by the Corporations Act. The violation of any of the provisions regarding the duties of the director will incur a civil penalty for the directors in compliance with section 1317E of the Corporations Act. The same can be illustrated with the case of ASIC v. Lindberg. In the event of the violation of the duties being reckless and reflects intentional dishonesty, the directors will be rendered liable under section 184 of the Corporations Act. Section 184 provides for criminal sanctions. In the case of AISC v Flugge & Anor, an incurrence of criminal penalty by the director was sentenced with 10years of imprisonment.

The directors involved in such a breach of duty will also attract the section 206B of the Corporations Act. This section contains provisions relating to automatic disqualification of the directors in the event of conviction for the breach of duties. Any director who will be convicted for any offence under the Corporations Act will be rendered disqualified automatically from carrying out position as a director. He will be disqualified from being a director. Section 206C provides for the suspension of the director alleged to have breached his duties as a director.

However, the Corporations Act provides for certain defences that are available to the directors alleged to have breached his duties as a director under section 180(2) and section 1317S. Section 180(2) of the Corporation Act contains the business judgement rule, which states that if the director alleged to have breached his duties as a director can prove that he has acted in good faith for a proper purpose, such actions have not incurred any benefit to him and he had a reasonable belief of the action to be appropriate, then he may take resort to this section for defence. Section 1317S of the Corporations Act confers a discretionary power to the court to excuse the director of his breach of duties if the court is satisfied that the director has exercised his powers honestly and it would result in injustice if the director is not excused.

Penalties for Breach of Director Duties

In the case of ASIC v. Cassimatis, the directors of the company, Mr. and Mrs. Cassimatis were held liable for the breach of duties conferred upon them for being directors of a company under section 180(1) and were delivered with a sentence against them.

In R v. Hodgson, the court held the directors liable for the breach of duties conferred upon them for being a director in a reckless manner and convicted them with a criminal penalty delivering a five and a half years of imprisonment.

In the case of ASIC v Healey & Ors, the court held the directors liable for violating the their duties as a director relating to the exercise of reasonable care and skill.

In the case of ASIC v. Adler, the court held the director of the company to be in breach of their duties as a director under section 183 and have awarded the director with a civil penalty.

In the case of Regal (Hastings) Ltd. v. Gulliver, the court held that the directors should refrain from appropriating the assets and wealth of the company for serving personal benefit even if the same results in the best interest of the company.

In the present case, Lilian is the director of the All Mine Pty Ltd, which renders him liable to abide by the duties conferred upon him under section 180(1), 181, 182 and 183 of the Corporations Act. In failure to comply with any of the duties mentioned in these sections, the director will be held liable to penalty under sections 1317E and 180(2).

Lilian has failed exercise its powers and discharge its duties conferred upon him by virtue of being a director with proper care and diligence. He failed to attend every meeting of the All Mine Pty Ltd, which he was obligated to attend. The director was unaware of the fact that the company was approaching insolvency. This was a failure on the part of the director in exercising his duties relating to care and diligence. Moreover, without being aware of the financial condition of the company and without making any effort to have knowledge about the same, Lilian has entered into a contract with Gumpta for the supply of much needed computers for $100,000. These will amount to the breach of the duties provided under section 180(1) and 181 of the Corporations Act. The same can be illustrated with the case of ASIC v. Cassimaits.

Again, Gumpta, being the managing director of the Greedyas Pty Ltd is rendered with the liability to abide by the duties conferred upon him under section 180(1), 181, 182 and 183 of the Corporations Act. In failure to comply with any of the duties mentioned in these sections, the director will be held liable to penalty under sections 1317S and 180(2).

Gumpta has failed exercise its powers and discharge its duties conferred upon him by virtue of being a director with proper care and diligence. This has made him liable for breach of section 180(1). He failed to exercise proper care in entering into a contract with the All Mine Pty Ltd being aware of their chances of being insolvent.

Gumpta has failed to exercise his duties and powers in good faith, which will ensure the best interest of the company. Gumpta had knowledge of the approaching insolvency of the All Mine Pty Ltd but still he has chosen to enter into a contract with the same supplying computers. This shows a breach of section 181.

Gumpta has violated his duty to refrain from utilising his position in the company to serve personal interest causing detriment to the company. He has entered into a contract with the All Mine Pty Ltd in which Lilian is the director. Lilian is an old friend of Gumpta and he had knowledge about the approaching insolvency of the company. After being aware of all the facts Gumpta has entered into a contract with the same to meet his sales target, which has landed the company in trouble. Therefore, it can be stated that Gumpta has violated section 182 of the Corporations Act.

Gumpta is restricted to make use of the information, which became accessible to him by virtue of his position in the company to serve personal interest resulting in detriment to the company. Gumpta disclosed the confidential information of a proposed merger to his old friend Lilian and suggested to buy the shares of the same. The said merger has proved to be beneficial for both Lilian and Gumpta, which was due the use of confidential information leaked by Gumpta. This was a breach of section 183 of the Corporations Act. The same can be illustrated with the case of ASIC v. Adler.

It is evident from the above discussion that Lilian and Gumpta have violated their duties as directors and have breached section 180(1), 181, 182 and 183 of the Corporations Act. This will have the effect of application of section 1317E, section 206B and section 206C. Moreover, if the court is of the opinion that the alleged directors have breached their duties in a reckless manner, the court may award them with criminal sanctions.

Conclusion

Lilian and Gumpta have breached their duties as directors. They will be held liable for the same and will incur civil penalty.

Reference

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

ASIC v Cassimatis (No 9) [2018] FCA 385

ASIC v Flugge & Anor [2016] VSC 779

ASIC v Healey & Ors [2001] FCA 717

ASIC v Hellicar [2012] HCA 17

ASIC v Rich [2009] NSWSC 1229, (2009) 236 FLR 1; (2009) 75 ACSR 1

ASIC v Vizard [2005] FCA 1037; 145 FCR 57; 219 ALR 714; 54 ACSR 394

ASIC v. Lindberg [2012] VSC 332; 91 ACSR 640

v. Hodgson, [1998] 2 S.C.R. 449

Regal (Hastings) Ltd v Gulliver [1942] UKHL

The Corporations Act 2001