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BLO5540 Business Law

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BLO5540 Business Law

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Course Code: BLO5540
University: Victoria University

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Country: Australia


1.  (a)Advise whether any of the persons mentioned above have breached the directors’ duties regime in the Corporations Act 2001(Cth). Please refer to relevant case law authorities in support of your discussion. (b)Advise if any defences are available to any of the above persons in the circumstances. (c)Advise what penalties (under the Corporations Act 2001 (Cth)) and common law remedies are available if a breach of directors’ duties is found.
2. Advise Caitlin and Sarah whether any member remedies are available under the Corporations Act 2001(Cth). Please refer to relevant case authorities in support of your discussion.

The issue is to determine whether any of the Directors have breached their duty as Director under the Corporations Act 200.
Section 180 of the Corporations Act 2001 lays down the care, duties and diligent Directors need to carry out in Australia. Subsection 1 of this section states that a director or an officer must carry out his duties with utmost diligence and care, like a man of reasonable prudence would. While the subsection 2 of the same section lays down that the directors who are under the obligation to take business judgments or decisions:

must make them in good faith for a proper purpose;
should not intend to have personal gains that would influence their judgement;
should inform the others about a particular business decision that needs to be taken;
the directors must believe that such business judgement or decision is for the best possible interest of the company.

Section 181 of the Act clearly lays down that the directors or any officers must do their duties and carry out their powers in good faith for the best possible interest of the corporation and such duty must serves a proper purpose. Section 182 of this Act states that a director, officer or a secretary of a corporation should not strive to make use for their positions improperly to:

have an advantage for themselves or for others; or
tarnish the reputation of the company.

Section 191 (1) of the Act strictly directs a director to notify other directors about his personal interest when there is a conflicting idea concerning the company and its best interest.
In the given case study, there is a gross violation of duty by Dion in the capacity of an Executive Director (under section 191(1) of CA 2001) of Food Works Ltd as he suppressed the facts about doing personal business with Organica Ltd through his own solely owned company named Lifestyle Today Pty, which is giving a tough competition to Food Works Ltd. It is the first and foremost principle in a business that the members should not indulge into a competitive business. Therefore Dion’s involving with Organica is unjust and unfair.
Additionally, Dion, Larry and Vance have somewhat breached their duty as directors and can be held responsible for pushing the company to its dead end (section 181 of CA 2001). However, in this matter there are legal provisions under CA 2001 which would defend them for their actions taken toward the best interest of the company.
Dion can be sued by the other directors for his misconduct and breach of duty for suppressing such vital information from the other directors.  
The issue is to find out whether the Director who has breach director’s duty have a defence to plead innocence.
Section 180 (2) of the Corporations Act 2001, lays down the Business Judgement Rule, which states that a director or an officer is at liberty to take up any action for the best interest of the corporation while making a business judgement. They must make such business judgments in the following manner:

must make them in good faith for pursuing an appropriate purpose;
should not intend to have personal interest or gains or interest that might influence their business judgement;
should inform the others and discuss among themselves about a particular business decision that needs to be taken;
The directors must rationally believe that such business judgement or decision is for the best possible interest of the corporation.

Section 1317S of the Act, additionally, relieves the liabilities of the directors for infringing the civil penalty provisions. If the alleged person proves that he has acted honestly for the best interest of the company and all his actions are towards the betterment of the company’s present situation, then in such case the person is excused for the infringement.
Section 1318 of CA 2001, grants power to the court to relieve the person who has allegedly violated his duties under the Act, for a reason cited as the best possible business judgement taken at the moment.
However, the court runs the test of reasonable degree of ‘care and diligence’ laid down under section 180 (1) of the CA.
Australian Securities and Investments Commission v Rich is a landmark case that suggests that the directors have a defence under the law to prove innocence. They have the defence to mark their actions for the best interest of the company.
Dion would be prosecuted for his act of suppression of information about his business deal with Organica Ltd. as he violated his director’s duties under section 191 of CA 2001. On the other hand, in the matter of pushing the company towards insolvency, Dion, Larry and Vance has suitable defences available under section 180 (2), 1317S and 1318 of the corporations Act 2001 to protect themselves from any civil proceedings.
Therefore it is clear that Dion has no remedy left with him for suppressing material facts about the company and for competing with the company. While, Dion along with Larry and Vance can plead innocence for carrying out the vigorous promotion and marketing campaigns for the best interest of the company that eventually bankrupted it. 
The penalties for the breach of Director’s duty under Common Law and the Corporations Act 2001 need to be determined.
Section 184 of the Corporation Act states that breach of duties by a director may result in Criminal Offence. Section 184 (1) says that a director or officer is said to commit an offence when they are dishonest on purpose, and when they do not discharge their duties in good faith for the best possible interest of the company and for an appropriate purpose. Section 184 (2) lays down that it is an offence on the part of the directors to use the confidential information received on the course of their business capacities, dishonestly:

intending to gain upper hand or advantage for themselves or for another person, or to disrepute the company; or
Recklessly derive profit or advantage for themselves or for another; or to do something detrimental to the company.

Under Section 191 (1A), the director who has breached his duties faces strict liabilities and is charged under section 6.1 of the Criminal Code.
In addition to, Section 1317 E of the Act lays down all the penalties that a director or an officer is liable to for breaking the laws made for them to follow in terms of Corporations.
Dion would be held liable for suppressing the vital information regarding making a business transaction with Organica Ltd, which could have been arranged with Food Works Ltd as it would have boosted Food Works Ltd’s financial condition. However, Dion decided to make use of the opportunity to visit Europe that he received through Food Works Ltd and divert such opportunity towards his personal gain. Remedies like restitution of profits, injunction, rescission of contract and damages can be awarded by the court.
He could be sued by Food Works Ltd on behalf of the other directors for violating his duties as a director; the court may take away his position as a director and grant several remedies to the aggrieved party. 
The issue is to determine whether Caitlin and Sarah have any remedies available under the Corporations Act 2001.
Section 236(1) and 237(2) of the Corporations Act 2001 discusses about the proceedings that are instituted on behalf of a company. Section 236 (1) includes the instances when a person may apply for bringing a proceeding on behalf of a company, if such person is:

a member or anyone who has the capacity to be a member of such corporation or of a related corporation;
is or has been the company’s officer.

Section 237 (2) states that the court should grant such applications if it has reasons to believe that:

the corporation itself would not bring the proceedings;
the person or corporation so applying is acting in good faith;
There lies a serious question of doubt if the petitioner is applying for leave for bringing in the proceedings.

The traditional rule of the liability of the directors toward the shareholders would lay down as negligible as stated in the case of Foss v Harbottle. It stated that the directors only hold duty and liability towards the company and not towards the shareholders, individually or collectively. It had two aspects to it: (a) the appropriate plaintiff aspect; (b) indoor management aspect. The plaintiff aspect made the basis or foundation of the rule as it is the application to the Derivative Action. However, Wigram V.C. had laid down certain exceptions to the rule which was entirely covered in Australia.
However, in the case of Advent Investors Pty Ltd v. Goldhirsh, the convention rule of directors not having a liability towards minority shareholders was upheld. It was observed that the directors, not have duties towards the company, they bear liabilities towards shareholders. Failure to carry out such duties would attract legal proceedings, which is specially termed as Statutory Derivative Action.
Caitlin and Sarah could institute the legal proceeding against Ben and David under section 236(1) and 237(2) of CA, as the directors not only ignored their views on a vital decision regarding the growth and development of the Company; additionally the directors suppressed fact about holding a board meeting and altering certain norms of the company without even letting them know about it.
Therefore, Caitlin and Sarah, the shareholders can bring Statutory Derivative Action against Ben and David, the directors for breaching their duties as directors toward the shareholders. 
Articles /Books/Journals
Keay, Andrew. “Assessing and rethinking the statutory scheme for derivative actions under the Companies Act 2006.” (2016) Journal of Corporate Law Studies 16.1: 39-68
Case Laws
Advent Investors Pty Ltd v. Goldhirsh [2001] 37 ACSR 529
Australian Securities and Investments Commission v Rich [2009] 236 FLR 1
Foss v Harbottle [1843] 2 Hare 461
Corporations Act 2001(Cth)
Criminal Code Act 1995
Internet resources
Corporations Act 2001 (2018) Legislation.gov.au v
Criminal Code Act 1995 (2018) Legislation.gov.au

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