Directors' Accountability For Breaching Fiduciary Duty: An Essay.

Provisions of the Corporations Act 2001 related to director's duty

Whether Jason, Bob and Derrick being the director of Great-Makes Ltd. have breached the provision of the director’s duty as provided in Corporations Act 2001?

Certain provisions of the Corporations Act, such as sections 180 to 183, specify the responsibilities of the company's directors. According to section 180 of the Corporations Act 2001, it is the responsibility of a corporation's director or officer to use their authorities and fulfil their obligations with due care and caution to ensure that the company's interests are not jeopardised as a result of their choices or actions. In the instance of ASIC v Vocation Limited, this was decided. In this case, the court determined that the directors failed to act following their duty of care and diligence. Section 181 also outlines the requirements for directors to act in good faith and with a proper purpose for the beneficial interest of the corporation. In addition, as per section 182, any director or officer of the corporation should not improperly exploit their position for the personal benefit which could be damaging to the corporation's interests. Furthermore, as stated in section 183, the organisation’s directors are also responsible for maintaining the confidentiality of the secret business informant to protect the company's interests. However, if any of the directors or officers perform their work by going against the above stated provisions related to director duties in the Corporations Act, will be considered liable for the violation of breach of duty provisions and it will subject them to civil liability under the Corporations Act.

By applying the above-mentioned provisions of director duties to Jason, it can be concluded that Jason, as a director of Great-Makes Ltd., has violated the Corporations Act's section 180. As detailed in the case of ASIC v Vocation Limited, he breached his responsibility to perform his work with complete care and diligence since he invested company funds in U.S. securities without conducting a thorough investigation, resulting in a loss to the company because the securities were worthless. Further, he also violated section 182 by abusing his position, such as persuading the other directors to provide $10 million and then utilising $2 million of that for personal gain by investing in the company in which his family had a stake. Jason's action also demonstrates that he did not operate in good faith and solely for his advantage, which is also in violation of section 181.

Furthermore, by applying the terms of the Corporations Act 2001 to Bob and Derrick, it is clear that they have also breached the provisions of the mentioned act regarding breach of duty. First, they violated section 181 because they failed to perform their duties with due care and diligence, as they provided $10 million to Jason, another director of the company, without taking any security or conducting necessary investigations, and they also concealed the information from the company's investment committee, resulting in further losses. And this action by both of them makes them culpable for violating section 181 since it shows that they are unconcerned with the company's interests; if they were, they would not have operated in such a manner. Not only that but Bob and Derrick are also accountable for violating Section 182 of the Corporations Act since they used their position to provide such a large sum of money to Jason because they knew they could do the same and no one would question them.

Application of the provisions to Jason, Bob, and Derrick

Conclusion

As a result of the discussion, it can be determined that all three directors of Great-Makes Ltd. are accountable for breaching their director duties and that ASIC, as the regulating authority over the company, can impose civil penalties on these directors.

Whether Jason had worked against the provisions of the Corporations Act regarding the use of the funds of the company?

According to the applicable sections of the Corporations Act 2001, the company's directors must guarantee that the company's money is used properly and not for personal gain, which could result in a loss for the company in the future. If the directors fail to meet this commitment, they are committing a breach of fiduciary duty and participating in behaviour that is oppressive to shareholders' rights. In Advance Bank Australia Ltd v FAI Insurances Ltd, the provision of director fiduciary obligation was decided. The court ruled in this case that directors must use their authority to spend business funds or money for legitimate objectives and only for the objective of the corporation as a whole. Further case law recognised that violating this fiduciary duty to the organisation by misusing corporate funds and assets might be considered oppression of a minority shareholder.   

However, if any director is held liable for a breach of fiduciary responsibility, ASIC, the company's regulatory authority, has the jurisdiction to take action against such directors, with a financial penalty of up to $200000 being levied if the infringement committed by the directors is substantial. Here, shareholders have the right to file a claim for oppression against the company's directors because if the directors do not use the funds of the business properly that were invested by the shareholders in the business and perform functions that are contrary to their interests, they can file a claim for oppression as defined under section 232 of the Corporations Act to the court and the court can award them compensation.

Here action for the breach of fiduciary duty by the directors will be taken against the director of the company and not against the company because the company has separate legal entity status from its members hence it is not liable for its member’s actions.

By applying the appropriate provisions to the facts of the case, it is determined that Jason, the director of Great-Makes Ltd., is accountable for the violation of fiduciary responsibility. Being the company's director, it was his fiduciary duty to spend the company's funds properly and not for his gain, yet he did exactly the reverse. He invested $5 million in US company securities without conducting adequate due diligence, resulting in a loss to the business due to the US stocks' failure to perform. He also put $2 million into a private corporation in which his family had a stake. So, as determined in the case of Advance Bank Australia Ltd v FAI Insurances Ltd, he did not operate in the company's best interests but kept his interests in mind. As a result, all of the negative outcomes in the business are the result of Jason's failure to fulfil his fiduciary obligations, which gave shareholders and the ASX the ability to take action against the company's directors for breaching their duties.

Breach of fiduciary duty by directors and its consequences

Conclusion

Following the discussion, it may be established that Jason, as a director of Great-Makes Ltd., is responsible under the Corporations Act for violation of fiduciary duties.

Issue

What defences are available to the directors of the company on the breach of director duties provisions?

According to the applicable provisions of the Corporations Act 2001 relating to directors' duties, it is the directors' responsibility to perform their duties and use their powers as provided to them in the stated act with complete care and diligence to ensure that the decisions they make are reasonably appropriate and, in the corporation’s, best interests. It is the responsibility of the company's directors to guarantee that any choices made by them about business operations have a suitable purpose and are not damaging to the corporation's interests. Apart from that, company directors have some fiduciary responsibilities, which are primarily related to the corporation's funds, and require the directors to spend the funds for a proper purpose while also considering the firm's best interests. This was decided in the instance of ASIC v Plymin, when the appropriate court held that it is the director's responsibility to prevent the company from incurring any excessive debt. However, if any of the directors is discovered in violation of these requirements, it is regarded as a breach of their duty, and such directors are subject to civil liability.

However, several defences are open to the directors in this case, including the use of a delegated power, judgmental rule, and reliance on others. If responsibility for breach of duty arises, the directors must demonstrate that the decision was made in good faith after assessing whether the action is appropriate for the business's best interests. If the choice was reasonably believed to be beneficial for the corporation business, the defence of the judgmental rule can be considered. The second defence that directors might employ in the case of a violation of director's duty is the defence of reliance on others, in which the blamed director must show that he or she operated based on the advice of a third party and that the act was entirely the result of that advice. Finally, there is delegated power as a last line of defence. To be eligible for this defence, the director must show that the decision and judgement were made by someone else. And this authority to take all the important business decision have been provided to third parson after considering the trustworthiness and competence of such person.

By applying the applicable provisions regarding the given matter, it is stated that the board of directors of Jon Fly Travels Ltd Pty Ltd ('Jon Fly') are liable for breach of the director's duty in providing gifts to business customers in the financially weak financial situation of the company, and in providing the business premises on lease and offering for sale at less than market price because that was not beneficial to the business's interest. And the board of directors of Jon Fly cannot use the above-mentioned defence of delegated power because the performance of company activities was entirely in the hands of the directors, who had not assigned this authority to any third person. Furthermore, because their choice was not based on the advice of any third person, the defence of dependence on others is equally ineffective. Furthermore, the last defence of the judgemental rule is unavailable to the directors of John Fly because the decision they made reflects that it is not in the best interests of the company, and they have not properly considered the company's best interests, because, in a loss situation, it makes no sense to give customers gifts or lease business property for less than market value. As discussed in the case of ASIC v Plymin, the directors incurred excessive debt on the company's part.

Conclusion

Hence after all the discussion, it can be inferred that all of the directors of John Fly are accountable for violating the Corporations Act's director duty provisions. According to the appropriate company law provisions, they are also not accountable for any of the defences.

References

"Corporations Act 2001", Legislation.Gov.Au (Webpage, 2022) <https://www.legislation.gov.au/Details/C2019C00216>

ASIC v Vocation Limited [2019] FCA 807

Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 12 ACLR 118

ASIC v Plymin, 46 ACSR 126; 21 ACLC 700

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