Question

Florentia (F) is the managing director of XO Pty Ltd, a profitable company that runs a dance school (mainly ballroom dancing style) and that specialises in buying and selling dance clothes for women - mainly between the ages of 45-65 years. XO has a board of directors that includes 5 majority shareholders and F chairs the monthly meetings. Recently, F was having lunch with a friend (Luis) who has no connection whatsoever with XO although F would like him to join the dance school as she wants to attract more male dance partners to attend. At lunch, Luis asks F if her company would be interested in helping him to market a new organic deodorant that he has invented (made from ingredients extracted from mango skin). Luis claims his new product is primarily for young men and has the advantage of helping them think they are more attractive when they use this product. F tells Luis that her company would not be interested because it sells women’s dance clothing and runs a dance studio that is mainly for mature women. However, she offers to help him by setting up a new company called Amazing Mango Products Pty Ltd (AMP). F and Luis become its directors and members. As F contributed most of the setup capital, she became its majority member. AMP is an immediate success and quickly makes considerable profit. At a board meeting of XO nine months later, F proposes that XO enter into a long-term contract with AMP to buy supplies of organic mango-skin deodorant for re-sale. She proposes that many of the women who attend dance school might try it and then promote it on the internet. The board agrees and F negotiates with the board to receive a small commission on every sale as she found this business opportunity for them. XO then makes large profits from selling the organic deodorant. XO then learns informally that F is actually the majority member in AMP. Directors are very annoyed with F and want to know if anything can be done. Has F breached any of her director’s duties? If so, what remedies should XO seek?

Answer 1

Has F breached any of her director’s duties?

As a director of XO Pty Ltd., Florentia has following duties and responsibilities:

1. Act within powers
2. Exercise reasonable skill, care and diligence
3. Promote the company’s success
4. Exercise independent judgement
5. Not to accept a benefit from third parties
6. Avoid conflicts of interest
7. Disclose any interest in a proposed transaction or arrangement
8. Maintain records and preparation of financial statements each financial period

Apart from the above, the directors of a company are expected to be bound by fiduciary duty towards the company, its shareholders and all the other stakeholders. Fiduciary duties signify acting in good faith and having the best interests of the company in each of their acts. It also suggests that directors show loyalty and honesty towards the company.

In given case, F has breached disclosure of interest in a proposed arrangement and avoid conflict of interest. F failed to inform / disclose to the Board that she is majority stakeholder in AMP. This action defeats disclosure duty. Further, F negociated a commision from XO on each sale made for AMP as she sourced this opportunity. This creates a conflict of interest and defeats avoid conflicts of interest duty.

F also has failed to act in a fiduciary position with XO. She did not have best interests of XO in mind when she failed to disclose her involvement with AMP. This act negates the loyalty and trust that F would have been expected to hold.

If so, what remedies should XO seek?

Following are the remedies available with the Board in the case of breach of duties explained above:

1. Dismissal from XO Board, where she can be asked to step down from XO's Board
2. Claim for the damages for the financial loss incurred in terms of commission she pocketed from XO and other damages
3. Rendering the long term contract with AMP as null and void as the same was not in good faith
4. Criminal fine can be imposed or criminal proceedings can be initiated against F,if the law of the country of incorporation allow to do so
5. F can be disqualified from being the director on intimation of her fraudulent behaviour to the Registrar of companies in the country