Question

Fenner Fashions Ltd designs fashion items, including clothing, accessories and cosmetics. Fenner Fashions has three directors on its Board, and these directors are also directors of a subsidiary company of Fenner Fashions called Mean Beanies Pty Ltd (Mean Beanies). The three directors are majority shareholders in both Fenner Fashions and Mean Beanies.

During August of 2019, Mean Beanies contracts with another company, No Sale Pty Ltd, for the purchase of goods to the value of $250,000. In due course, No Sale Pty Ltd fails to deliver the goods to Mean Beanies, and the company does not refund any money to Mean Beanies.

The three directors of Mean Beanies decide not to commence legal action to recover the $250,000 from No Sale Pty Ltd. They simply advise: “it would not be an advisable course of action”. This decision results in a major loss for Mean Beanies that also has a serious financial effect on Fenner Fashions.

The minority members of both Fenner Fashions and Mean Beanies are concerned with the way the company is being run by the 3 directors, and so they seek legal advice.

Question 2: Answer both A and B

A). Outline the liability of the directors in terms of their duties under the Corporations Act 2001 (Cth). Have the directors breached their duties to either Fenner Fashions or Mean Beanies? .

B). Identity the possible remedies that the minority members could seek against Fenner Fashions and Mean Beanies. Consider whether the minority members are likely to be successful .

Answer 1

A)

As a director of a company, you owe duties to the company under the Corporations Act 2001 and at law, such as the duty to act in the best interests of the company and the duty to act with care and diligence. A breach of those duties will render you personally liable to the company for any loss suffered by the company.

However, you can also be personally liable as a director under a variety of statutes, including if you are ‘involved’ in a contravention by your company under those laws. This is commonly known as ‘accessorial’ liability and whilst the reach of accessorial liability varies, it generally covers instances where you have been ‘involved’ in a contravention by:

• aiding, abetting, counseling or procuring the contravention;
• inducing the contravention, including by threats, promises or otherwise;
• being in any way, including by act or omission, directly or indirectly, knowingly concerned in or a party to the contravention; or
• Conspiring with others to effect the contravention.

Directors may be liable as an accessory to their company’s contravention of the Corporations Act under section 79 of the Act if they were ‘involved’ in the contravention.

An example of this is the well-known case of Asic v Adler and 4 Ors [2002] NSWSC 171, where the Supreme Court held that three directors of the collapsed insurance company HIH Insurance Limited (HIH), were ‘involved’ in HIH and its wholly owned subsidiary’s contraventions of section 208 (related party financial benefits without shareholder approval) and the subsidiary’s contravention of s260A (financial assistance for the purchase of shares) of the Corporations Act.

As decribe in Sec. 197 also Directors are liable for debts and other obligations incurred by them as trustee, they would liable to discharge the whole or a part of a liability incurred by them to M/s Mean Beanies.

B)

Section 234 of the Act sets out who may apply for an order under section 232 of the Act. Those people are:

· a member of the company, even in circumstances where the application relates to an act or omission that is against the member, it may also relate to an act or omission that lies against another member in their capacity as a member;

· a person who has been removed from the register of members because of a selective reduction;

· a person who has ceased to be a member of the company, if the application relates to the circumstance in which they ceased to be a member;

· a person to whom a share in the company has been transmitted by will or by operation of law;

· a person whom ASIC thinks is appropriate, having regard to investigations it is conducting or has conducted into the company’s affairs or matters connected with the company’s affairs.

In circumstances where oppressive or unfair conduct can be established, then the Court, in exercising its discretion, may grant a remedy appropriate to the circumstances pursuant to section 233 of the Act.

The objects of section 233 of the Act are to compensate the injured party or parties and, of course, bring the conduct that is causing the oppression or unfair conduct to an end.

Some examples of the orders that may be appropriate for a court to make are as follows:

· the company be wound up;

· the constitution of the company be modified or repealed;

· regulating the conduct of the company’s affair in future;

· restraining a person from engaging in specified conduct or from doing a specified act;

· the purchase of shares of any member by other members or a person to whom a share has been transmitted by Will or by operation of law; or

· appointing a receiver or a receiver and manager.

As per above said discussions it is evident that minority members can succeed in their case against the majority members.