Question

The Board of Dental Assist Pty. Ltd. has five directors: three are executive and two non-executive. Dental Assist provides an employment agency for dental nurses. The Board recently approved the purchase of a complex computer system from Singsong Computers Pty. Ltd., on the recommendation of Sharif Omar, one of the non-executive directors.
A minority shareholder of Dental Assist, Pam Yates, is aware that Sharif and the other non-executive director, Jing Jao, are the shareholders and directors of Singsong Computers. Pam believes that an equivalent quality computer system could have been purchased for a fifth of the cost.
Pam Yates has another concern. She believes that one of the executive directors, John Stone, is approaching the dental nurses who have registered with Dental Assist to offer them training courses with ‘ProTrain’, a partnership he conducts with his spouse. Pam Yates considers that Dental Assist should be diversifying so that it provides this training.
Required:
a)   Advise whether any of the directors breached sections 181-4 of the Corporations Act 2001. Consider the position of each director. and
b)   Advise Pam Yates, whether she has any rights as a shareholder to take legal action and if so, under which section or sections of the Corporations Act 2001
In your response you must give reasons and refer to sections of the Corporations Act 2001 (Cth) and cases where relevant.

Answer 1

Directors owe duties under the general law and statute. The classification of the duty can be important because different remedies are available depending upon the genesis of the duty. Tthe relationship between director and company is a fiduciary relationship, and a high standard of loyalty is set. The positive duties of loyalty include the duties to act in good faith and in the best interests of the company, to act for proper corporate purposes, to give adequate consideration to matters for decision, and to keep discretions unfettered. The negative aspects of the duty of loyalty are those that require directors to avoid conflicts of interest of various kinds. These duties are reinforced by sections 182 and 183 of the Corporations Act 2001.

Under the common law, directors owe a duty of care to their company. This is reinforced by section 180(1) of the Corporations Act 2001.

The statutory business judgment rule provides that a director, or other officer of a corporation, who makes a business judgment is taken to have met the requirements of section 180(1), and their equivalent duties at common law and in equity, in respect of the judgment, if they

a) make the judgment in good faith for a proper purpose;

b) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

c) rationally believe that the judgment is in the best interests of the corporation

d) do not have a material personal interest in the subject matter of the judgment

Directors are subject to strict duties at law but this is necessary to protect shareholders from the inherent risks that are present when a person entrusts their property or affairs to another. They are prohibited from improperly using their position to gain an advantage for themselves or someone else or to cause detriment to the corporation and are prohibited from using information obtained as a consequence of their role with the company to gain an advantage for themselves or someone else or to cause detriment to the corporation.

Directors have a duty to make full and frank disclosure of information within their knowledge to enable shareholders to make properly informed judgments on any matter

Conclusion

So, according the provisions listed above non executive directors have to disclose the interest in SingSong Computers Pvt Ltd and in the event of non disclosure, they may found guilty and may attract penalty as listed above.

Also, John Stones will not be guilty, if she discharge duties as listed below:

a) make the judgment in good faith for a proper purpose;

b) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

c) rationally believe that the judgment is in the best interests of the corporation

d) do not have a material personal interest in the subject matter of the judgment.

However, if transaction is in contravention of above provisions then Pam Yates has a right to take criminal actions as mentioned in Section 184. The Corporations Act 2001 also sets out criminal offences where a director or other officer acts recklessly or is intentionally dishonest in their failure to exercise their powers and discharge their duties in good faith and in the best interests of the company or for a proper purpose. Similarly, criminal offences are created where a person recklessly or intentionally dishonestly misuses their position or information they have gained through their position with the compan