Question

Polyester is a director of Style Pty limited involved in making women's clothing Situation 1. She arranges with the company bank to transfer an amount of $65000 from the company account into a personal bank account held by her in her own name. She uses the funds to finalise some outstanding personal debts. Situation 2. As a director she receives information that the company is in a serious financial position. She arranges to transfer a larger amount of the assets of the company over a new proprietary company that she formed with the intention of caring on the same business. Situation 3. Contrary to a resolution of the Board and notwithstanding established business practice that limits credit to $20,000 she allows a trade debtor (who has a history of bad debts) to exceed its credit limits by $25,000. The debtor fails to pay the outstanding amount of $45,000. Can she rely on the business judgement rule in this situation? Required: Has she breached any duties under the Corporation Act in the three (3) situations listed above?

Answer 1

According to the Corporations Act, Directors of the entites have certain duties to follow as follows:

1) They have to act in due care and deligence.

2) Act in good faith and proper purpose.

3) Company's information should not be used for personal purpose, it should be in the interest of the company.

4)Should not misuse his position

5) Disclose the interests

Business Judgement Rule: According to the Business Judgement Rule, the director of the entity has to act upon due care and in good faith, the actions to be taken in the interest of the company or the shareholders of the company.

Situation 1: According to the Corporation Act, the directors of the entities should not use their position for improper purpose. In this situation, Polyster, the director of Style Pty limited has transfered an amount of $65,000 which tells us that he has breached his duties by using the company's money for personal debt.

Situation 2: According to the corporation Act, the duties of the director are to act in good faith, duty with care and deligence, not to trade at the time of insolvent, not to use the information and position for improper purpose, act in interest of the company. In the given situation, polyster knows about the financial condition of the company and have transfered the assets to the another proprietory company which is not in the interests of the company . Thus he has breached the duties as a director according to the company act.

In situation 3 It is the duty of the director to act deligently and with due care in the interests of the company. According the rules of the company , the crdit limit is only upto $20,000 but the director allowed $45,000 which is more than the limit by $25,000. The actions is not taken in the interest of the company but taken in personal interests. He cannot use the Business judgement rule in this situation. It is said that she has breached her duties as a director of the company and liable for the breach of statutory duty.