Question

Assume Tom, Duck and Harry are appointed directors of the company, Masks R Us Pty Ltd. The company needs a ware-house to keep its stock.  During the process of incorporation, all three of them sold the property they co-owned to the company for $1 million.  That property, which the company now uses as a ware-house, had a market value of $500,000.  

Explain whether Tom, Duck and Harry have breached any duties under the Corporations Act 2001 (Cth)?  Use a relevant precedent to support your answer.

Answer 1

Answer:

The duties imposed on corporation directors by the Corporations Act 2001 (Cth) are;

• Duty to disclose interest in proposed transaction.
• Duty to act in good faith and proper purpose.
• Avoid improper use of position.
• Avoid improper use of information

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Explanations:

The Corporations Act 2001 (Cth) imposes a number of additional fiduciary duties on directors of a corporation. The duties are;

• Duty to to disclose interest in proposed transaction. Section 191 requires directors of a company to disclose material personal interest in proposed transactions or arrangement. The director must disclose to the other directors any material interests in any proposed transactions to avoid conflicts. In Aberdeen Rly Ltd v Blaike Brothers it was held that a director is not allowed to enter into any arrangement that may raise conflict of interest.
• Duty to actin good faith and for proper purpose.Section 181 of the act imposes a civil duty on directors to exercise their powers and discharge their duties in good faith, in the best interest of the corporation and for a proper purpose. They should not use their power for self interest or third party interests to the detriment of the company interests. In Re Smith & Fawcett Ltd the directors are bound to exercise their power in a way that they consider in the best interest of the company
• Avoid improper use of position. Section 183 of the Act provides an obligation that prohibits a director from making improper use of their position to gain advantage to the detriment of the company.Ben is under obligation to use his position properly and must not use his position.
• Avoid improper use of information.Section 183 of the Act provides an obligation that prohibits a director from making improper use of information gained from company activities to gain advantage to the detriment of the company.

The directors are in breach of his fiduciary duties by acting without good faith and using their position to earn an illegal profit by inflating the value of the warehouse.They fail to act in good faith for the benefit of the corporation and gain an undue and illegal profit by selling the warehouse at an inflated price to the company. Tom, Dikk and Harry fail there duty to avoid improper use of their positions. They used their position to earn an illegal profit.

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The remedies available are shareholders are ;

• The directors may be required to compensate the shareholders for the secret profits made

• The directors may also be disqualified from holding a director position

• Additionally, Under the Corporations Act, the directors may be fined up to $ 200,000 for the breach of statutory duties

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References

Bird, H., & Gilligan, G. (2016). Deterring corporate wrongdoing: Penalties, financial services misconduct and the Corporations Act 2001 (Cth). Company and Securities Law Journal, 34(5), 332-359.