Breach Of Directors’ Duties And Fiduciary Duty: Application Of Legal Rules And Principles

Issue

Issue

The paper determines the whether or not there have been a breach of statutory and fiduciary duty on part of Daniel, Sarah and Melanie.

Rule

The duties of the directors in Australia are derived from both common law and statutory provisions as provided in Corporations Act 2001 (Hanrahan, Ramsay & Stapledon, 2013).

An appropriate degree of care and diligence is required by the directors when they are discharging their duties In relation to the operations of the company. Section 180 of the CA further provides that such care and diligence must be similar to what a reasonable person would have taken in the same circumstances (Marshall & Ramsay, 2012). The judgments of the directors would be said to include care and diligence if the judgments are made for a proper purpose and in good faith. The judgment must also not include any personal material gain for the directors (Keay, 2014). They matter of the decision must be informed and they must believe that the decision is appropriate. They directors also must have a rational belief that the decision is towards the best Interest of the company. The reasonable belief of the directors is compared with that of reasonable person in order to determine its validity. Section 181 of the CA states that the directors of the company must discharge the duties and exercise the power which they have in relation to the company’s affair towards the best benefit of the company and in a bona fide way. The discharge of duty and use of power must be for an appropriate purpose (Gerner, Paech & Schuster, 2013). Section 182 of the CA states that the directors of the company should never use their position in such a way so as to bring any disadvantage to the company and make personal gains at the cost of the company (Redmond, 2012). The duty under this section extends even after the person is no longer director of the company or related to it. Any person who has information related to the company as they are or have been directors of such company are not allowed to use such information unethically towards the detriment of the company (Blair, 2012). The information should also not be used by such person to gain advantage for any other person or for their personal interest at the cost of the company as provided by Section 183 of the CA. The directors of a company can be held to commit a criminal offence in case they are intentionally dishonest or reckless towards the operations of the company as provided by Section 184 of the CA. The Section further provides that the directors are deemed to breach this section if they do not work towards the best interest of the company in good faith and for an appropriate purpose (Gerner & Schuster, 2014). According to subsection 2 it is a criminal offence for the directors to use the information of the company to its detriment and for personal gain (Harris, Hargovan & Adams, 2013).

Rule

According to the principles of Chan v Zacharia (1984) 154 CLR 178 the directors of the company must under all circumstances avoid a conflict of interest with the interest of the corporation and their personal interest.  In this case the parties to the suit were partners. They took a lease which was subjected to be renewed. The defendant did not agree to renew the lease but latter took the lease in his name alone.  It was ruled by the court that the defendant had breached his fiduciary duty he owed towards the other partner by obtaining the lease in his name alone. it court was provided by that the lease was obtained by the defendant by exploiting his fiduciary position.

In the case of Boardman v Philips [1967] 2 AC 46 it was argued by the court that the directors of the company must strictly comply with the no profit and no conflict rule with respect to the fiduciary duties. According to the duty of no conflict the fiduciary is not allowed to create any conflict between the interest of the beneficiary and his personal interest.  

The concept related to duty of care has been for the first time brought into the legal system through the case of Donoghue v Stevenson 1932. The court provided the neighbor principle through this case according to which if others can reasonably be harmed due to actions of another than the person owes a duty of care towards them (Hill, 2013). It was ruled by the court in the case of Perre v Apand (1999) 198 CLR 180 duty of care is determined by the vulnerability of the plaintiff due to the actions of the defendant along with the ability of the plaintiff to safeguard against the actions (Knepper et al., 2016).

Application

This part of the paper deals with the application of of the above discussed rule to determine whether Sarah and Daniel have breached directors duties with respect to getting involved with Crystal and providing loan to Winning wines. The section also discusses whether Melanine has breached any directors’ duty owed to the Joint Venture or Blue.

In the provided scenario a company has been formed by Sarah and Daniel along with Mitchell known as Crystal clear Pty Limited. Although Daniel had advised Melanine that they should not funds Mitchell’s project he funded the project though his newly formed company with Sarah. it is known to them that product of Crystal would be a direct competitor of JVI between Blue and Asset Management Group Ltd (AMGL). Thus in this case they have breach the duty with respect to section 183 of the CA along with common law duties related to conflict of interest as discussed above. It was the duty of Sarah and Daniel not to let any conflict of interest arise out of their personal interest and the interest of the company. They have also not complied with the duty to act in good faith and for the best benefit of their company as their actions will surely bring Detriment to Blue Pty Ltd. As discussed above in the case of Chan v Zacharia they have also breached their fiduciary duty but creating a position where a conflict of interest between the interest of the company and their personal interest along with interest of other. The two directors have not only failed to avoid the conflict of interest but also failed to comply with the common law duty of loyalty which they owe towards the blue. It was their duty to be loyal to blue as well as the JVI they had entered with AGML and ensure that no harm is caused to the JVI or Blue because of their actions.

Application

In relation to the loans provided to Winning wines by Daniel and Sarah overruling Melanie’s decision against it also is a breach of directors’ duty by them. It has been discussed above that the directors of the company must observe care and diligence towards discharging their duties towards the company. Such care and diligence is assessed by analyzing what a reasonable person would have done in similar circumstances. A reasonable person should have considered in this case that in the present circumstances blue should have maintained their cash reserves they should have also considered that the interest rate provided by Winning Wines is fairly low as compared to the market rate. Thus they have been reckless towards allowing the loan and have also breached Section 184 of the CA. they also had a duty of care towards the company and had the knowledge that their actions could significantly harm Blue and thus their actions have breached the duty of care as discussed above in the Donoghue and Perre cases. Although in this case Melina had concealed the fact that she had diverted the funds of the company to manage the accounts she had provided a correct advice in relation to the loan and not listening to her ultimately caused losses to Blue.

In case of Melanie it is to be determined that she had breached her fiduciary duty owed to Blue Pty Ltd or not. she had recently discovered that there were a lot of misappropriation in relation to the funds of the JVI by the accountants. She had the knowledge that if the information is leaked it would damage her own reputation and cause problem to the investment made by Blue. She opted not to inform the other directors of Blue about it as replenished the funds from Blue’s cash reserves. In this case Melanie had breached the the fiduciary duty owed to blue. It was her duty to act is best interest of blue. It was also her duty not to allow a conflict of personal interest with the interest of the company. According to the duties discussed above she was prohibited to prioritize the interest of herself and of any other over the interest of the company. a reasonable person in similar circumstances would have not worried about personal reputation and informed about the fraud to the other directors of the JVI. Thus in this case Melanie is guilty of breaching section 180-183 of the CA along with common law duties provided through the above discussed cases. 

Conclusion

Thus all three directors of Blue Pty Ltd have been involved in violation of their fiduciary duties.

Issue

The major issue in this case is to identify whether duty of care had been breached and whether there are any defenses available for such breach. The issue is also to identify whether or not insolvent trading has been done by the directors of JVI.

Law

A person who represents herself or himself having a considerable knowledge in relation to a specific area has a duty of care towards the other (Becker & Strömberg 2012). The employees and other officers of the organization also have a duty of care towards the organization. As discussed above in the case of Donoghue v Stevenson a duty of care arises when actions of a person can cause harm to another person. In the case of Thake v Maurice [1984] 2 All ER 513 the defendants ha=ad relied on the advice of the doctor that after vasectomy is performed they would not conceive a child (Laster & Zeberkiewicz, 2015). The operation was performed successfully but they defendant conceived a child latter. It was held by the court that it was not only the duty of the doctor to conduct a successful operation but also to ensure that such operation would prevent the birth of a new child. The defendant had relied on the statement made by the doctor and had intercourse. The court held that the doctor was at fault and ordered for damages.

There are three major defenses which can be used by directors and other officers of the company to defeat a claim of negligence and breach of directors’ duties (Bruce, 2013). The first defense is the rule related to business judgments as provided in Section 180(2) of the CA. The rule is applicable in relation to business decisions taken by the officers of directors with respect to the organizations affairs (French et al., 2014). The person has to prove that the decision had been made for a appropriate purpose and in a bona fide way. The person did not have any personal interest with respect to the core matter of the decision (Sealy & Worthington 2013). They reasonably believed that the decision is appropriate and they inform themselves about the core matter of the decisions. They must also have a rational belief that the decision taken by them is towards the best benefit of the company (Aier, Chen & Pevzner, 2014).

The second defense which can be claimed by officers and directors of the company is the reliance on others rule as provided in Section 189 of the CA. The directors of the company may not be held responsible if their action was based on the advice of another person who they believed on reasonable grounds after making appropriate enquires and in good faith (Horrigan, 2012).

The third defense which can be used by the officers and directors of the company is the utilization of delegated powers as provided in Section 190 of the CA. The directors may not be held responsible for their actions if they relied on the fact that some other person exercised the judgments or the decision (Leung & Webster, 2012). However the directors need to show that they had reasonable grounds to believe that the other person to whom the power was delegated is competent and reliable.

 Section 588G of the CA prevents the directors of the company from trading when the company does not have capacity to pay its debts. The section is applicable of the directors reasonably believed that the company is or may become insolvent (Strine, 2014).

Defenses against insolvent trading are provided through Section 588H of the CA. The defenses which the directors of a company have in relation to insolvent trading are they had reasonable grounds to believe that the company had not faced insolvency and it would be able to pay all its debts when they arise (Jones & Welsh, 2012). They had reasonable believe that the advice provided to them by another person about the solvency of the company was correct and they relied on such advice to continue trading. They took all steps which a reasonable person would have taken to stop the company from incurring additional debts (Bilchitz & Jonas, 2016).  

Application

Firstly it has to be determined that whether or not Gina owed and breached her duty of care towards AGML along with applicable defenses. Gina had been delegated the authority by AGML to investigate the investment plan. Thus she has a duty of care towards the company. she has the duty to ensure that she observes care and diligence towards her work. she had appointed an IT expert to investigate the project which a reasonable person would also have done in the circumstance. However she had confessed that the investigation for the investment was not of high standard. She had been influenced by personal desire to invest in the project. Thus she had breached the duty of care she owed to AMGL Ltd by not observing care and diligence in her work and initiating a conflict of interest.

However their a few defences which can be availed by Gina in relation to the duty of care she owes to AMGL. Gina is eligible to claim the defense of reliance on others with respect to section 189 of the CA. she can claim that she relied in good faith on the advice of the IT professional for the purpose of investigation. She can claim that as the person was a professional she had reasons to rely on his advice to make the decision not withstanding her on personal interest.  

The directors of AMGL have an obvious duty of care towards the company as their actions directly impact the position of the company. In this case not only Mr Chester but also all other director of AMGL have violated the duty of care. Mr Chester had knowledge and qualification in relation to information technology and the repot was assured to be reliable by him. Given his qualification it was expected that he should have made an in depth inquiry about the matter. He should have in forced the board about his inefficiency to understand the matter which he did not to save his reputation. Thus he was reckless towards his duties and violated the duty of care owed AMGL. The other directors on the company were skeptical about the report that means that they had reasons to doubt the report of the IT professional. They must have ensured that the report is appropriate through further inquiry and thus breached the duty of care owed by them to the company of observing due diligence and care.

However there are a few defenses which can be availed by the directors of AMGL in this case. Mr Chester is eligible to claim the defense of reliance on other and can state that he relied on the advice of the It professional to make his decision. As the person was a processional he had reasons to believe that he could be relied upon for the report. On the other hand the other directors of the company may claim that they have delegated their powers to Gina and had reasonable grounds to rely on her decision. They can also claim that they had observed care and diligence towards the affairs of the company as a reasonable person would have relied on the advice of the professional.

In relation to the question related to insolvent trading the directors of JVI have breached the provisions of section 588G. According to the section the directors must not indulge in any trading when they know or have reasons to believe that the company is insolvent or may get insolvent. The directors have received a report that there is very limited scope for JVI to incur debts or equity capital. However even after having such knowledge they decided to enter into  a trading agreement with a German software firm. This act by the directors is a clear breach of insolvent trading provisions by the directors of JVI. However as Adderson was not present he would not be responsible for the breach of section 588G.

There are a few defenses which the directors can avail in relation to insolvent trading. As discussed above section 588H of the CA provides a few defenses against insolvent trading. In this case the directors can claim that they have sufficient reasons to believe that the company would not become insolvent due to the trading. They can also claim that they intended to take all the steps which are possible to protect the company against insolvency. Adderson can claim the defense of not being present at the time the decision was taken.

Conclusion

Thus Gina and other directors of AMGL have breached their duty of care and Directors of JVI are involved in insolvent trading.

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