In this question, the issue is if Gerry can be held liable for the range of his duties as the director of Anthrax Ltd, and therefore if any action can be taken against them. This issue has arisen as a result of the fact that Gerry was a major shareholder in Virgin Bush Pty Ltd but he had failed to disclose this fact to the other directors of Anthrax that the board of the company was making a decision regarding during the task of the restructure of Anthrax to a management consultancy. Later on, another director of Anthrax, Frieda came to know that Gerry was a major shareholder of Virgin Bush Pty Ltd. Therefore she wants to know if any action can be taken against Gerry under the corporation’s law.
Among the general duties of the directors prescribed by the law include the duty to act bona fide, considering the interests of the company as a whole. The directors also required to exercise their powers only for the purpose for which these powers were granted and not for any other improper purpose. Similarly, the directors should avoid situations where there may be a conflict of interest between their personal interests and the company’s interests. At the same time, the directors of corporations also have some fiduciary duties. Among these duties, it has been provided by the director should not use their position in the company improperly. The improper use of information takes place when a director has used his position for obtaining an advantage or to cause a loss to the corporation. In the same way, it is also the duty of the directors that they should not use any information that has been received by them due to their position in the company for achieving a personal advantage or for causing loss to the corporation (Prentice, 1990). According to these duties, the directors are required to exercise the powers in good faith and also for the proper purpose. Similarly, the law also requires that in case the director has a material personal interest related with the subject matter of adjustment being made by the board and when a conflict is present, the other directors should be informed regarding such personal interest. In this context, a material personal interest can be described as a matter that is related with the affairs of the corporation. In this regard, the director is required to give a any time before the board is made a decision regarding such subject matter.
According to the Corporations Act, 2001, the standard of care that the directors are required to exercise it is necessary that the directors exercise their powers with the same care and discharge their duties by using the same diligence that can be expected from a reasonable person is a person was a director under the circumstances of the corporation and occupied the same office and also had the experience and powers of the director in question.
The directors owe this duty towards the company. Therefore the directors will be liable towards a company if they have made a profit as a result of the contravention of their duties. Another very significant role of the corporations’ law that can be applied in the present case is the conflict rule. Therefore, it provides that the director should not allow any conflict between his or her personal interests and the interests of the corporation. In Phipps v Boardman, this was also mentioned as the fundamental rule of equity. To avoid a conflict of interest, the director is required to see if the possibility of a conflict is something more than a real prospect. Similarly if the director can enter into an arrangement after coming to know that they may have real chances of creating a conflict of interest with the company. Similarly, the director has to see if a conflict arises when the director also holds shares in another company and the original company is going to transact with such company.
In this context, it has been mentioned in s191(1) that it is the duty of the director to notify the other directors in case the director has the material personal interest in case of a particular transaction.
As mentioned above, the law provides that the direct result fiduciary duties towards the company. This can be described as a significant legal relationship. In this elicited a duty of trust and good faith is involved. As a result of this duty, it is necessary that the directors and should give preference to the interests of the company as compared to their personal interests. Similarly, the directors should avoid these situations where there can be a present or a future personal interest that may be in conflict with the interests of the corporation or such a conflict may arise in the future as the directors are under an obligation to protect the interests of the corporation. Such a situation may take place when a real possibility of conflict is present. It also needs to be mentioned that such a conflict can be direct or indirect. It is the duty of the directors that they should not have any personal interest regarding a transaction that the company is going to enter. On the other hand, this duty will not be breached by the directors if they are directly or indirectly going to enter into a contract with the company. In case of a direct contract, the director personally enters into a contract with the corporation. Such a contract may be created indirectly when the director is also a director or a shareholder in the other company that is going to enter into a contract with the first company.
However certain qualifications are attached with the enforcement of this duty against the directors. Hence it is possible that it has been expressly allowed by the constant now the company that the director may have a personal interest that is in conflict with the company’s interest. Therefore in such a case, the fiduciary obligations of the director will be modified to such an extent. However, the law provides that such a provision should be strictly complied with for the purpose of avoiding a breach of duty. In the same way, when a director has a material personal interest in case of transaction as a result of the conflict of the company, such director can still vote on the board of directors, but in such a case the duty to vote in the benefit of the company as a whole will still be applicable unless the director has been relieved of this duty in some way.
Another requirement in such a case is that a full disclosure should be made by the director regarding the nature of his interest in the transaction to the other members of the company at the general meeting and at the same time, the collection should be approved by an ordinary resolution.
In this case, Gerry was the director as well as the chairperson of Anthrax Ltd. at the same time, Gerry was also a major shareholder in Virgin Bush Pty Ltd. When the board of anthrax was considering a proposal to are the services of a management consultancy to restructure the business of the company, Gerry and actively promoted Virgin Bush. He gave particular attention to the documents that were provided the Virgin Bush and similarly he also emphasized the experience that the company had in tourism and also in redundancy planning. As a result, the board of Anthrax Ltd. had passed the resolution by all the directors. According to which Virgin Bush Pty Ltd was going to be engaged for the purpose of the limitation of researchers in Anthrax Ltd. But later on, another director of Anthrax Ltd came to know that Gerry was a major shareholder in Virgin bush Pty Ltd.
As a result of the duties that have been imposed on the directors, it is clear that in the present case, Gerry had breached its duty as the director of Anthrax Ltd. . This duty was breached when Gerry failed to inform the other members of the board of Anthrax regarding the fact that he was a major shareholder of Virgin Bush. Similarly, there was no provision present in the Constitution of Anthrax Ltd. that would have allowed Gerry to have such conflicts of interest.
Therefore in the present case, it is clear that Gerry had breached his duties as the director of Anthrax Ltd.
References
Austin R P and Ramsay, I M (2013) Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed. 432
Farrar, J., (2008) Corporate Governance: Theories, Principles and Practice, 3rd ed. Melbourne: Oxford University Press, at pp 108-109
Ford H A J and Austin, R P (1995) Ford and Austin’s Principles of Corporations Law (Butterworths, 7th ed. 262
Sealy, L.S. (1988) ‘Directors’ Duties — An Unnecessary Gloss’, 47 Cambridge Law Journal 175
Worthington, S (1981) ‘Directors’ Duties, Creditors’ Rights and Shareholder Intervention’ 18 Melbourne University Law Review 121
Case Law
Phipps v Boardman (1967) 2 AC 123
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