LAWS2301 Take Home Assignment

Henry Shao 21335576

Question A

(i)

The issue is whether Rick has breached his duty as a director.

Under s180(2), it states that directors need to make judgment in good faith for proper
purpose and rationally believe that the judgment is in the best interests of the corporation. It
can be argued that Rick knew the land was valued at $350000 and kept that information
from his fellow directors and is not in the best interests of the corporation. S183 states that a
person who obtains information because they are or have been a director of a corporation
must not improperly use the information to: (a) gain an advantage for themselves or
someone else; or (b) cause detriment to the company. It also important to note that this duty
continues after the person stops being an officer of the corporation. Confidential information
for the purposes of s.183 are information acquired as a director, officer, or employee. Rick
knew the land was independently valued at $3500000, but was convinced it was worth
$500000.

(ii)

The issue is whether the alteration of part (i) of the companys constitution is valid and
whether Rick can claim compensation for the dismissals.

Rick can prevent the alteration by stating in the provision that Rick has been appointed as
managing director as long as he desires under s140(1)(b) but this is subject to s136(2). He can
also prevent the alternation under s136(2) but it is unlikely possible here.

The Constitution previously provided that Rick was to be managing director as long as he
desires under section 140(1)(b) contract, which is a statutory contract. The Constitution was
amended to allow removal of Rick as a managing director. The dismissal is valid and no
damages are payable as there was no independent contract between Rick and the Board of
director (Shuttleworth v Cox Bros (Maidenhead) Ltd). However, if the contract between Steel
Tanks Ltd and Rick is independent, Rick can recover damages for wrongful dismissal. (Allen
v Gold Reefs of West Africa Ltd).

As for the dismissal as the technical consultant, it is valid under s136(2), as long as the
special resolution is passed. Since there is no independent contract, Rick cannot claim
compensation.

(iii)
Steel Tanks can sue Dick as the court is likely to lift the veil behind Metro Tanks Pty Ltd and
hold Dick liable for his breach of duty. Liability arising from conflicts of interests may be
avoided if these interests are disclosed to the board or at the general meeting and the
company ratified this conflict of interest. There was no disclosure of interests by Dick
therefore, he will not be able to escape his liability for his breach of his fiduciary duty to
Steel Tanks Ltd.

Dick also breached s181 as he did not discharge his duty in good faith and in the best
interest of the company by setting up his own company. S182(1) states that the director must
not improperly use their position to (a) gain an advantage for themselves or someone else or
(b) cause detriment to the company. As Dick used his position as a director to enter into a
contract with the farm in the shire of Wagin he has breached s 181.

Dick has breached fiduciary duties and statutory duties he owed to Steel Tanks.

(iv)

(v)

If the companys constitution does not require directors to disclose grounds or reasons for a
refusal to register a transfer, it is difficult to challenge the refusal. The person who
challenges must prove that the directors acted in bad faith or for improper purposes: Re
Smith and Fawcett Ltd [1942] Ch 304.
If the directors refuse to register a transfer of shares, the transferee may apply to the court
and if the court is satisfied that the refusal to register was without just cause, the court may
order that the transfer be registered or make such order as it thinks just and reasonable
including an order providing for the purchase of the shares by a specified member or the
company: sec 1071F. Members may also have a right under sec 232.

Jane can apply to the court for an order under s1071F. If the court is satisfied on the
application that the refusal or failure was without just cause, the court may order that the
transfer be registered or make such other order as it thinks just and reasonable.

https://legalvision.com.au/how-to-amend-a-company-constitution/

Questions B

One of the issues is whether the directors of Fine Homes Pty Ltd have breached their duties
to the company, and abused the directors power to issue shares.

Usually cases on the proper purpose doctrine involve the alleged misuse by directors of their
power to issue shares. One way of raising money for the companys operation is to issue
shares. Raising capital is usually the major purpose of an issue. Other purposes which have
been regarded as proper in the exercise of this power include the fostering of desirable
business connections, the maintenance of the minimum necessary membership in the
company and improvement of the companys financial positiono11 Improper (sometimes
called collateral) purposes for an issue have included the defeat of a takeover, the
entrenchment of a board in control of a company, benefiting some shareholders or their
friends at the expense of other shareholders or so that some shareholders or their friends
will wrest control from the other shareholders and the prevention of interests unfriendly to
the directors form gaining power.

Appropriately drafted articles can determine which purposes are proper and which are
improper. Prentice maintains that an article can validly permit directors to allot shares to
maintain themselves in control, provided they thought that this was in the best interests of
the company.
In Hogg v Cramphorn Ltd,15 Buckley J held that an allotment of shares (each with weighted
voting power) made bona fide by the board, but with the intention of defeating a possible
takeover bid and of retaining the present board in control, was an improper exercise of that
power. The fact that the directors undoubtedly acted throughout in the belief that what they
were doing was for the good of the company16 was of no avail. The complaint of the
minority shareholder, Mr Baxter, was accepted. The issue was shown to be intended not
only to ensure that, if Mr Baxter succeeded in obtaining a shareholding which, as matters
stood, would have been a controlling shareholding, he should not secure control of the
company, but also, and perhaps primarily, to discourage Mr Baxter from proceeding with his
bid at all.17 Buckley J relied on Piercy v Mills.18 There, the directors were held to be acting
in breach of duty in issuing shares to procure a majority for their side in an internal power
struggle.

In Ngurli Ltd v McCann, the High Court ruled that the controlling director could not use his
power -- termed fiduciary power in the judgment -- to issue shares at par to a friendly
interest to the exclusion of the two McCanns (minority shareholders). This issue was solely
for the controlling directors benefit.

The power must be used bona fide for the purpose for which it was conferred, that is to say,
to raise sufficient capital for the benefit of the company as a whole. It must not be used under
the cloak of such a purpose for the real purpose of benefiting some shareholders or their
friends at the expense of other shareholders or so that some shareholders or their friends
will wrest control of the company from the other shareholders.

Directors are subject to a number of broad duties, some of which fiduciary duties, for
example;

The duty to act in the best interest of the company;

The duty to act in good faith;
The duty to exercise powers for a proper purpose;
The duty to avoid conflict of interest;
The duty not make secret profits and make full disclosure;
The duty to retain discretions.

In addition to these fiduciary duties, there is, at common law, a duty to exercise care,
diligence and skill. These duties have also been supplemented by provisions in the
Corporations Act - particularly the statutory duties imposed by sections 180, 181 and 182.

The duty of good faith applies to directors when they make decisions or exercise powers for
the corporation. Roger breached s181 as he not discharges his duty in good faith and in the
best interests of the company by setting up a company by himself. Gerald also breached s181
as he didnt act with good faith. As stated in the facts, Gerald was very jealous of Rogers
high public profile and reputation, and therefore didnt want the company to take the offer
as Fine Homes received the offer due to Rogers reputation. This was not acted in good faith
and in the best interests of the company.

S182(1) states that a director must not improperly use their position to (a) gain an advantage
for themselves or someone else or (b) cause detriment to the company. It is obvious in this
case that Roger used his position as one of the two directors to stay in contact with Futuristic
Homes to gain an advantage for himself due to the board rejecting the contract with
Futuristic Homes. It doesnt seem that Gerald has breached s182, as he didnt receive any
advantages or cause any harm by not taking up the offer.

S183 states that a person who obtains information because they are or have been a director of
a corporation must not improperly use the information to: (a) gain an advantage for
themselves or someone else; or (b) cause detriment to the company. It also important to note
that this duty continues after the person stops being an officer of the corporation.
Confidential information for the purposes of s.183 is information acquired as a director,
officer, or employee. Roger obtained this information when he was still the director of Fine
Homes Pty Ltd. Because of Fine Homes Pty Ltds rejection, he formed his one person
company by virtue of his knowledge of the business opportunity with Futuristic Homes Pty
Ltd (Artedomus v Del Casale).

Directors also have a duty to avoid conflicts of interest. The company must not suffer loss
and directors must not take any corporate opportunity (Regal (Hastings) Ltd v Gulliver). The
court is likely to lift the veil behind Rogers one person company and hold Roger liable for
his breach of duty. Liability arising from conflicts of interests may be avoided if these
interests are disclosed to the board or at the general meeting and the company ratified this
conflict of interest. There was no disclosure of interests by Roger therefore; he will not be
able to escape his liability for his breach of his fiduciary duty to Fine Homes Pty Ltd.
Disclosure of material personal interests also may also be done under the statute under s191.
This disclosure requirement is in addition to common law and the companys constitution
(Furs v Tomkies).

Roger might try to argue in this case that the company rejected the corporate opportunity.
(Qld Mines v Hudson). However in this case, there was no full disclosure of his interests. He
can also argue that he was approached in personal capacity (Peso Mines v Copper).

As Roger breached his fiduciary duties under the common law and under the statue, Fine
Homes Pty Ltd is the proper plaintiff and is entitled to remedy for the wrongdoings of
Roger. Depending upon the circumstances, Fine Homes may be entitled to

Compensation or damages
 Account of profits there is no need to show loss (green), as Fine Homes just lost an
opportunity and did not suffer any detriment yet. If there was damage done then
clearly there would be a loss, and under s1317H Fine Homes can receive
compensation for damage suffered and return of profits.
Rescission of contract where a director has breached their duty by having an
undisclosed interest in contract with a company
Injunction preventing Rogers one person company from trading.
Or an order requiring property to be returned to the company.

The court may also make a declaration in which declaration was a conclusive evidence of
contravention under s1317F. The court may order:

Pecuniary penalty order- up to $200,000 under s1317G

Disqualification from managing corporation under s206C
Criminal offence if there is recklessness and dishonest intent under s184(2) and (3), if
cant prove intent move to s1317G.
Compensation for damage suffered under s1317H where application is made by
ASIC if the company is short of funds.