Property Developments Julian - Sol and Daniel.

Questions: 1. What common law duty and statutory duty if any has Julian breached? 2. What common law or statutory duty have Sol and Daniel breached? 3. If the directors have breached their duties do any of them have a defence and if not what are the consequences for them? Answers: 1. Fiduciary duty of Loyalty Under the common law he director has been placed with a fiduciary duty. This duty includes the duty to act with grim loyalty to the company. Under the common law a director is a fiduciary of a company and it is expected that they will not enter into any transaction that they stand to benefit from or which they have an interest in. This basic common law duty was held in Aberdeen Railway Co v Blaikie Brothers (1854) where the court decided that a director should not take part in self dealing. The court further held that any transaction that is conducted by a director who has an interest in it shall be voidable and be terminated at the will of the company. Julian had a personal interest in the contract for the sale of land because his aim was not exonerate his uncle Gerald from the bank loan misery, although he did not stand to gain any material benefit. It can thus be conceded that Julian has breached this this common law duty. Duty to Avoid Conflict Pursuant to section 191(1) a director has been placed under a duty to void any material personal interstate in any in any issue that is related to the company affairs (Corporation Act 2001). This section requires that where there is such an interest, the director must disclose it by way of notice to other directors. It is evident that Julian did not disclose that he had a personal interest in the contract for the sale of land. In McGellin v Mount King Mining NL (1998) the court held that the test that is applied is whether a reasonable person will be convinced that the interest affected the judgment of the director. Julian was affected by the interest because he went on to vote for the decision during the board meeting. According S192(1) to notice of any personal interest must be in writing and be given during a directors meeting. The notice must explain suffieciently for the board of director to clearly understand the interest (Camelot Resources v MacDonald,1994). There has been no evidence that a notice has been supplied by Julian. Duty not to make improper use of information By dint of s183(1) a director must not obtain any information from the company for his own personal advantage or for the advantage of some else (Corporation Act 2001). In Commissioner for Corporate Affairs v Green (1978) the court insisted that the information must be used for the advantage of the director or someone else. It is evident that that Julian used information from the company to benefit his brother Raphael so that he may win the tender. This is contrary to the corporation act and Julian is thus in breached of the duty under s183 (1). 2. Duty of care Directors have the common law duty to exercise their responsibilities and duty with reasonable care and due diligence. In Daniels v AWA (1992) the court affirmed this common law duty by holding that the directors have the moral imperative to take reasonable measures to ensure that they oversee the operations activities of the company. In Australian Securities Commission v Gallagher (1993) the court held that the standard of care and skill that was expected was that of an ordinary person in the same position as the director. Sol and Daniel were reckless as to the fact they were required professionally to conduct an independent valuation and thus were in breach of the duty of skill and care expected of the directors. Duty to act with reasonable care and Due Diligence Pursuant to S180 (1) a director has been vested with the obligation to act with reasonable care and due diligence in a manner that any reasonable person would do (Corporation Act 2001). In ASIC v MacDonald (2009) the court held that the test that should be applied is an objective one where the question will be what an ordinary person who has the same professional experience and expertise as the defendant would do in the same circumstance. It has also been held that the standard of care is judged by what a prudent person would do in similar circumstances. Sol and Daniel expected to exercise skill and care in their duty to oversee the companys activities and they failed to do so. A reasonable and prudent person having an ordinary skill as is expected of them would have conducted an independent valuation of the land and would ensure that they are aware of all the operation of the company but they failed to do so and have not been keen with the operations of the company (Re City Equitabl e Fire Insurance Co, 1925). Furthermore, in Daniels v AWA (1992) the court insisted that the director of a company must keep himself informed of all activities and operation that go on in a company. It is imperative to note that the court in Vines v ASIC (2007) noted that common law application of the duty of care and due diligence is similar to the statutory application in Australia. 3. Consequences for Breach In law it is a general principle that ignorance of the law is not a defense and therefore the directors cannot claim innocent mistake because they did not know understand the legal position of the director duties. The only practical defense that would be applicable for the breach of section 191(1) would be that the director had given a sufficient notice of the conflict of interest but this has not been given by Julian. A breach of section S180 (1) on the duty of reasonable care and due diligence invites a civil penalty and a criminal liability 5 years imprisonment or fine of $200, 000. A breach pursuant to section 191(1) attracts a civil penalty of 10 units or an imprisonment of 3 months or both. If the breach of the duty of care causes a detriment to the company the director may be required to pay for the detriment caused or return any benefit that he has incurred to the company inform of damages. References Aberdeen Railway Co v Blaikie Brothers [1854] UKHL 1 ASIC v Macdonald (No 12) [2009] NSWSC Australian Securities Commission v Gallagher (1994) 11 WAR 105 AWA Ltd v Daniels (1992) 7 ACSR 759 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437 Corporate Affairs Commission v. Green [1978] VR 505 Corporation Act 2001 (cth) McGellin v Mount King Mining NL (1998) 144 FLR 228 Re City Equitable Fire Insurance Co [1925] Ch 407 Vines v ASIC [2007] NSWCA 75