Joanne Breslin 17382477 Law of Business Association LST2LBA Wednesday, 8:30am Diana Blackburn 3rd October 2012

Page 1 of 6 Joanne Breslin

The issue is whether Pots N Plates can do something about Alices conduct and her lack of action against Zack. To determine this, it needs to be established whether Alice has breached any legal duties. Duties are imposed on directors due to the fiduciary relationship that exists between a director and a company, therefore her conduct will be examined against the required standard expected of a director under General Law, and the statutory requirements under the Corporations Act 2001 (CA).

The first situation is whether there is a problem with Alice leasing excess space to her boyfriend Zack at a ridiculously low price. One concern is whether she has breached her duty to avoid a conflict of interest. Also reflected in s182(1), a director must not use their position to gain an advantage for themselves or someone else. A conflict will arise when a director is put in a situation where they may abuse their position for personal gain, or where a decision is likely to benefit themselves, or someone close to them. Consequently, the director is unable to make impartial decisions, including entering into contracts where there is an indirect interest. This was demonstrated in the case of Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co1, where the court held there was a conflict, even though the director didnt receive a personal gain, similarly to Alices situation. Where a conflict arises, s191(1) requires directors to disclose a material personal interest to the shareholders, except where under s191(2)(b) the company is a proprietary company, and all directors are aware of the nature and extent of the interest. The facts show Chris was aware of the relationship but it is unknown if all the directors were fully aware of the nature and extent of the relationship, or how it was disclosed. The courts may find a conflict of interest, which may make the contract with Zack voidable, or to be rescinded by the company.

(1914) 2 CH 488

Page 2 of 6 Joanne Breslin

Further to this, under s181(1)(a) Alice is required to act in good faith in the best interests of the company, and s181(1)(b) for a proper purpose. It was established in Percival v Wright2 that company means all shareholders and not individual shareholders. This includes Pots N Plates when the contract was entered, as they were future shareholders. Making the decision to lease at a ridiculously low price is not in the best interests of the company or for a proper purpose, similar to the case of Re W & M Roith Ltd3 where a director breached his duty by entering a contract where his wife would receive a pension on his death. This was a benefit to the wife, but not the company. The company has lost income by leasing at this low price to Zack, confirming Alice has failed to put the interests of the company first. The fiduciary duty to act bona fide for the benefit of the company as a whole also reflects this statute. s184 will also be breached if done recklessly and dishonest and is a criminal offence. It is unlikely Alice would be found guilty of this, with her case differing to the case of R v Adler4 where a director put his own personal interests first through intentional dishonesty and recklessness.

The next issue with Alices conduct is the lack of action by Alice against Zack for the damage to the Gallery. This decision goes against s181(a) where a director must exercise their powers in good faith and in the best interests of the company, and for a proper purpose under s181(b). This rule was reinforced in Clarkson Co Ltd v White5 where the court found the directors had not acted in the best interest of the company by forgiving a debt. Alice defends this action by stating Zack is the largest customer, however it is unknown how much Zack contributes to revenue in comparison to the damage bill. If the revenue is significantly more it could be used to support her, on the other hand applying the but for test here on whether Alice would have excused this debt but for the fact Zack was her spouse, may

2 3

(1902) 2 CH 421 (1967) 1 WLR 432 4 (2005) NSWSC 274 5 (1980) 102 DLR 403

Page 3 of 6 Joanne Breslin

determine the true purpose for her conduct. This test was used in Whitehouse v Carlton Hotel Pty Ltd6 to find the actual purpose, and once applied to Alice, its likely her personal relationship was the main reason she did not take action. Her situation is similar to the case of Adler v ASIC7 which demonstrated more than one breach due to the actions of the Adler. He pursued his own interests over the interests of the company, and acted for improper purposes by trying to gain an advantage for himself. He obtained an unsecured loan to purchase shares in a company that he was involved in. His actions contravened sections 180 (1) care and diligence, 181(1)(a)(b) not acting in good faith for the best interests of the company, and 182(1)(a)(b) improperly using the position to gain advantage for someone else to the detriment of the company. Similarly, Alice is also in breach of these sections by taking no action against Zack. A reasonable person in her position would have taken action against Zack for the damage caused. s180(1) is only contravened if put to the reasonable test, a person in the same position would have acted the same way. It is likely a reasonable person in Alices position would have taken action against Zack. Alice would not satisfy the requirements of s180(2)(a)(b)(c)(d) under the Business judgement rule to defend herself against s180(1). Alice did persuade Chris to agree with her, but as she holds the majority interest of 36% over the combined 16% interest of Ben and Chris, this will have no effect on the case. Even if his vote created the majority, courts do not find in favour of directors who use voting power for improper purposes, as held in the case of Cook v Deeks8, where three directors abused their voting power against one director for their own purposes.

While Chris ratified Alices decision, under s239(1) of the CA, this will not release Alice from her statutory duties, with this rule being reinforced in the case of Forge v ASIC9.

6 7

(1987) 162 CLR 285 (2002) 41 ACSR 72 8 [1916] 1 AC 554 9 (2004) 52 ACSR 1

Page 4 of 6 Joanne Breslin

The courts will find Alice has breached her directors duties, therefore Pots N Plates could bring a derivative action (proceedings on behalf of the company) against Alice under s236 of the Corporations Act, and initiate proceedings against Zack to compensate for the damage. Derivative action is subject to the courts granting leave if certain requirements have been met under s237. In this case, ss237(1)(2)(3) have been satisfied, therefore the courts will grant leave to Pots N Plates.

Alice could be removed as Director under s203C of the CA by resolution of members. ASIC may impose an injunction under s1234, and courts will make a declaration under s1317E, with pecuniary penalties imposed from s1317G.

Question B To advise Alice on whether the mortgage to The Southpaw Bank could be binding, it needs to be established what the requirements were under the company constitution, and what the requirements are in the Corporations Act 2001.

s127(1) states a company may execute a document without a common seal if under s127(1)(b) a director and company secretary both sign the document, which did occur in this case with Ben and Dino. Even though the requirement is contracts over $5,000 must have unanimous board approval and use of the company seal attested by two directors, s128(1) protects third parties who make assumptions that people are entitled to make under s129. A person is able to assume that under s129 (1) the rules and constitution have been complied with, s129 (2) that the people involved were appointed and have the authority, s129(4) the people properly perform their duties and under s129(5) the documents have been signed in

Page 5 of 6 Joanne Breslin

accordance with s127 (1). Supporting this is the rule in Royal British Bank v Turquand10 where people are entitled to assume that the internal rules of a company have been complied with even when this is not the case, therefore a court may find the mortgage to binding.

Conversely, the court held in Northside Developments Pty Ltd v Registrar General11 that the rule of Turquand did not apply where validity of the apparent authority can only be assumed if it has been given for the purposes of the companys benefit. The mortgage has no benefit to All Fired Up, therefore the mortgage may not be binding if the courts take this view.

10 11

(1856) 6 E&B 327 (1990) 170 CLR 146

Page 6 of 6 Joanne Breslin