Case Study: Fashion First Pty Ltd

Affected Parties:

Andrew
Brian
Collin
Diana
Elizabeth
Fashion First Pty Ltd
Development Interests Pty Ltd
George

Issues:

What are the duties of directors?
Have the directors breached their duties?
What are the consequences of breach of director duties?
Is there any relief available to the directors for breaching their duties?

Rule:

The Corporation Act 2001 has provided a number of duties that are to be fulfilled by the directors of a company. Among others, such duties include –

Duty of acting in good faith and in the interest of the Company (Section 181); and
Duty to disclose all material personal interests to the Company (Section 191).

Case Laws:

In Chew v R (1991) 5 ACSR 473 (Davis, 2023), the duty to act in good faith has been summarised by Malcolm CJ. As per this summary, the directors –

Must not misuse their powers, and use them in the interest of the company;
Must avoid conflict between the interest of the company and their personal interest;
Must not use their position to make secret profits;
Must not misappropriate the assets of the company for their own benefit.

In McGellin v Mount King Mining NL (1998) 144 FLR 288 (Davis, 2023), it was observed by Murray J that if a director has an interest that is in conflict and it can affect the voting decision of the director, such interest must be disclosed to all other directors and if such director fails to do so then it will be considered as a breach of section 191(1).

Breach consequences:

The consequences for breaching the director duties include the following:

Personal liability;
Commercial consequences;
Criminal consequences;
Disqualification from position of director.

Defences

There are mainly three defences (RSG LAWYERS & ASSOCIATES, 2019) –

The business judgement rule;
Reliance on others; and
Use of a delegated power.

The business judgement rule provides that the directors had acted in the interest of the company and did not have any personal interest in the subject matter in question, informed themselves with regard to the subject matter of the decision to the extent they reasonably believed to be appropriate; and had rational belief that the decision in question was taken in the best interest of the company. Reliance on others means the directors had made their decision relying on the advice of professionals like lawyer, or accountant. In some of the cases, directors may argue that they had delegated the decision-making power to someone else and they believed that such other person was competent and reliable.

Application:

In this case, Fashion First Pty Ltd decided to expand its business due to increase in competition and for this the company had to obtain a bank loan amounting to $4 million. The amount of $3 million was used to purchase inventory and remaining $1 million was used to purchase a large new warehouse and showroom from Development Interests Pty Ltd. Elizabeth, Andrew, and Brian had voted in favour of the loan proposal and obtained the loan.

Meanwhile, Brian had contacted with George for the supply of fashion accessories; since the latter was not interested in dealing with Fashion First, Brian had set up him own business to encash this opportunity while remaining a director of the company.

Brian resigned from his position of director of Fashion First after six months, and this was also the time when there were clear indications of Fashion First being insolvent. Brian also had a material interest in Development Interests Pty Ltd. which he did not disclose to other directors, and he also approached the customers of Fashion First to get orders for his own business.

It is found that Brian failed to disclose his material interest in the Development Interest while purchasing warehouse and showroom from the latter. He earned secret profits by establishing his own business to deal with George. He also misused his position of director for his personal interest by gaining established customers of Fashion First for his own business.

Andrew and Elizabeth had consented by believing that obtaining loan would be in the best interest of the company; while Colin and Diana did not vote.

Conclusion:

Based on the provisions and their application to the facts of this case, it is concluded that -

Brian had breached his fiduciary duties under section 181 and 191 of the Corporation Act 2001;
He is liable for the civil liability provisions and so has to pay pecuniary penalty as per section 1317G of the Corporation Act 2001;
He cannot seek any defence as he has not acted in the good faith and interest of the company;
Since, Andrew and Elizabeth had consented by believing that the loan will be for best interest of the company hence they can use the safeguard;
Since Colin and Diana didn’t vote so they are not liable for any breach.

References

Davis, W. (2023). Breach of Directors Duties in Australia - Directors and Officers - Australia. [online] www.mondaq.com. Available at: https://www.mondaq.com/australia/directors-and-officers/1330024/breach-of-directors-duties-in-australia#:~:text=In%20Chew%20v%20R%20(1991 [Accessed 25 Oct. 2023].

RSG LAWYERS & ASSOCIATES (2019). Defences for Breach of Directors’ Duties. [online] Rsg Lawyers & Associates. Available at: https://rsglawblog.com/2019/05/26/defences-for-breach-of-directors-duties/#:~:text=These%20are%3A%20the%20business%20judgement [Accessed 25 Oct. 2023].

You Might Also Like:

Liam Complex Care Case Study Sample

Pestle Analysis of the Fashion Retail Industry in the UK

Accounting And Finance Assignment Help