Q

Has Freddy breached his statutory obligations under the Corporations Act (Cth) 2001? Explain your answer

Home, - Has Freddy breached his statutory obligations

Question - Freddy is a director of Ace Finance Ltd. The board of directors for Ace Finance Ltd have unanimously agreed to have a marketing campaign to attract new clients to their financial business. Freddy's nephew - Frank - is a marketing executive who runs his own business. Freddy informs his nephew of the possibility of obtaining the marketing contract with Ace Finance Ltd.

Freddy also discloses to Frank the price range that the company will consider. Freddy attends the board meeting where they consider who will get the marketing contract, but he does not disclose his connection with his nephew. After looking at all the potential candidates, the board of directors have selected Frank's business to do the marketing campaign for Ace Finance Ltd.

Has Freddy breached his statutory obligations under the Corporations Act (Cth) 2001? Explain your answer.

Answer -

Legislation

Director has a legal or statutory duty to act in good faith of the Company, use the power appropriately, and avoid conflict of interest. Director is required to show proper care, diligence and skill for the betterment of the Company. Section 181 of Corporation Act, 2001 states the duty of director to be honest, use care diligence, does not misuse information and position and also prevent insolvent trading. The breach of statutory duty occurs when director does not follow the stipulated duties under section 180(Premeirs.qld.gov.au, 2022, pg.1(3)). Director will have to bear penalty up to $200000 and also ban from management. Board of directors have legal right to take action against the director for breach of duty. Section 191 of Corporation Act, 2001 requires director to disclose material personal interest which is related with the affairs of the Company. Director should give notice to other directors before the meeting to be held for the matter in which director is interested. The notice to directors must disclose the nature and extent of interest. Director must give notice as soon as the interest has been found in the transaction or matter of business.

In the case of Queen V Hopwood Byrnes 1995, it was held that directors of Magnacrete limited gave commitment to guarantee an overdraft facility to Vicksburg Pty Ltd. While, Vicksburg Pty Ltd was floated for specific purpose to fill the shortfall under the convertible issue from Jeffcott investments ltd. Byrnes, managing director of Hopwood and Jeffcott was substantial shareholder in both Companies. Independent directors of Magnacrete were not informed for the transaction which has been taking place. Court fined a conflict of interest and found that the intention was to provide benefit to Jeffcott and acted without authority. The directors did not tell other directors of what they were doing and thus court considered the case of improper use of office by directors.

Another case of ASIC V Vocation Limited 2019 FCA 807, federal court held that directors have been personally liable under section 180 of Corporation Act, 2001 for facilitating Vocation limited to breach the statutory obligations as stipulated under ASX listed entity. Directors failed to inform each other about the matter and relying carelessly on the information offered for the dispute with DEECD.

Analysis of the case

Yes, Freddy has not complied with statutory obligations as stated under Corporation Act, 2001. As discussed above, director did not act in good faith, has been dishonest, and misused the information which was shared in the discussion of marketing campaign in the board meeting of the Ace Finance Limited. Fraddy did not show any care and diligence for the Company and shared the private information with nephew about the price range, the Company is about to offer. Later, when another meeting of considering the final decision of marketing contract, Fraddy failed to disclose the information about his close relation with nephew which is breach of duty under corporation Act, 2001. Freddy has improperly used the advantage of position by giving advantage to nephew causing detriment to Ace Finance Limited. In the case, Freddy benefitting for self-interest by providing benefit to third party which is nephew of Freddy. Freddy is also personally interested in the contract of marketing which Ace finance limited was about to enter with frank business. Freddy failed to serve notice to other directors disclosing the interest in the matter of marketing campaign under section 191(Queensland Government, 2016,pg.1(5)).Therefore, Freddy is liable for breach of duties which may range up to $200000 under corporation act, 2001.

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