Director's duties exist to protect shareholders from the risk of directors causing harm to the company or its property. The risk arises because the internal rules of most companies vest the power to control and manage the company's property and affairs in the board of directors. The duties fall into two broad groups: 1. The duties of loyalty and good faith; and 2. The duties of care, skill and diligence. 1 The duty of "loyalty and good faith" generally includes the specific duties to act in the interest of the company, to exercise powers for a proper purpose, to retain discretions and to avoid conflicts of interest.
These general law duties are reflected in the Corporations Act 2001 at ss 181-184 with the duty to act with "care and diligence" reflected at s180. The duties specific in the Corporations Act 2001 operate together with these general law duties and not instead of them. Section 140 of Corporations Act 2001 gives a company's constitution and any replaceable rules the effect of a contract between the company and each director, between the company and each member and between members.
Alpha and Bravo the directors of the company Alphabet Pty Ltd are under a legal obligation to act in accordance with the general law duties, the statutory law duties and any duties outlined in the company constitution. However, Alpha and Bravo actions may have breached their duties to the company. General Law Duty of Loyalty and Good Faith As mentioned above, the duty of "loyalty and good faith" generally includes the specific duties to act in the interest of the company, to exercise powers for a proper purpose, to retain discretions and to avoid conflicts of interest.
A director is a fiduciary and must act in the interest of the director's company. Director breach their fiduciary duty if they enter into contracts with their company because they are then in a position where their personal interest conflict or may conflict with the company's interest. The duty imposed on director not to contract with their company and not seen to put themselves in a position where they may further their own interests. 3 The profit rule states that a 'fiduciary is accountable for profits made in connection with his fiduciary office'.
'Directors must not take corporate property, information or opportunities without the permission of the company'. 4 As a directors is in a fiduciary position, directors must not put themselves in a position in which there is a conflict between their duties to the company and their personal interests: Aberdeen Railway Co. v Blaikie Bros [1843-60] All ER Rep 2495. A railway company entered into a contract with a partnership for the supply of a large quantity of iron seats.
The company sought to avoid the contract on several grounds, including that at the time the contract was enter into, one of the partners was a director of the company. The House of Lords held that the company could avoid the contract even though its terms were fair. As Lord Craworth LC noted, in a situation such as this there would be a temptation for the director to set the highest price possible for the goods which were to be supplied and the business opportunity rule was directed to preventing this from occurring. Taking up corporate opportunity
A well-known case in which the duty not to usurp the business opportunities of a corporation was affirmed was the Privy Council decision in Cook v Deeks 6, held that the directors breached their duty to Toronto Construction Company by diverting a contract to their newly formed company. In this case the directors had taken an opportunity belonging to the company. This effectively redirected the profits and thus the fiduciaries were made accountable for profits made in connection with their office. Alphabet Pty Ltd operates the business of designing web pages and developing services for use on the Internet.
The company has made a substantial profit, for this money should be used for developing a program that acts as a computer virus detector and spy ware monitor which with further capital. The development could produce even bigger returns for the company. Alphabet Pty Ltd would have an interest in spy ware programs. They would like to use the substantial profit for buying the programs. But the directors Alpha and Bravo distribute the accumulated profit as a dividend to the members the result is that Alphabet Pty Ltd no longer has sufficient capital to develop the spy ware programs.
Alpha and Bravo used their dividend from Alphabet Pty Ltd to provide the additional capital for the further development of the program by Immunity and Co. Consequently, Alpha and Bravo make a profit from taking up this opportunity which should have been taken up by the company. They were in breach of their duty to avoid conflict of interests. Contracts with the company Directors are in breach of their fiduciary duty if they enter into contracts with their company because they are then in a position where their personal interests conflict or may conflict with the company's interests. This is illustrated in Transval Lands Co.
v. New Belgium  2 Ch. 488 7 in that case, the court held that the director's interests conflicted with his duty. He breached his fiduciary duty to that company even though he did not vote on the board's resolution which agreed to the contract. In the meantime Alphabet Pty Ltd has been providing services to Immunity & Co at a reduced rate through a contract made with Immunity & Co and signed by Alpha and Bravo as directors of Alphabet. Alpha and Bravo owed a good faith for Alphabet. They enter into contract and put themselves in a position where they may further their own interests.
The directors also made personal profits through this contact — reduce rate. Misuse of company funds Directors are under a duty to act in their company's interests with respect to the use of the company's funds. Alpha and Bravo distributed the profit as a dividend to the members. It occurred that Alphabet no longer has sufficient capital to develop the spy ware programs which could produce bigger returns for the company. They used this funds to develop their own program. Obviously, they obtain funds for their personal use. This is a misuse of company funds. 8 Duty of Care and Dilig ence
In general law directors have the duty of care and diligence. The care that a director is bound to take has been described as reasonable care and the diligence of directors has been referred to as a continuing obligation to keep informed about the activities of the company. The rule in Foss v Harbottle prevents shareholders from bringing a negligence action against directors on the company's behalf. Since the directors owe their duties to the company, the rule in Foss v Harbottle regards the company as the proper plaintiff to bring the legal proceedings not the shareholders.
According to Pavlides v Jensen  Ch. 565 9, in the absence of proof of actual fraud by directors, the fraud on the exception to the rule in Foss v Harbottle does not apply to allow minority shareholders to bring an action against negligent directors on the company's behalf. However, in Daniels v Anderson  16 ACSR 60710 state that responsibilities of directors required that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. Alpha and Bravo has breached the duty of care and diligence by reducing rate.
They take the advantage; they are director of Alphabet, to make a contract what benefit for them. The independent valuer had also been used by Immunity to provide a valuation of the product. It was on this valuation that Immunity had made the offer to Alphabet. The valuer was not independent. Alpha and Bravo has breached the duty of act good faith. The most important case dealing with R v Cook  ACLC 947 11. There are restrictions on voting power by majority shareholders against minority shareholders. Alphabet Pty Ltd cannot change its share capital structure to disadvantage minority.
By allocation 20 shares each to the majority, Alpha and Bravo, for no consideration, and not allocating a similar amount to the minority, this is clearly disadvantage the minority. Statutory Law Improper Use of Position or Information The Corporations Act 2001 places civil obligations on directors and officers of a company similar to the duties established in general law to avoid conflict of interest. Sections 182 and 183 provide that directors or other officers must not make improper use of their position or information to gain an advantage for themselves or another person or to cause detriment to the company.
It could be argued that Alpha and Bravo have made improper use of both information acquired by virtue of their position and their position to gain an advantage. Consequently they contravened s182 and s183. As managing director, Alpha and Bravo gained information about the spy ware program. They have improperly used this information for his own benefit by taking the opportunity to be involved as director of the company that will develop the spy ware program. A contravention of these provisions is a civil penalty provision actionable by the Australian Securities and Investment Commission (ASIC).
If the court finds Alpha and Bravo in contravention of a civil penalty provision it may make a declaration and order him to pay the Commonwealth a pecuniary penalty of up to $200,000 under s1317G or disqualify them from acting as director. The court could also make a compensation order, which may include profits made by them resulting from the contravention. Furthermore, if it could be proven that Alpha and Bravo acted dishonestly or recklessly with the intention of gaining an advantage this would be a breach of s 184, a criminal penalty provision and could result in imprisonment.
Material Personal Interests Under s 191 a director has a duty to notify other directors of material personal interests when a conflict arises unless the section provides an exemption. 13 Section 195 places restrictions on voting of directors of public companies who have a material personal interest in a matter that is being considered at a directors meeting. Those directors with a material personal interest are not permitted to be present while the matter is being considered or to vote on the matter. An offence based on s 195 is an offense of strict liability.
If Alpha and Bravo have not disclosed their interest and have not removed them from position of influence over the board's decision they will be in a position to influence the outcome of any decisions relating to the negotiations with Immunity & Co. 13 Directors of proprietary companies that have a material personal interest that has been disclosed are not restricted and may vote on the matters that relate to the interest. Members of Alphabet were aware that the partners in the firm Immunity were Alpha and Bravo. Alpha and Bravo are able to vote as director of Alphabet on matters relating to the negotiations with Immunity.
Removal of directors The general meeting of a proprietary company can only remove a director if empowered to do so by the replaceable rules or constitution. The replaceable rule in s203C which applies only to proprietary companies, permits the shareholders by resolution to remove a director and appoint another person. In the case of a proprietary company, the constitution may permit the majority of members to remove a director. However, it is possible for Alpha and Bravo to remove Charlie. Charlie may also permit majority of members to remove Alpha and Bravo.