Question

polyester is a director of style Pty limited involved in making women's clothing

1. She arranges with the company's bank to transfer an amount of $65000 from the
company account into a personal bank account held by her in her own name. She uses the funds to
finalise some outstanding personal debts.
Situation 2. As a director she receives information that the company is in a serious financial position.
She arranges to transfer a larger amount of the assets of the company over a new proprietary
company that she formed with the intention of caring on the same business.
Situation 3. Contrary to a resolution of the Board and notwithstanding established business practice
that limits credit to $20,000 she allows a trade debtor (who has a history of bad debts) to exceed its
credit limits by $25,000. The debtor fails to pay the outstanding amount of $45,000. Can she rely on
the business judgment rule in this situation?
Required: Has she breached any duties under the Corporation Act in the three (3) situations listed
above?

Answer 1

Business judgement rule protects companies from frivolous or unnecessary lawsuits that can ruin a companys reputation. ie under this rule as long as court believes the directors are acting in good faith and are taking rationale decisions ,it wont act against the director.

But here the director has act against the shareholders interest and by law it cant be justified. All the 3 situations has violated the actions in terms of good faith and hecne the director wont be protected by Business judgement rule.

Some of the Duties of director as per corporations act are

• Care and diligence
• Good faith
• Not to improperly use position
• Not to improperly use information
• Insolvent trading
• Disclosing directors’ interests
• etc...

From these duties we can clearly see she has violated good faith, Not to improperly use position, Insolvent trading etc by these 3 situations.