Question

(1) Roberta is the managing director of EY Pty Ltd, a profitable company specializing in buying and selling anti-aging cosmetics and shampoos for sensitive hair. The market for EY’s products is women between the ages of 40 and 70 years. While at the hairdresser’s having a power perm, Roberta chats to her hairdresser, Leonardo. Leonardo asks Roberta whether her company would be interested in helping him to market a new organic hair soap called “Wonder Bar”. Leonardo claims that the soap prevents male hair loss. Roberta tells Leonardo that her company would not be interested because it sells women’s products only. She offers to help Leonardo herself. Leonardo agrees. Roberta and Leonardo set up a company called Wonder Hair Soap Pty Ltd (WHS) and become its directors and members. Roberta is the majority member. The business of the company is an overnight success. At a board meeting of EY six months later, Roberta proposes that EY enters into a longterm contract with WHS to buy supplies of the organic hair soap for re-sale. The board agrees and as part of the contract Roberta negotiates with the board that she will be paid a small commission on each sale because she drew the board’s attention to this new product opportunity. EY makes large profits from selling the soap overseas. EY now learns that Roberta is the majority member in WHS. The directors are angry and want to know what can be done.

(a) Has Roberta breached her directors duties. Which (if any) has she breached and explain how she breached has them?

(b) Should Roberta have been present at the board meeting when the contract with WHS was discussed and voted on?

(c) What general law remedies (if any) should EY seek against Roberta? (d) What statutory penalties (if any) can be imposed against her? Who can impose them?

Answer 1

Answer 1. Yes, Roberta breached her director's duties under the Corporation Act 2001 because Roberta has failed to comply with fiduciary and statutory duties for the PTY LTD.

Roberta is a managing director of EY PTY Ltd. and has to comply with her fiduciary and statutory duties under Corporation Act 2001 (same duties for Pty. Ltd.). We will discuss the fiduciary and statutory duties that a director has to comply with under the Corporation Act 2001 in the below points,

a. Section 180 Duty of proper purpose: The director of the corporation act their duties for a proper purpose. At the time of conflict, the court will compare the legal purpose of the power and the actual purpose, and if any difference between them the court would define improper purpose.

b. Section 181 (1) Duty to act in good faith, The director and other members must exercise their powers and duties in a good faith and the best interest for the company. Director's and other member's acts should be in the company's best interest. This is a fiduciary duty of the director.

c. Section 182 and 183 Duty of Conflict of Interest: This is the duty of the director to avoid conflicts of interest for the company. They should not act where they have actual conflict, a real prospect of conflict, between their duties to the company and person interest or duty to other companies. They should not act towards gaining personal profits or undisclosed profit acting as a director.

If there is a conflict of interest, the director has a fiduciary duty to make full disclosure of the company's. shareholders. The directors should not misuse their position and power to gain personal advantage.

So as per the discussion of the duties of a director of a corporation, we can say that Roberta has breached the director's duties. She can be a director in multiple companies but she would have disclosed it to the shareholders and she also used her position and power to convince the board to buy supplies of the organic hair shop for re-sale from WHS that she is the part of that company. She has done this for her personal interest.

Answer 2. Roberta should not be present in the meeting and she has no right to vote where she has a personal interest in a contract with WHS as per section 195 (1) under corporation act 2001. According to this section, the director's vote will not be counted if the director has a personal interest in the contract if the director has not disclosed her personal interest to the shareholders.

But section 195(2) allows her to present in the meeting and vote and take part in the discussion of the contract, only if she had disclosed her personal interest to the shareholders prior to the meeting and discussion the matter.

Answer 3. As we have discussed that Roberta has breached her duties as a managing director of EY Pty. Ltd. This is the example of personal interest and material gain from the contract with WHS. Again she is demanding commission on each sale of soap called "wonder bar", in this context she is showing dishonesty and ignorance towards the company as she knows that she is a majority shareholder in WHS.

There are general remedies when any director breaches a contract under Corporation Act 2001. When a director is involved in breaching director's duties, the general remedies are followed:

a. Criminal Sanctions - Imprisonment for dishonesty and anti-competitive conduct. Imprisonment up to 5 years.

b. Civil Sanctions- Fines, up to $ 3,40,000

c. Disqualification from the positions as Director in the corporation.

d. A penalty payment up to $2,00,000.

Answer 4. As per the statutory laws, the shareholders can hold the assets earned from the deal of EY and WHS, also they can hold profits and transfer to EY accounts due to sale commissions and other ways. The company shareholders have the right to file a lawsuit and also remove Roberta from managing the company, which could land her into prison with a heavy financial penalty. As per the statutory laws, there is penalty up to $ 200000 for breaching of director's duties.