he legal issues raised by this problem are: 1. Whether Kath has breached the duty under both the general law or the Corporations Act 2001(Cth) 2. Whether Sharon and Brett have breach their duties under the Corporations Act 2001 (Cth)

APPLICATION

It is not any possible conflict which results in the general law rule applying. Where the general law conflict rule applies to a director, the director must disclose their interest to the company, which usually means that the interest must be disclosed to the other directors. If the interest is not disclosed, there is a breach of the duty to avoid a conflict of interest. The fact is that Kath is the managing director of VitaHerb, meanwhile, she is also a shareholder and director of HorseCare Pty Ltd which has only two shareholders and directors. Therefore, she shouldn’t place herself in a position where there is a personal interest and the interests between these two companies. However, the contract between these two companies based on her proposal, which was proposed in VitaHerb’s board meeting. Moreover, she didn’t disclose anything about her interest in HorseCare in VitaHerb’s board meeting.

Any benefit obtained by a director by reason of his or her position or in the course of the company’s business, whether it takes the form of a commission, a bribe, qualification share, or any other sort of benefits, renders the director accountable to the company—unless the transaction is disclosed to and ratified by the general meeting. (Queensland Mines Ltd v Hudson) A director must disgorge any benefit gained unless the ratification of general meeting or the transaction has been disclosed to the general meeting. The decision to pay commission to Kath was made by the board meeting, which should be made by the general meeting. Moreover, as the director of the board Kath should not vote in the board meeting to make any decision. For this reason, she breached her duty by receiving the commission.

ARGUMENT

Kath will argue that there is no conflict interest exists in this case. The interest which comes from HorseCare arises in relation to her remuneration as a director of the company. Hereby, she doesn’t need to give any notices of an interest to other directors of VitaHerb: s 191(2) CA  Sharon and Brett will argue that the interest which comes from HorseCare is Kath’s personal interest. This part of interest is based on the trading between two companies, which has been proposed by Kath in board meeting. Because Kath gained her personal interest from other companies, it is absolutely conflict interest. In addition, Kath should know this proposal is likely to bring personal interest to her, hence, she should disclose it in the director meeting: s 191 CA

• RULE (legal principle): in the general law

The other general law conflict rule states that directors must not take corporate property, information or opportunities without the permission of the company. (Furs Ltd v Tomkies)

APPLICATION

Where a director takes corporate property, information or opportunities without the permission of the company, the director places their personal interest over their duty to act in the interests of the company. As the case stands, Kath received a large commission on resale herbal tonics, which were produced by HorseCare. Nevertheless, she is one of the directors and shareholders in HorseCare, which has just two directors and shareholders. That means she may breach her duty by placing herself in a position where her personal interest (obtained a large commission) conflicted with her duty to act in the interests of HorseCare Pty Ltd, which meant ensuing that HorseCare Pty Ltd obtained the best possible price for the sale of its products. (Furs Ltd v Tomkies)

ARGUMENT

Kath will argue that the commission is a kind of award to encourage her to find more opportunities to help company to make more money. This part of profit can’t prove HorseCare didn’t obtain the best possible price.

The court will argue that although this commission is used to award Kath for helping company earn money, this part of money still came from the trading between two companies. That is, it is possible that HorseCare didn’t obtain the best interest because VitaHerb obtain a great profit plus a large commission. Accordingly, as if in the case Furs Ltd v Tomkies Kath has breached her duty.

• RULE (legal principle): in the general law

In addition, a director must not compete with his or her company, either directly or indirectly. The executive directors are unable to join the boards of competing companies. 

APPLICATION

An executive director must serve his employer full time during normal working hours, (On The Street Pty Ltd v Colt) meanwhile, executive directors may breach their duties to the company if they work for a rival business in their spare time, using skills and knowledge that assists the rival business to compete with the employer company. (Hivac Ltd v Park Royal Scientific Instruments Ltd) VitaHerb Ltd is an unlisted company selling over-the-counter herbal treatments for small domestic pets. HorseCare Pty Ltd is selling Kel’s herbal treatment in domestic market and oversea market. Because these two companies are all focus on herbal treatment, the competitive relationship does exist. Kath, as the managing director of VitaHerb Ltd shouldn’t work for any other competing companies in both normal working hours and spare time. Meanwhile, Kath shouldn’t use her skills and knowledge to assist the rival business to compete with VitaHerb. However, she registered the competitive company—HorseCare Pty Ltd with Kel and placed themselves as the only shareholders and directors. In addition, because Kel has no business experience, it’s likely that Kath did the main work in operating the company. For this reason, it may be ratiocinated that Kath works not only in the working hours but also in spare hours for HorseCare by using her skills and knowledge.

The principle that a person can be a director of two competing companies does not apply to executive directors. They are unable to join the boards of competing companies. Kath, as the board members of VitaHerb, shouldn’t join other competing companies. However, she has registered another company with Kel and joined the board of HorseCare.

ARGUMENT

Kath will argue that VitaHerb and HorseCare are not competing companies. first of all, VitaHerb focus on the domestic pet market including horse, however, HorseCare just focus on horse. Secondly, VitaHerb just focus on the domestic market, whereas, HorseCare focus on native and overseas markets. They can’t become virtual competition. Above all, she can be the director in HorseCare.

Sharon and Brett will argue that these two companies are all focus on the herbal treatment, in another words, the main product of two companies are the same—herbal treatment. Thus, the competing relationship does exist.

• RULE (legal principle): in the Corporations Act 2001(Cth)

A director of both public and proprietary companies has a duty to disclose particular interests. In other words, a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give other directors notice of the interest unless the section provides an exemption: s 191 CA

APPLICATION

A director should give the notes to other directors about the details of the nature and extent of the interest and the relation of the interest to the affairs of the company, which should be given at a directors’ meeting as soon as practicable after the director becomes aware of their interest in the matter. As the matter of fact, Kath didn’t give any notes about the details of interests to other directors in board meeting of VitaHerb. For this reason, Kath has breach her duty of avoid conflict interests.

• RULE (legal principle): in the Corporations Act 2001(Cth)

A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not be present while the matter is being considered at the meeting or vote on the matter.

APPLICATION

VitaHerb is a public company and Kath is the director of VitaHerb and HorseCare, the contract between these two companies can bring interest in both sides. The interest which comes from HorseCare, is a kind of personal material interest to VitaHerb. For this reason, she should obey this rule in directors’ meeting. As the matter of fact, Kath proposed the trading with HorseCare and didn’t disclose her interest, in addition, she has voted to trade with HorseCare in directors’ meeting. Thus, she breached her duty.

ARGUMENT

Kath will argue that no matter she has voted the decision would be passed by the board, because other two directors were agreed to enter the contract with HorseCare. So the effect of her vote basically means nothing. Even though she quit to vote or vote against this project, it couldn’t stop the company enter the contract with HorseCare. So she has not breached her duty.

The court will argue that although the result would not change, Kath should obey her duties as the director of VitaHerb.

2. Whether Sharon and Brett have breach their duties under the Corporations Act 2001 (Cth)

(1) The duty of care, skill and diligence

RULE (legal principle): in the Corporations Act 2001(Cth)

A director of company must exercise their powers and discharge their duties with the degree of care and diligence: s 180 (1) CA

APPLICATION

Whether a person has breached the statutory duty of care is determined by considering the circumstances of the person’s position and responsibilities within the company. In terms of general principles, directors must ensure that they are in a position to guide and monitor the management of the company. One of the minimum standards of care, skill and diligence expected of all directors. Directors are under a continuing obligation to keep informed about the activities of the company. (Daniels v AWA Ltd) As the directors of VitaHerb Ltd, Sharon and Brett should pay attention to not only the company’s business, but also the trend of the market which may effect on the company’s business. Moreover, they should pay attention to the development of the product. However, the new herbal treatment has been provided to native and oversea market after half a year, they still have not any information about this new popular product. Thus, Sharon and Brett have breached their duty of care, skill and diligence.

ARGUEMENT

Sharon and Brett will argue that they are not familiar with the herbal treatment because they are not the professional. As the director they always take care about the company’s finance and hold the board meeting on time. The new treatment should be discovered by the managing director because it should belong to the daily operating. Therefore, they haven’t breached their duty of care, skill and diligence.

The court may argue that as the directors of the company they should inform the activities of company. The new trend, the new development of the product is an essential element for the company. Thus, it is important to know the changes about the market. However, Sharon and Brett didn’t get any information about the new herbal treatment after it has been introduced to the native market half a year. Hence, they have breached their duty of care, skill and diligence: s 180 CA

(2) The duty to retain discretions

RULE (legal principle): in the Corporations Act 2001(Cth)

There is a duty imposed upon company directors to retain the freedom they have to make decisions on behalf of the company.

APPLICATION

The duty of retain discretions means that directors cannot undertake or agree that they will not exercise powers given to them in the company’s constitution or under the Corporations Act. In the director meeting of VitaHerb, the board agreed to pay commission to Kath. Any benefit obtained by a director by reason of his or her position or in the course of the company’s business, whether it takes the form of a commission, a bribe, qualification share, or any other sort of benefits, renders the director accountable to the company—unless the transaction is disclosed to and ratified by the general meeting. (Queensland Mines Ltd v Hudson) A director must disgorge any benefit gained unless the ratification of general meeting or the transaction has been disclosed to the general meeting. The decision to pay commission to Kath was made by the board meeting, which should be made by the general meeting. For this reason, they breached their duty by passing the commission.

ARGUMENT

Sharon and Brett will argue that the commission which has been paid to is a kind of award. As the directors of the company, they have the power to issue the award. For this reason, they haven’t breach the Corporations Act 2001 (Cth)

The court will argue that no matter the forms of the commission, it should be decided by the general meeting. As if in Queensland Mines Ltd v Hudson, Sharon and Brett have breached their duties.

CONCLUSION (on Kath and other directors)

For the reasons given, Kath has breached the duties of director in both general law and the Corporations Act 2001. As the managing director of VitaHerb Ltd and the director of HorseCare Pty Ltd, Kath should discharge all the duties of director. However, she has breached the following duties:

1. the duty of good faith in the interests of company
2. the duty to act proper purpose
3. the duty to avoid the conflict interest

Accordingly, Kath should receive the following consequences of breach of duty:

1. Kath may receive civil penalties because she has breached the duty to act in good faith in the best interests of the company and for a proper purpose. Actually, she has breached a corporation/scheme civil penalty provision. Therefore, she should pay a pecuniary penalty of up to $200.000, and being disqualified from managing companies for a specified time.
2. Kath may commit an offence and can be subject to criminal penalties if the are reckless or intentionally dishonest and fail to act in good faith in the best interests of the company.
3. A director who makes a profit because of a breach of fiduciary duty may have to pay that profit to the company. This remedy can be appropriate where the company has not suffered any loss as a result of the breach of duty. (Regal Hastings Ltd v Gulliver) For this reason, Kath has to repay the commission the VitaHerb.
4. Kath may be ordered by court to pay a fine of up to $1,100, or be sent to prison for up to three months, or both: Schedule 3 to the Corporations Act

According to the above items, Kath may has to: 1. pay $200,000 to Commonwealth Government; 2. repay the commission to VitaHerb; 3. been sent to prison for up to three months; 4 been ordered disqualifying from managing VitaHerb for a special times.

In addition, because Sharon and Brett has breached their duties of care and retain discretions, they may face a prescribed offence. So they has to pay $550 as a penalty.

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