1. Easy Groceries Pty Ltd: the Company

Issue
The issue here is Easy Groceries Pty Ltd is liable for the debts incurred as a separate legal entity to its directors and shareholders? Or will its directors be personally liable for its debts?
Law
Upon incorporation, a company becomes a separate legal entity from its directors and members (s119). It can sue and be sued, acquire assets and debts, and enter into contracts in its own name. Its existence can lasts a lifetime as well. The Doctrine of Separate Legal Entity also known as “corporate veil” entails that the Directors of a Company have no personal liability while its Shareholders are only liable up to the amount they paid for their shares. In Salomon v Salomon & Co Ltd Case, Mr. Salomon was the majority shareholder and a secured creditor of the company. Upon winding up, the liquidators argued that Mr. Salomon must not be considered as a secured creditor since he was in control of the company itself. But the Court’s decision recognized Mr. Salomon as a secured creditor since the company has a separate legal personality from the directors and shareholder upon its registration and it has nothing to do with Mr. Salomon being a secured creditor.

Application

Applying s119 corporations act, Easy Groceries Pty Ltd is a separate legal entity from its directors and shareholders, meaning that Easy Groceries Pty Ltd as a company itself is liable for the debts that occurred.

Conclusion

As an own legal entity, Easy Groceries Pty Ltd is liable for all the debts occurred.

2. Directors

A. Tom and Jones : Executive directors

Issue

Are Tom and Jones directors under s9 Corporations’ Act? Did they breach their duties under general law and the Corporations Act as directors? Can they be held personally liable? Are they able to any defences as directors of the company? Law

According to Section 9 of the Corporations Act, a Director is a person appointed to the position of a director or alternate director. He can be an Executive, Non-executive, Shadow, Nominee or an Alternate director. An Executive director is both a full time employee and a board of director of the company. A non-executive director is not an employee and a part time director of the company only. All directors and officers are bound by statutory duties and a number of general law (derived from common and equity law). There are similarities between statutes and judge-made law since the Corporations act refines and categorizes the existing judge-made legal duties imposed on directors and officers. The following general law duties to be discussed are covered in the Corporations act. The only difference sits in the administration of these duties and its remedies. Directors are in a fiduciary relationship with the company, which is based on trust and confidence and are expected to act in best interest of the company (ASIC v Adler 2002). As fiduciaries, directors must exercise: (1) Duties of care, skill and diligence (s180) with the two sub duties. First is to exercise reasonable care, skill and diligence in the performance of the functions and the exercise of the powers, which form part of the director’s office. (2) Duties of good faith and proper purpose (s182-s183) include the duty to act in good faith in the interest of the company as a whole and avoid actual or potential conflicts between one’s personal interest and those of the company (ASIC v Adler 2002). The duty requires directors to act for the benefit of the company as whole and not just the majority of members (Greenhalgh v Ardene Cinemas ltd 1951). (Ciro and Symes, 2013) (3) Duties to avoid conflict of interest (a191-s195). Some situations where the conflict of interest arises are: Contracts with the company and personal profits arising from acting as director. However the risk of breaching this duty can be avoided by a provision in the Constitution, which authorizes a director to have an in interest in a contract with the company and full and frank disclosure of a director in their interest in any contract with the company (Regal (Hastings) Ltd v Gulliver 1942 where the directors of Regal took the shares from its subsidiary company and subsequently sold these shares for a very huge amount of profit. The court’s decision was to give up all their profits to the company since they didn’t make a full disclosure about the matter to the company’s general meeting). (Ciro and Symes, 2013) (4) Duty to prevent insolvent trading (s588G). Related with its duty of care, skill and diligence, preventing insolvent trading applies if : a) a person is a director of a company at the time when the company incurs a debt ; b) the company is insolvent at that time, or becomes insolvent by occurring that debt, or by incurring at that time debts including that debt; c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; d) that time is at or after the commencement of this ACT.
There are some defences available to directors who otherwise contravene s588G. The business judgment rule (s180(2)) is the only defense available if the director breached the duty of care, skill and diligence (s180). It comprises of the director’s belief that his judgment is in best interest of the company and any reasonable person in their position would hold the same judgment. For those directors who contravene the duty to prevent insolvent trading, there are four defenses available. The first two refers to a director’s expectation that the company is solvent, either based on their own knowledge or reliance to someone else (Metropolitan Fire Systems Pty Ltd v Miller Case,). Another would be a non-participation in the management of the company at the relevant time for some good reason. Lastly, the director took all the reasonable steps to prevent the company from incurring the debt. (Ciro and Symes, 2013)

Applications

Applying s180 corporations act, Tom and Jones as executives directors of the company must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person has ordinarily imposed an objective standard for the director or company to satisfy. Tom and Jones breached directors’ duties of care, skill, and diligence to monitor and be informed of the general and financials of the company. They were focused on the growth of the company and overlooked other aspects especially the financial ones (ASIC v Adler, ASIC v Vines). The defense of business judgment rule can be used but they need to prove that they acted on best interest of the Easy Groceries Pty Ltd on the basis of their aggressiveness to pursue growth strategies of the company and not for their own interest.
They also breached their duties of good faith and proper purpose. They failed to include the interest of their members and creditors even if they were aware that the company is nearing its insolvency. In addition, John was also in violated his duty to act in good faith and for proper purpose.

The two directors also breached the duty to prevent insolvent trading. They knew that their business have been struggling from the start but they disregarded it and came up with a strategy by adopting aggressive marketing techniques such as buying more stock and then dropping prices to low levels. In applying their strategy, they took a loan for 1 million dollars and paid no attention in their struggles of the business. One of the statutory defence they can use in contravening this act is s188(H), they had reasonable grounds to expect or did expect that the company was solvent and would remain solvent even if it acquired debts (Metropolitan Fire systems v Miller).

Conclusion:

Tom and Jones breached their director’s duties under general law and the Corporations act as executive directors, hence they can be held personally liable for the debts of Easy Groceries Pty. Ltd.

B. Mary : Non-Executive Director

Issue
Did Mary breach the duties under general law and the corporation Act as director? As a non-executive director, is she personally liable for its debts?
Law
According to Section 9 of the Corporations Act, a Director is a person appointed to the position of a director or alternate director. He/she can be an Executive, Non-executive, Shadow, Nominee or an Alternate director. An Executive director is both a full time employee and a board of director of the company. A non-executive director is not an employee and a part time director of the company only. All directors and officers are bound by statutory duties and a number of general law (derived from common and equity law). There are similarities between statutes and judge-made law since the Corporations act refines and categorizes the existing judge-made legal duties imposed on directors and officers. The following general law duties to be discussed are covered in the Corporations act. The only difference sits in the administration of these duties. (Ciro and Symes, 2013)
Application
Applying Gold Ribbon (Accountants) P/L v Sheers, where non-executive directors are supposed to fulfil their duties to act with care and diligence although any breached of these duties has not caused any loss to the company. They are still supposed to exercise their power and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were director of the corporation in the corporation’s circumstances. (s18o)
In this case, Mary did not attend the meeting but trusted Tom and Jones’ business instincts and signed the relevant documentation to get the bank loan. She doesn’t have a single idea as to how the bank loan will affect the company. It only proves that she didn’t exercise her duty to act with degree of care and diligence properly. Hence, she has breached this duty.
Applying Cook vs Deeks, where it was established that directors breach their duty of loyalty by taking up a corporate opportunity that actually belonged to the company, and the new company held the contract for the benefit of the main company and had to account for any profits resulting from it.
In this case, Luke actually wanted to do business with Easy Groceries Pty Ltd. But Mary convinced him that the company is not being managed well and will be insolvent soon and made him enter into an exclusive contract with her own company which she sets up after meeting Luke.
This clearly explains that Mary has taken up the opportunity that actually belonged to Easy Groceries. Hence, she has breached her duty of loyalty and her duty to avoid conflict of interest.
Conclusion
Mary, being a non-executive director is personally liable as she had breached her duties as a director to act with due diligence and care duty to avoid conflict of interest.

C. Steven: Director/Shareholder
Issue
Has Steven breached his duties as a director? Can it be proved that his rights have been oppressed? Can he seek for any remedies as such?
Law: Under s 1318, a director in breach of duty can be relieved of any liability if they can convince the court that they have acted honestly and reasonably in all the circumstances.
Application
When the meeting was held between the director and shareholder, Steven didn’t attend the meeting. He was in the hospital recovering from food poisoning. The resolution to obtain the loan was also passed by remain 80% vote. Hence he had no knowledge of any resolutions being passed and any actions being taken in the directors’ meetings. (Gamboto v Wcp case)
There is, however, a bigger issue in Steven’s case and that is Steven’s right here have been oppressed. a. He didn’t sign the resolution to obtain the loan. b. Remaining 80% vote to dilute the voting power attached to Steven’s shares.
1.Under general law, Fraud on the minority is one of the ground on which member are permitted to bring a personal action. They have the right to have her or his voting right protected against improper action by the director, which dilute or otherwise harm that right. (Case of Gambotto v Wcp) in the other hand under statute s175, right to apply on the court for an order to correct a company register.
Hence, Steven can bring in personal action against the directors, who have harmed his voting rights. He also has statute right to apply to the court for an order to correct a company register under s 175.
2. Under the derivation action, as per se 236 ,a member has a general statutory right to bring action or intervene in the proceeding on behalf of the company to challenge a wrong that has been done to the company. (Case:Charlton v baber)
The only thing is that if Steven decides to bring on the derivative action, it has to be against the directors doing wrong to the company and not to him personally.
Further, Steven can also bring the derivative and the personal actions together if he can prove that the decisions/ actions of the members of the company has given rise to both personal and derivative rights.
Conclusion
Steven can easily be relieved of the breach of his duty as a director under s 1318, as he has acted honestly and reasonably in all the circumstances.
So, Steven can actually bring personal actions and derivation actions or both against the majority shareholder and the directors of the company, on the ground that his rights as a minority shareholder has been oppressed. D. Vincent: Shadow/de-facto Director
Issue
Is Vincent considered to be a director under s9 Corporations’ Act? Did he breach his duty under general law and the Corporations Act as a director? Can he be held personally liable?

Law
Definition of Director under section 9 Corporations’ Act includes a person who acts in the position of a director even if the person is not appointed as a director. Therefore in this case Vincent is considered to be a Shadow/de-facto Director.
Application
When meeting was held to obtain bank loan and to dilute Steven’s share, Vincent agreed with whatever decision his Father, Tom made. Under s198D, Vincent’s agreement to “follow” Tom’s decision is considered to be a delegation. Under s190(1) Vincent is responsible for the decisions taken by Tom as if he has taken the decisions himself.
Conclusion
Alongside with Tom and Jones, Vincent who is considered as a shadow/de-facto director has breached his duties under general law and the Corporations act, hence they can be held personally liable for the debts of Easy Groceries Pty. Ltd. 3. Shareholders : Tom, Jones, Steven, Rita and Sheela

Issue
Tom and Jones are the directors of the company of Easy Groceries Pty Ltd, and their wives Rita and Sheela also became involved in the company as shareholder with each holding 20% of share. Now when the company has incurred debts, the issue here is what is Rita and Sheela’s position as minority shareholder? And what are some of the action that they can take as members of the company?
Law:
Easy Groceries Pty Ltd is a company limited by shares. As such, in the event that a company does not have sufficient assets to meet all its debts, each member (shareholder) is only liable for the amount, if any that remains unpaid on their shares (s 9 and s 516).
Application:
Applying s 9 and s 516, both Rita and Sheela have limited liability. They both are minority shareholders in the company and they don’t hold any management position too. Hence, their liability is limited to the extent of their ownership of shares, which is 10% each.
Conclusion:
Both Rita and Sheela are liable only for the amount that they have invested in the shares, i.e. together, 20%.