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Advanced Solar Ltd designs, manufactures and installs solar electricity cells. The company's directors are Mary, Derek and Edward. Mary is the Managing director owning sixty per cent of the company's issued share capital, whereas Derek and Edward are non-executive directors of the company and each of them own twenty per cent shares in the company. At a recent board meeting, the following resolutions were passed:
a) To shift the company's manufacturing facilities to China. Derek and Edward were concerned at the meeting that sufficient feasibility study had not been undertaken on the quality of the manufacturing standards in China. However, Mary was confident and keen to make the move to China to save costs and save the company from further financial ruin.
b) To reject a proposed contract with Riverside University to install 100 solar electricity cells on the roof of the university library. The board did not feel that there was enough profit in the contract to make it commercially viable. After the meeting, Mary and Derek have approached Riverside University and have been offered the contract in their personal capacity which they intend to accept.
Mary and Derek have also called a members meeting where they successfully passed a resolution permitting them to take on the Riverside University contract. Edward feels helpless and wants to recover the profits made by Mary and Derek through this contract. Edward is concerned that the majority rule will prevail and the courts may be reluctant to interfere with the company's internal affairs.
a) Advise the company on any potential breaches of directors' duties.
b) Advise Edward of how the Corporations Act 2001 (Cth) can assist him or Advanced Solar Ltd in commencing a legal action against Mary and Derek to stop them from accepting the Riverside University contract or recovering the profits made by them through this contract.
Whether the company can sue the directors for breach of their duties?
Area of law
Statutory duties of the director under section 180-183 and section 191-192 of the Act;
Principles of law
A company is a separate legal entity in the eyes of law as held in (Saloman v saloman, 1896). A company is an artificial legal person and thus requires the presence of some natural person who must run the company by applying his mind (Bourne, 2016). As per section 198A of the Corporation Act 2001, the directors are the authorised person who conduct the acts on behalf of the company and is held in (Hely-Hutchinson v Brayhead Ltd , 1968). ( (Harris, Hargovan, & Adams, 2016)
However, the company's directors have certain obligations which should be complied by them in each and every situation. The same are:
- Section 180 (1) of the Act submits that the acts of the directors must be carried on with utmost care and diligence like a normal prudent man would have done in the similar situation (ASIC v Healy , 2011). If the director can prove that he has acted with all reasonable care then he can protect himself under section 180 (2) of the Act.
- As per section 181 of the Act, the acts of the officers and company directors must be carried on with utmost good faith and with proper purpose and in the interest of the company;
- As per section 182 and section 183, a company director must not misuse his position and information which is in his own interests and is detrimental to the company and is held in (ASIC v Vizard , 2005)
- As per section 191and section 192, every director must disclose any material personal interest that is in conflict with the interest of the company to the other directors of the company.