Corporation Law Analysis of Case Fodare Pty Ltd v Shearn NSWSC 479

Question: Discuss about the Analysis of Case Fodare Pty Ltd v Shearn. Answer: Introduction Every nation has its own legislature, which governs the companies in the nation. In Australia, the Corporations Act, 2001, (CA) which is an act of the Commonwealth, assigns certain duties and obligations over the directors, along with the officers of the company, when they discharge the duties given to them and when they exercise the powers put on them, by being in such position (Latimer, 2012). The directors run the business of the company on behalf of the shareholders and due to these reasons, the CA imposes duties on the directors. When a breach of these duties takes place, the directors of the company attract both civil and criminal penalties, depending on the nature of contravention (Rosa, 2015). The case of Fodare Pty Ltd v Shearn [2011] NSWSC 479 is one of such cases where the sole director of the company had breached the directors duties laid down under this act (Moores, 2014). The following parts contain a discussion over this case to present a summary of the case, whereby the duties breached by the director and the decision of the case have been elucidated. Fodare Pty Ltd v Shearn With regards to Shearn, who was the director of Fodare Pty Ltd, upon being instigated by Clout, who was the liquidator of the company, Fodare Pty Ltd initiated claims against the sole director of the company. The plaintiff was the trustee of Alexandria Trust, which was a trust of a settlement, and was formed through a deed. It was also a family trust of sorts which benefit the members of the Shearn family. Certain property had been acquired by Fodare as a trustee, which was sold by the director to an independent purchaser. This sale was what formed the basis of this entire case (NSW Case Law, 2011). In this case an eye opener decision of the recent times was given by the Supreme Court of New South Wales. In this matter Shearn was a sole director of a company, at such time period when the property of the company was sold. The defendant had cleared all of the registered mortgages and had diverted the funds amounting to a value of A $ 383,000 in her personal bank account and she had also diverted a sum of A $ 251,000 for paying up, as well as, discharging the mortgage over the property which was held by her daughter. Eventually, the company was wound up. The proceedings were initiated by the liquidators and they sought a declaration which would state that Shearn had breached her fiduciary duties. In this matter, her daughter was also charged and the grounds for the same was that as per the scope of the constructive trustee, she was covered under it due to the fact that she had clear knowledge that the fund which she received was out of the proceeds which came from the sale of the p roperty of the company (INSOL, 2012). Duties Breached As per section 180 (1) of CA, the civil duty has been imposed on the directors of the company, which dictates that the directors of the company, have to use their authority, along with undertaking their obligations in a manner which shows diligence and care. This diligence and care had to be compared on the basis of a reasonable individual, as if they held the officer which the director held, held the same responsibilities, and was the director of the company in the similar situation (Australasian Legal Information Institute, 2017). Section 1317 E of this act contains the civil penalties for the breach of director duties. Under this section, the Court has the power of making a declaration of contravention which contains the details of the penalties and the conduct which led to such contravention, along with the other details of the breach. Once this declaration has been made, the ASIC has the power to apply for pecuniary penalties as are contained in section 1317G of CA, or can also apply for getting a disqualification order against the director pursuant to section 206C of CA (WIPO, 2015). Under section 181(2) of CA, a business judgment rule has been provided. A director would not be held liable for a breach of section 180(1) in case they can establish that the decision was taken after making proper inquires about the decision, on the basis of their knowledge and that the judgment was made for a proper purpose and in good faith. It also has to be shown that the director did actually believe, in a rational manner, that the decision was in the companys best interest (Federal Register of Legislation, 2017). The reasons for providing this defense is that at times, a business decision make turn into losses, even when the matter was carefully and diligently handled by the director. And so, for every loss of the company, the director cannot be held liable, otherwise the directors would stop making any business judgment, for the fear of attracting civil penalties under this section (Cassidy, 2006). Section 181(1) of the CA imposes duty on the directors to act in a good faith, for proper purpose and in the manner which is in the companys best interest. This has to be done when the directors use their authority, and undertake their obligations. The breach of this section also attracts the civil penalties contained in section 1317E of CA (Australian Government, 2017). Section 182(1) of the CA provides that the directors are not to use their position of being a director in a manner which results in them getting an advantage for either themselves or for someone else, and the effect of which is detrimental for the company. The breach of this section results in civil penalties being applied pursuant to section 1317E of the CA (ICNL, 2017). Decision of the Court At the very beginning, the court stated that no allegations had been made against the sale of the property, which took place, at the values stated in the application given by the plaintiff. A substantial sum was owed to one Bruce Dennis by the company, and the director and her daughter were aware about company being in a debt due to the two sums paid by them, which resulted in no money being left for the payment to be made to Dennis. With regards to the property being the asset of the trust, the evidence could not lead the judges to state if that was or was not the case. Though, the court considered it crucial to consider the events which led to Denniss indebtness (Australasian Legal Information Institute, 2011). The court considered that the awareness of Shearn with regards to the payment of sum resulting the company having insufficient funds to pay off the debt were not much significant. Instead of asking if a particular application of assets of the company would leave the company in a mode where they would not be able to pay their debts; the question has to be rather decided upon the purpose for which the assets had been applied. This purpose had to be a proper purpose to not lead to a contravention of the duties stated in the previous part. The money held in the trust was held to be held in metaphorical sense. Further, as Shearn was the sole director of the company, it was held by the court that she had the duty to safeguard the funds of the company and only to use them for discharging the liabilities of the company for corporate purposes. The payment of funds to herself or that to her family members in a manner of gift, which resulting in a benefit for her or her family could not be deem ed as a due or proper discharge of her duties as being a director (Jade, 2011). The court highlighted the cardinal rule which binds the directors, as a result of the duties imposed on them through CAs Division I, Part 2D.1 (Boone, 2012). As per this, the personal interest of the director has to be below the interest of the company and the directors of the companies are required to account the profits or gains made by them due to their fiduciary company, to the company. So, the companys money, which reaches the hands of the directors or is under the control of the director, has to be out in the possession of the company so that the same can be recognized as being the property of the company. It also has to be explained, why the money was not put in the possession of the company and why the money had been applied in another manner. For this, there is a need to keep the records in form of receipts and payments by the company, which properly recognize the use of the money (Jade, 2011). In this case, there was only one director and so, the accuracy and the adequacy of the records had to be kept properly and this should be done on the basis which reflects the adherence to the fiduciary duties, so that the company can be aware of the fact that their property is being used in a particular manner and is being applied in a particular manner. The evidence in this case revealed that Shearn had failed in performing her duties in a proper manner. When the liquidator asked for the records and the books of the company, regarding the companies entire property, she did not provide the liquidator anything. And later on, she gave the liquidator a report which showed that the company had no assets and no liabilities. She also gave a statement which stated that the company had no tax liability and that for the previous three years no accounts were maintained by the company. The settlement cheques were not recognized as the property of the company. Also, she used the money of the com pany for benefiting her daughter and even the daughter was aware of the fact that the money which she was getting, came from the sale of companys property. The court held that even though Hirtzell did not know the fine details, but she was nevertheless aware of the ownership interest of Fodare in those assets (Jade, 2011). It was held by the Supreme Court that Shearn had to be held accountable for the company for the equitable compensation for both of these amounts, along with the statutory compensation, which would have to be in addition to the costs and interest. Along with this, it was held by the court that Shearns daughter also had to be held accountable for the equitable compensation, to the company, the amount of which was A $ 251,000 along with interest. It was held by the Court that Shearns daughter might have been aware about the fact that her mother did not have any money as she was a former bankrupt, along with the fact that the property which was sold was not of her mother, but that of the company. The Supreme Court stated that the mothers and the daughters liability of the equitable compensation amounting to A $ 251,000 along with the interest had to run alongside in a manner that both the son and the daughter had to be held jointly, as well as, severally liable (Jade, 2011). Conclusion To summarize the case, there was a sole director in this case who was held by the court to have breached her duty of acting in best interest of the company and which was in good faith, along with breaching of her duty of acting for a proper purpose, not making an improper use of her position and to act with reasonable diligence and care. These duties were breached as the director had caused some of the funds from the sale of property of the company for her and her family members use, and the fact that the company did not have a proper financial record. It is the duty of the directors to make certain that they work for a proper purpose, act in good faith and also in the best interest of the company. Owing to these breaches, the director had to pay the amount of compensation, along with the costs. References Australasian Legal Information Institute. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479 (25 May 2011). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/479.html?stem=0synonyms=0query=Fodare%20Pty%20Ltd%20v%20Shearn [Accessed on: 31/05/17] Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 31/05/17] Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 31/05/17] Boone, J.W. (2011) International Insolvency: Jurisdictional Comparisons. 3rd ed. London: Thomson Reuters. Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press. Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 31/05/17] ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 31/05/17] INSOL. (2012) Duties Of Directors A Holistic View. [Online] INSOL. Available from: https://www.insol.org/emailer/Jan2012_downloads/India_Duties%20of%20Directors.pdf [Accessed on: 31/05/17] Jade. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479. [Online] Jade. Available from: https://jade.io/article/217574 [Accessed on: 31/05/17] Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited. Moores. (2014) The Directors Series: Part 2 - Fiduciary Duties. [Online] Moores. Available from: https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties [Accessed on: 31/05/17] NSW Case Law. (2011) Fodare Pty Ltd v Shearn [2011] NSWSC 479. [Online] NSW Case Law. Available from: https://www.caselaw.nsw.gov.au/decision/54a635133004de94513d87f6 [Accessed on: 31/05/17] Rosa, D.D. (2015) Are you in breach of your duties as a director of your company?. [Online] Di Rosa Lawyers. Available from: https://dirosalawyers.com.au/breach-duties-director-company/ [Accessed on: 31/05/17] WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 31/05/17]