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According to s 9, a director of a company is defined as a person

01 / 10 / 2021 Assignment

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Director’s Duty


According to s 9, a director of a company is defined as a person who is appointed to the position of a director or alternate regardless of the name given to their position. He/she must act in the best interest of the company because they owe the duties of good faith and loyalty, as they are locked by the fiduciary relationship with the companies. They cannot take merrily benefit of their position of trust to take advantage of themselves at the company’s expenses without the knowledge of the company. De facto directors are the persons who act in the position of a director regardless of being appointed to that position: s 9. They play a role as a director despite being appointed as a director and takes part in the affairs of a company.


1. Duties of care, skill and diligence


Section 180(1) states that director should take into consideration the company’s circumstances and exercise their power in the situation deciding the care and diligence and skill. Director of a company has their responsibility in determining the care and diligence. It is the duty of the directors must take a rational decision to overseer and lead the management of the company. Daniel v Anderson (1995) 35 NSWLR 438.


2. Good faith and proper care


Section 181 (1) deals the statuary duties of a director to act in good faith and for the proper purpose. Directors are bounded by their fiduciary duties to act upon good faith and for the growth of the company. Directors must exercise their power with honesty, integrity, and loyalty and without any bias and act rational. They must make proper use of their power for the overall benefit of the company and for appropriate purpose.


3. Improper use of position


Section 182 of the Corporation Act states that director are indulged to prevent making wrongful advantage of their position to benefit personally or the third party or that may produce impairment to the company. This









type of breach can be taken from the case of Fork serve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd.


4. Proper use of information


Under s 183 of the Corporation Act, directors should not exploit the company’s confidential information for their personal benefit that may affect the company. They should avoid using the company’s vital information to aid Competitor Company where the director holds or otherwise purchase share. It is clear in Australian Securities and Investment Commission v Vizard. Similarly s 184 states “ a director or other officer of a corporation commits an offence if they are reckless and are intentionally dishonest”.


5. Reliance of information or advice provided by other


Likewise, under s 189 provides defense related to reliance that the director might trust the information upon besides the reliance must be in good faith. Directors can delegate any of their power to any other person, although they are not guilty if the delegate exercises the power in compliance with the duties executed by the directors in good faith in after making appropriate analysis.


6. Material personal interest


Under s191 directors are under fiduciary duties to avoid conflict of interest, they should avoid consequences that would detriment the company. They should not take up opportunities that belong to the company. In the case Cook v Deeks, the court oversees that director cannot act to take benefits even though the company cannot or will not take up the opportunity.


7. Duty to prevent insolvent trading


Relatedly, director has duty to prevent insolvent trading while company cannot pay their debt, under s 588G. A person is said to breach the insolvent trading of s 588G if he/ she is director of the company at the time when company is not able to pay its debts and the person is not able






to prevent the company from incurring the debt. It can be clearly seen in the case of Metropolitan Fire System Pty Ltd v Miller.


Consequence of insolvent trading (Penalties)


There are various penalties for insolvent trading of a company.

Civil penalties: Civil penalties against director may cause the director up to $200,00 monetary penalties


Compensation proceedings: In addition to civil penalties, a compensation order can be made.


Criminal charges: If director of the company are found liable for fraud and dishonesty in insolvent trading, they may be subject to


criminal charges (fine up to $200,000 or imprisonment up to 5 years or both).




1.Business judgmental rule


However, in the defense side, the business judgment rule facilitate defense against the breach of directors of care, skill and diligence. However, it does not protect the director if they breach their duty under s588G of Corporation Act to prevent insolvent trading.


2. Section 588G


Similarly, under section s885H, a director can rely upon statutory defense only if the director with the available information the director expects the company was solvent, if director by some reason like illness or other reason are not able to take part in management, and only if director takes rational process to avert the company form incurring the debt.


Voidable transaction


If the insolvent transaction and unfair loans are entered into during a specific period before the presentation of the petition of bankruptcy are known as voidable transaction. Section588FE specifies different time periods prior to the bankruptcy period depending on the type of transaction:






Unfair preference, if it had entered during the six months prior to the relation- back day period


Uncommercial transaction that is an insolvent transaction. An unreasonable director-related transaction.


An insolvent transaction for the purpose of defeating creditors.




If the director of the company encounters debt when the company is insolvent then this would be called as insolvent trading. It is the duty of director to prevent trading during the time of insolvency. According to s588G it is the directors’ duty to prevent insolvent trading by company.


Likewise, defense is available under s588H for the people who have breaches s588G only if the director had the reasonable expectation.


In other words, directors should keep an update with the company’s financial position in timely manner. Also, directors cannot simply rely on the information provided by other parties without focusing on the matter.


Daniels v Anderson.


A company goes to voluntary administration to overcome its debt during the time of insolvency. It helps to resolve company’s financial position. The main reason for the company to be insolvent can be recognized as trading the asset of company lower than the market price. According to the s181 statutory duties of good faith and proper care, directors must use their power for the benefit of the company rather than their own benefit. Fork serve Pty Ltd v Jack & Aussie Forklift Repairs Pty 

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