In 2012, three friends (Amy, Lee and Chu) incorporate Bold Fresh Pty Ltd to oper

Question

In 2012, three friends (Amy, Lee and Chu) incorporate Bold Fresh Pty Ltd to operate a retail fashion shop that specialized in selling the latest trendy fashion designs. Amy and Lee each held 45% of the issued shares in the company and Chu held the remaining 10% of the shares. The company’s constitution stated that all three were directors of the company, with Amy being appointed as the managing director. Chu is very critical of Amy’s management but lacks the support of Lee in confronting Amy about her style of management. Lee informs Amy about the Chu’s dissatisfaction with her management style. To teach Chu a lesson, Amy and Lee decide to incorporate a new company called Bolder and Fresher Pty Ltd in which Amy and Lee are equal shareholders. Bolder and Fresher Pty Ltd trades in the neighbouring suburb and Amy and Lee divide their time between the two businesses. Chu is unhappy when he hears about these developments but is unsure what he can do as he feels that he has been outsmarted by his friends. Advise Chu whether: (a) Amy and lee have breached any directors duties owed to Bold Fresh Pty Ltd under the common law and under the Corporation Act; and (b) The remedies available to Bold Fresh Pty Ltd and ASIC for breach of duties identified above in part (a).

Explanation / Answer

One of the duties of any director is to act in good faith to promote the success of the company for the benefit of its members. In this case, the shareholders are the directors. This means that there is an overlap between the members and directors. When Amy and Lee, start up a new company, they should have declared about additions in their directorship to all the companies in which they are directors. However, they dint inform Bold Fresh Pty Ltd about the new company which means they did not act in good faith. This means they have breached the duties of directors.

In this case, Bold Fresh can sue the directors for not performing their duty of care or loyalty and ask Amy and Lee to indemnify them. In order to determine whther a director has satisfied its fiduciary duties, the courts generally apply the business judgement rule under which a board’s decision is protected unless it is shown that the directors breached their duty of care or duty of loyalty.

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