Dronebotics Limited (âDroneboticsâ) is a start-up company which designs, manufactures and supplies autonomous drone systems, using automatic flying robots. The robots are programmed by software to complete tasks such as monitoring oil pipelines, inspecting equipment or surveying land and then to return to the base station. The use of the flying robots instead of humans to perform these tasks increases cost efficiencies and productivity.
Dronebotics is approached by an agribusiness, CorpGrain Limited (âCorpGrainâ). CorpGrain wants to use the autonomous drone system to inspect towering grain silos, a task which is very dangerous for employees to perform and which requires compliance with onerous safety regulations.
Frank and Diane are executive directors of Dronebotics and Ron and Kelly are non-executive directors. Frank and Diane are entrepreneurial risk-takers and are keen to expand Dronebotics into as many different industries as possible. Frank and Diane want to enter into a contract to supply the autonomous drone system to CorpGrain.
Ron and Kelly are concerned that the current technological capabilities of the autonomous drone system would not cope with the complexity of the proposed task of inspecting the grain silos at enormous heights and that it would require considerable and costly further research to develop the appropriate software. Ron and Kelly are more cautious and use their voting power on the board of directors to commission an expert report on the feasibility of the proposed task being successfully executed by the autonomous drone system with its existing software.
The expert report concludes that it would not be feasible for the proposed task to be successfully executed by the autonomous drone system with its existing software. Frank and Diane refuse to attend the board meeting at which the decision is taken to commission the expert report and also refuse to attend the board meeting at which the outcome of the report is discussed. Frank and Diane are subsequently given the written report to read, but neither of them read the report nor do they make any enquiries about the report of Ron and Kelly (who have read, assessed and accepted the contents of the report).
Frank and Diane are both very optimistic and are convinced that the autonomous drone system has the required capabilities to carry out the proposed task with the existing software. They are very domineering and stubborn personalities and, in the end, Ron and Kelly are persuaded to vote in favour of the proposal to enter into the contract with CorpGrain.
Have Frank, Diane, Ron and/or Kelly breached any of their general law and/or statutory directorsâ duties? Give reasons for your answer and provide relevant statutory law and/or case law as authority for your answer. (15 marks)
Assume that, in the same circumstances as described in Scenario A, the results of the expert report instead indicate that the autonomous drone system in fact has the capability to complete the task required by CorpGrain and that it would be feasible to successfully execute the task. Dronebotics is therefore in a position to enter into a very profitable contract with CorpGrain.
All four directors vote in favour of the proposal to enter into the contract with CorpGrain for the supply of the autonomous drone system.
After purchasing the autonomous drone system, CorpGrain experiences ongoing technical difficulties with the system and is unable to use it for the inspection of its grain silos. CorpGrain states that its own expert can produce evidence that the existing software is not adequate and it intends to claim substantial damages from Dronebotics.
Discuss whether any statutory defences could be raised by the directors in the circumstances. Give reasons for your answer and provide relevant statutory law and/or case law as authority for your answer (10 marks)
GUIDANCE FOR ASSIGNMENT
1. Identify the directorsâ duty which is relevant to the facts in the case study, based on the conduct of the director/s. State the name of the duty. Identify both the general law duty and statutory duty (unless only one is required in the question). eg. Duty to act with care, skill and diligence at general law
Duty to act with care and diligence in Section 180(1) of the Corporations Act 2001 (Cth)
a. Classify the directorsâ duty as general law (common law or equitable; fiduciary or non-fiduciary) or statutory.
b. Define the duty: state the general law definition or the statutory definition from the relevant section of the Act and explain the meaning of the duty, eg. – At general law, directors have a fiduciary duty to act in good faith in the best interests of a corporation. The meaning of âgood faithâ is honesty.
– The statutory duty of care and diligence as defined in Section 180(1) of the Act is:
âA director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporationâs circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.â
2. Analyse the duty:
a. State the principles which apply to the duty,
eg. At general law, in equity, directors have a fiduciary duty not to misuse confidential company information.
The principle which is applies to this duty is that a director cannot use confidential company information for his/her own benefit without disclosure and approval of the members and, in some instances, the directors.
This principle includes the misuse of trade secrets and lists of customers and suppliers.
b. State any rules which may apply,
eg. At general law, in equity, the fiduciary duty to avoid conflicts of interests requires directors to make full disclosure of their potential conflict of interest to the companyâs members at a general meeting and obtain the membersâ informed consent.
The equivalent statutory duty under Section 191 requires directors who have a material personal interest in a matter that relates to the affairs of a company to disclose that to the other directors.
c. Examine the tests used to determine compliance with or breach of the duty, for example:
eg. In order to establish whether a power was exercised for proper purpose, the following tests are applied:
(i) The âtwo stepâ test:
x the reason for the existence of a directorsâ power
x the actual purpose of a director when he/she exercises the power
Howard Smith Ltd v Ampol Petroleum Ltd (cite in full)
(ii) The âbut forâ test:
The test used when there are multiple (more than one) possible purposes, in order to determine the actual purpose for which the power was exercised by a director – Mills v Mills (cite in full)
d. State what standard is used in certain circumstances, for example, for assessing a directorâs conduct or state of mind,
eg. Both the general law duty of care, skill and diligence and the statutory duty of care and diligence impose an objective âreasonable personâ standard.
e. Provide authority as support for the law you have analysed, in the form of relevant case law and/or statutory law. Cite at least one case for every key principle, key statement, rule, test, etc.
3. Apply the law to the facts
a. Apply only the relevant law to the facts of the case study,
eg. There are three common situations involving the rule against conflict of interests:
1. diversion of business opportunities
2. misappropriation of company property; and
3. secret profits (undisclosed commissions).
Choose only the situation/s relevant to the facts of the case study.
b. Ensure that you have applied the law to all the relevant facts in the case study, without omitting any relevant facts, eg.
The âcorporationâs circumstancesâ in Section 180(1)(a) include: the type of company, the size and nature of its business, the provisions in its constitution, the composition of its board and the distribution of work between the board and other officers.
Therefore, any facts in the case study which provide information about these different factors are relevant when applying the law to the facts.
c. In developing an argument for both parties, what follows below should be taken into account. The extent of detail required in dealing with defences and relief
from liability will depend on the scope of the assignment, as determined by the wording of the assignment question. If you are not specifically required by the assignment question to deal with defences and/or relief in your answer, you need only include them, or either of them, briefly and not in detail. It appears that defences relate to the issue of breach, whereas relief applies to the issue of liability.
i. Breach: Identify and analyse the duty, then apply the law to the facts to determine whether or not a duty has been breached.
1. If there is a defence, there is no breach and the director will not be liable.
2. If there is no defence, there will be a breach and the director will be liable.
An application may be made to Court for relief from a breach or contravention, in certain circumstances:
1. If relief is granted, the director will not be liable.
2. If relief from liability is not granted, the director will be liable.
d. Remedies and penalties will apply if the director is liable. Remedies and penalties need only be included in your answer if specifically required by the assignment question. These may be:
1. Statutory and/or general law (common law or equitable)
2. civil and/or criminal
This is the short answer to the question posed in the case study and should follow logically from the reasoning in part 3 of your answer.
REFERENCING GUIDE – AGLC
A reference in accordance with the Australian Guide to Legal Citation (AGLC) is to be provided for every quotation. All quotations must be in quotation marks:
-for short quotations of three lines or less, use single quotation marks;
-for long quotations of more than three full lines, do not use quotation marks but indent the
quotation and type it in a smaller font size.
You are also to provide a reference for every idea which is not your own and which is taken from another source, even if the idea is expressed in your own words.
All quotations and sources referred to in the body of your assessment are to be referenced in footnotes at the bottom of the page. In addition, a bibliography is to be provided at the end of the assessment, which is a list of all resources read or consulted, whether or not you actually used or referred to them in the body of your assessment.