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Analyze The Case Of R V Byrnes And Hopwood

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Question:

Discuss about the Analyze The Case of R v Byrnes and Hopwood (1995) 183 CLR 501.
 
 

Answer:

Introduction of the Case:

In the case of R v Byrnes and Hopwood (1995) 183 CLR 501; (1995) 130 ALR 529, it was observed that both Brynes and Hopwood wee the sole directors of the company named Jeffcott Investment Ltd. it is worth mentioning, from such given case study that from the beginning the company Jeffcott Investment Ltd. has incurred huge debt and as a result of which the directors were at the obligation to resolve the issue. For the purpose of resolving the problem, both Brynes and Hopwood issued securities by exceeding the actual amount for the purpose of repaying the debts incurred by Jeffcott Investment Ltd. In this regard, it is worth noting that, for the purpose of successful issuance of securities, it is important that the company must have obtained sufficient underwriting support. However, under writers shall only involve themselves in this scenario, if only assurance is provided that they would not incur loss in relation to underwritten securities. In such situation, Brynes and Hopwood decided to rely upon another business enterprise Magnacrete in which there were the sole directors as well in order to obtain loan by providing guarantee. However, the company Magnacrete was not aware of the fact that such transaction was only for the best interests of Jeffcott Investment Ltd and such transaction was agreed without prior approval of the other existing directors of Magnacrete.

It occurred to Byrnes and Hopwood that they could solve the present financial difficulty of Jeffcott Investment Ltd if there is a reverse takeover of Jeffcott by Magnacrete. In this regard, the proposal was clearly discussed with the directors of Magnacrete Messrs Douglas-Hill, Young and Paior. It was evident that, the takeover of Jeffcott by Magnacrete was not an attractive deal because in such process Jeffcott has already incurred debt of $2m. However, the takeover would have been beneficial if, the debts of Jeffcott Investment Ltd were paid from the amount raised by the process of successful convertible issuance of notes. In this case, it can be observed that, a sub-underwriting scheme was devised by Byrnes in consultation with Mr. Stephen Chapman who was the sole director of Baron Partners Ltd. in this regard, the trial judge was of the opinion that both Byrnes and Hopwood could not bear the risk of bringing such proposal before the board of Magnacrete because they were aware of the fact that such proposal may be challenged by Douglas-Hill. As a result of which they jointly decided to they decided to execute the Agreement of the Shareholders and the Agreement to Guarantee signed by utilizing the common seal of Magnacrete. Thereafter, without consulting the other existing directors of Magnacrete, both Byrnes and Hopwood involved themselves in affixing the seal of Magnacrete to a deed of guarantee of $2m. After which the executed deed was signed and counter-signed by Byrnes and Hopwood as the directors of Magnacrete.

 

The breach of duties:

In the case of R v Byrnes and Hopwood (1995) 183 CLR 501; (1995) 130 ALR 529, it is evident from the abovementioned facts that both Brynes and Hopwood has utilized their position improperly as the directors of the company Magnacrete for the purpose of gaining business advantage for Jeffcott Investment Ltd. in such process they breached the provisions of Section 182(1) of the Corporation Act 2001. In this regard, it is worthwhile to emphasize on the provisions of Section 182(1) of the Corporation Act 2001. According to the provisions of Section 182(1) of the Corporation Act 2001, it is required on the part of a director, secretary, other officer or an employee of an organization to not to use their position and duties in an improper manner. The directors according to the provisions of Section 182(1) must not make improper use of their position for the purpose of gaining advantage for themselves and for the other directors of the company. Under the provisions of Section 182(1), a director is not at the authority to cause detrimental harm to the corporation in which they are acting.

It is noteworthy to mention here that, the provisions of Section 182 of the Corporation Act 2001, emphasizes upon the mirror duties of a director. The Section emphasizes on the fact that, directors of a corporation must not act in improper use of their position in for their own benefit and also for the advantage of other individual closely related to such organization. However, it is worth mentioning that, the provisions of Section 182(1) do not provide information regarding the fact that whether the directors could achieve the result as intended. It is only required to prove that the director has conducted improper use for his position in order to gain advantage for him and for someone else thereby causing detriment to the corporation (Chen, Li and Zou 2016). It is worthwhile to refer here that situation may arise in which directors for their own personal benefit or for the benefit of other person may involve in improper use of position under the provisions of Section 182(1). This duty of the directors is termed as duty not to make improper use of position (Curry and Schorer 2016). In this regard, it can be mentioned that such duty of the director is similar to that of the fiduciary duties on the part of a director which he owes to the company (Kraakman and Hansmann 2017). However, it is important that the person involved in breach of duty depicted under the provisions of Section 182(1) of the Corporation Act must be the director or an officer of the company.

 


Similarly in the case of R v Byrnes and Hopwood (1995) 183 CLR 501; (1995) 130 ALR 529, the decision was held regarding the fact that both intention and purpose of the directors were involved for the purpose of gaining advantage by causing detrimental harm to the company concerned. The end result of the transaction may be such that the company has not suffered actual damage or has not incurred any real benefits or advantages by involving in such transaction. It is important to take into consideration that the intention to obtain advantage and by causing detriment to the company is not always essential (Pugliese, Nicholson and Bezemer 2015). In order to determine the improper use of position on the part of directors, the Court is at the authority to determine the situation in the same way as could be determined as any person of reasonable prudence which was observed in the case of  Forkserve Pty Ltd v Jack (2001) 19 ACLC 399; [2000] NSWC 106.

In the present case of R v Byrnes and Hopwood, it was observed that Brynes and Hopwood being the directors of the companies of Jeffcott Investment Ltd and Magnacrete was involved in improper use of their position as the directors of the company Magnacrete so that they can gain advantage for Jeffcott Investment Ltd by resolving the issue faced by such company in regards to incurring of debt. As a result of it, the directors violated their duties according to the provisions of Section 182(1) of the Corporation Act 2001.

 

Analyzing the decision of the Court:

In the case of R v Byrnes (1995) 183 CLR 501, the Court was of the opinion that, in regard to the improper use of directors’ position there may arise conflict of duties as result of presence of multiple directors. In this regard, it was held by the Court that, the decision on the part of the company must be unbiased and the nature of the decision would be such that it would address the duties of each of the directors of the company. Therefore, in this context, it can be argued that a person acting as a director of two different companies may involve himself in conflicting over the fiduciary duties owned by him to the each of the companies (Strine 2014). Argument can be presented regarding the fact that, acting as a fiduciary director of one company, such director must not make improper use of his position by acting for the benefit of interests of another company. In such process, it is required on the part of the director to disclose the benefits and interests of the first company to the second company thereby obtaining the consent of both the companies involved. It is worthwhile to mention here that, without prior consent of both the companies, the directors cannot act according to their own benefit. Therefore, it can be argued that, a director must not exercise the fiduciary duties on his part when the nature of the duty may be such that it would exceed the duties as depicted in the provisions of Section 182(1) of the Corporation Act 2001.

It is noteworthy to mention here that, the case R v Byrnes (1995) 183 CLR 501, involved a complex situation regarding the fact that the director was also acting as an officer of two different companies. In this context, the Court was of the opinion that, in order to prove that the directors has acted in improper use of their position, it is not necessary to prove the fact that such director has gained advantage for himself or for a third party or has caused detriment to the corporation. It is worth noting that, improper use of position can exist on the part of a director without causing any detriment to the corporation. However, it can also be argued that, an objective for the purpose of gaining advantage may also exist without an intention to cause further detriment to the corporation. The High Court while making decision in relation to the improper use of position of the directors held that the nature of the impropriety in any circumstances is not dependent upon the consciousness of impropriety of the offender in question. However, the nature of impropriety solely depends upon the breach of the standards of conduct that would be likely to be expected from any reasonable person of prudent nature, if such person would have been in the position of such offender in relation to their duties, powers and the authorization of their position as a director.

In the present case it can be observed that under the provisions of Section 229(4) of the Companies (South Australia) Code, both Byrnes and Hopwood were charged with the concerned offence. According to the provisions of Section 229(4), it is required on the part of an officer or director of a corporation not to use their position in an improper manner for the purpose of gaining direct and indirect advantage for himself or any third party and by causing detriment to the corporation. In such process, the High Court imposed a penalty of $20,000 with an imprisonment of five years. It can be argued on the part that both the directors accepted the fact that they have breached their fiduciary duties however; their intention was not to harm the company Magnacrete. Argument can be presented on the part that though the directors assured that they have acted in good faith, it is evident from the facts of the case that the directors have abused their powers by exceeding their position. However, it is true that the position of Byrnes and Hopwood as a director was such which was in conflict of fiduciary duties as they were acting as a director of two different companies- Magnacrete and Jeffcott.

 

The relevance of the decision to the development of Australian Corporation Law:

In the case of it can be seen that the defendants the relevant documents and an amount of $2m on deposit for a fixed term has put the property of the company at stake. It is evident that such an act on the part of the directors were performed for the purpose of advancing the conflicting interests of Jeffcott Investment Ltd, in which both of them were acting as directors and shareholders. The act on their part was performed without prior authorization and knowledge of the existing directors of Magnacrete.

In this regard, it is worthwhile to mention here that according to the provisions of Section 182(1) of the Corporation Act 2001, it is important that the directors should not make improper use of their position (Sonenshein 2016). Under any circumstances, it is important on their part to obtain prior consent of the other directors and shareholders in order to avoid violation of the provisions of Section 182(1) of the Corporation Act 2001 (Schwarcz 2016).

 

References:

Cases:

Forkserve Pty Ltd v Jack (2001) 19 ACLC 399; [2000] NSWC 106.

R v Byrnes and Hopwood (1995) 183 CLR 501; (1995) 130 ALR 529.

Statutes:

Section 182(1) of the Corporation Act 2001.

Section 229(4) of the Companies (South Australia) Code.

Journals:

Chen, Z., Li, O.Z. and Zou, H., 2016. Directors? and officers? liability insurance and the cost of equity. Journal of Accounting and Economics, 61(1), pp.100-120.

Curry, D.S. and Schorer, J.U., 2016. The Effects of Business Insolvency on the Duties and Liabilities of Directors and Officers—A Comparative Analysis With Recommendations to Promote Good Decision—Making. In Global Insolvency and Bankruptcy Practice for Sustainable Economic Development (pp. 168-218). Palgrave Macmillan, London.

Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.

Laster, J.T. and Zeberkiewicz, J.M., 2014. The rights and duties of blockholder directors. The Business Lawyer, pp.33-60.

Pugliese, A., Nicholson, G. and Bezemer, P.J., 2015. An observational analysis of the impact of board dynamics and directors' participation on perceived board effectiveness. British Journal of Management, 26(1), pp.1-25.

Schwarcz, S.L., 2016. Misalignment: Corporate Risk-Taking and Public Duty. Notre Dame L. Rev., 92, p.1.

Sonenshein, S., 2016. How corporations overcome issue illegitimacy and issue equivocality to address social welfare: The role of the social change agent. Academy of Management Review, 41(2), pp.349-366.

Strine Jr, L.E., 2014. Making it easier for directors to do the right thing. Harv. Bus. L. Rev., 4, p.235.

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