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Breach of Duty by Managing Director

Discuss about the Business Law for Companies Act 2006.

As mentioned in the above scenario, Bella is working with Eternal Youth Pty Ltd. (EY), as a managing director, which is a successful company. Bella owns most of the shares of Eternal Youth Pty Ltd i.e. 60% of the company. She decided to help Leon selling his new organic male soap for men by setting up a new company under the title Wonder Hair Soap Pty Ltd (WHS). Bella became the majority member of the company and Leo as its director. This scenario is not in breach of her duties as the managing director of Eternal Youth Pty Ltd while she even is the majority member in Wonder Hair soap Pty Ltd. But on the other hand, the proposal she suggested to the board of a long-term contract between Eternal Youth Pty Ltd. and Wonder Hair Soap Pty Ltd. where EY will buy supplies from WHS of organic hair soap for resale. (Rock 2015) In this deal, Bella demanded a small commission on each sale as she was the one who brought up the idea. Here, she breached her managing director’s duties as owned by Eternal Youth Pty Ltd. In accordance with Phipps vs. Boardman (1967) 2 AC 123, Bella breached the fundamental rule of equity. This act describes that she let her personal interests overruled her duties as a managing director in Eternal Youth Pty Ltd. (A guide to Director's responsibilities under the companies Act 2006, 2006). As she was the majority stockholder of Eternal Youth Pty Ltd. as well as that of Wonder Hair Soap Pty Ltd., she presented that idea just for the sake of her personal interests. She deliberately made the long-term contract to serve her personal interests as long as she can. She hid her position at Wonder Hair Soap Pty Ltd. from the board of directors of Eternal Youth Pty Ltd. (EY). (Gov.uk, 2014)She also failed to notify the board of directors about her personal interests in the deal while signing the contract. She, therefore, deliberately breached section 191(1) of the corporate act.

As Bella had personal interests in the contract between Eternal Youth Pty Ltd. and Wonder Hair Soap Pty Ltd as mentioned in the corporate law. So, she should not have been present at the board’s meeting during the signing of the contracts. (Legislation.govt.nz, 2016) If she would not have been present in the meeting during the signing of the contract, she might not be accused of any breaching in the general Corporations Law according to section 195(1) of the general corporate act, which clearly states that, if the director or any other executive member of the board has any personal interest in the contract, the executive member should not be present in the meeting. This might have saved her from facing a lot of trouble. This clause outcast the vote of Bella and she had no right to cast a vote under any circumstances either in favor or against the contract. But hiding this information from other directors for the sake of her personal interests has put her in jeopardy. (Skeel 2014) On the other hand, under the section 195(2) in general corporate law, Bella would only be allowed to attend the discussion sessions and voting only, if,

Consequences of Breach of Duty

Bella had already notified the board of directors of Eternal Youth Pty Ltd. about her personal interest and material gain by signing the contract with and Wonder Hair Soap Pty Ltd.

The executive bodies that do not have any personal interest or material gain are contented that the personal interest shown by the managing director should not make her disqualified from casting a vote and attend discussions.

This possibility could also be valid if the directors sign a written document mentioning that the director is allowed to attend discussions and cast vote even if he/she have any personal interest in the deal. (Johnson 2013)

Bella has the most important part to play in determining the future of the organization as she’s the managing director of Eternal Youth Pty Ltd. (Companylawclub.co.uk, 2016) She has the responsibility to exercise total discretion in order to develop and promote the internal as well as external affairs of the company. As the Bella was the one who proposed the contract issue, being managing director of EY, there was no need for going ahead of Eternal Youth Pty Ltd. In fact, it would have been far wiser for Eternal Youth Pty Ltd. to appreciate the determination of Wonder Hair Soap Pty Ltd. prospects and its shareholding throughout.

As we have discussed earlier in clause 1, that Bella breached her foremost duties and responsibilities that she owned to Eternal Youth Pty Ltd. (Icaew.com, 2016) She had her personal interest in the contract signed by both the companies She must have disclosed her position and interest before the executive board to avoid such complications. Furthermore, she deliberately inserted a clause in the contract in which she’ll get a commission on every sale of soap made under the banner of Eternal Youth Pty Ltd. Her behavior clearly depicts her ignorance, greed, and dishonesty regarding Eternal Youth Pty Ltd. It would be difficult for the company to find remedies of what Bella did to the company. She never declared her position to Eternal Youth Pty Ltd. that she was the majority member of Wonder Hair Soap Pty Ltd. Bella cheated her own company, of which she owns 60% of shares yet she let the company pay her commission on every sale EY made. In short, she was unable to fulfill her duties at Eternal Youth Pty Ltd. as a managing director.

Under the general corporate laws, she breached many rules for which she would be punished. First of all, Eternal Youth Pty Ltd. should lock her assets she made as a result of the contract. The profit made by Bella should be made company’s accountability no matter either the company made the profit or loss during the time period of the contract. (Icaew.com, 2016)The contract between Eternal Youth Pty Ltd. and Wonder Hair Soap Pty Ltd. should be locked immediately without making any further trade. Due to her poor leadership, dishonesty, lack of interest in company and ignorance led her to a complex situation. (Idowu et al. 2013) The board of directors can also file a lawsuit against Bella with all these charges and as a result, she might land into prison. The board of directors or stakeholders can file a lawsuit against her.

Appointment of a New Director

As in the above scenario, Bella wants to appoint Max, hey son, as a director and sectary of the company. Renny, director of Eternal Youth Pty Ltd., opposes her decision of appointing her son as a director of the company. According to the general constitutional laws, anyone can be appointed as director of the company if the majority of the existing bench of executives votes for his/her appointment. (Penalties for Breaches of Company Law, 2012) Yes, the executive board can appoint a director if the majority of them votes in favor. Currently, there are a total five directors sitting on the bench of Eternal Youth Pty Ltd. and out of these five, at least 3 of them have to vote for the favor of appointing Max as a director. There are no such legal barriers that can stop Max from becoming director of the company if the board agrees. But if the majority of the board does not approve his appointment, then there is no legal way through which Bella can appoint her son as a director. Even being managing director and having 60% shares in the company, Bella cannot appoint anyone at the post of director without any consent of its stakeholders (swarb.co.uk, 2015). 

According to the general corporate laws, any director can be removed by passing an ordinary resolution during a meeting with shareholders typically held on the subject of the removing director. There are three basic conditions under which a director can be removed from the board.

Give resignation letter to the company.

Die.

Disqualification or violating any law of company’s act. (Cabrelli & Siems 2015)

Every director can be removed by an ordinary resolution from the board except for the director appointed by the security holder.  In the above scenario, Bella needs to draw a legitimate reason or accusation on Remmy to make an excuse for his termination. She needs to draw valid arguments against Remmy to make the board vote against him. But if she fails to get the majority of the votes from shareholders and directors, there is no other legal way to remove Remmy from the post of director (The companies Act 2013, 2013).

It is the duty of a private corporation to formulate its constitution in accordance with Companies Act laws. A private firm is defined by the clause s15 in the document. Whenever a new Companies Act comes into force, all private companies are obliged to renew its constitution and policies according to the latest Companies act. According to the general corporate law, if a company needs to modify or adopt a new constitution, a general notice should be issued 21 days prior with a minimum approval of 75% by the board of directors and stakeholders of the company. No new law can be added in the corporate’s constitution without the consent of its stakeholders (LegalVision, 2013).

Corporate Constitution and its Importance

A company does not necessarily require a constitution to formulate but it helps a lot in sustainability and prosperity of the company. (Bainbridge 2014) The corporate’s constitution does not follow any specific pattern, in fact, a company can add any clause or point in the constitution regarding any aspect if the board  of governors and its stakeholders agree.    

Eternal Youth Pty Ltd. needs a minimum of 75% approval for implementing the constitution from its board of directors and stakeholders. (Klausner 2013) As Bella being the managing director of Eternal Youth Pty Ltd., wants to pass a constitution stating that a new director can only be appointed through her consent. This clause will only pass if 75% of the members vote in favor. If this constitution gets maximum votes, Bella will be having full control over appointing a new director. In short, it is very important to have the roles properly defined within a company because only then one can decide how to take care of such matters. Bella knew what decision she has to make at that time so, she handled herself. Otherwise, if the job role or position was not clearly explained, the consequences would have been quite different. Structural management really plays an important role and it is one of major components of corporate law. 

References

A guide to Director's responsibilities under the companies Act 2006. (2006). 1st ed. [ebook]

ACCA. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF technical/business-law/tech-tp-cdd.pdf [Accessed 27 Sep. 2016].

Bainbridge, S.M., 2014. Director versus Shareholder Primacy in New Zealand Company Law as Compared to USA Corporate Law. UCLA School of Law, Law-Econ Research Paper,(14-05).

Cabrelli, D. and Siems, M., 2015. Convergence, Legal Origins, and Transplants in Comparative Corporate Law: A Case-Based and Quantitative Analysis. American Journal of Comparative Law, 63(1), pp.109-153.

Companylawclub.co.uk. (2016). Company Law Club: Appointment of Directors. [Online]

Available at: https://www.companylawclub.co.uk/appointment-of-directors [Accessed 27 Sep. 2016].

Gov.uk. (2014). Appoint a director (AP01) - Publications - GOV.UK. [Online] Available at:

https://www.gov.uk/government/publications/appoint-a-director-ap01 [Accessed 27 Sep.2016].

Icaew.com. (2016). Guide to the duties and responsibilities of directors | Business resources |ICAEW. [Online] Available at: https://www.icaew.com/en/technical/business-

resources/legal-regulatory-tax-governance/directors-duties/the-icaew-guide-to-the-duties-and-responsibilities-of-directors [Accessed 27 Sep. 2016].

Idowu, S.O., Capaldi, N. and Zu, L., 2013. Encyclopedia of corporate social responsibility. Springer Berlin Heidelberg.

Johnson, L., 2013. Unsettledness Delaware Corporate Law: Business Judgment Rule, Corporate Purpose. Del. J. Corp. L., 38, p.405.

Klausner, M., 2013. Fact and fiction in corporate law and governance. LegalVision. (2013). What is a company constitution? | LegalVision. [online] Available at:

https://legalvision.com.au/what-is-a-company-constitution-what-does-it-mean-to-adopt-a-company-constitution/ [Accessed 27 Sep. 2016].

Legislation.govt.nz. (2016). Companies Act 1993 No 105 (as at 13 May 2016), Public Act Contents – New Zealand Legislation. [Online] Available at:

https://www.legislation.govt.nz/act/public/1993/0105/latest/DLM319570.html [Accessed 27 Sep. 2016].

Penalties for Breaches of Company Law. (2012). 1st ed. [ebook] Office of the Director of corporate Enforcement. Available at: https://www.boardmatchireland.ie/wp-

content/uploads/2012/08/Penalties.pdf [Accessed 27 Sep. 2016].

Rock, E.B., 2015. Corporate Law Doctrine and the Legacy of American Legal Realism. University of Pennsylvania Law Review, Forthcoming, pp.15-30.

Skeel, D.A., 2014. Corporate Governance and Social Welfare in the Common Law World. Texas Law Review, 92, p.973.

swarb.co.uk. (2015). Phipps v Boardman; HL 1966 - swarb.co.uk. [online] Available at:

https://swarb.co.uk/phipps-v-boardman-hl-1966-2/ [Accessed 27 Sep. 2016].

The companies Act 2013. (2013). 1st ed. [ebook] Delhi: Ministry of Law and Justice. Available  at: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf [Accessed 27 Sep. 2016].

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