Breach Of Director's Duty In Chaser Ltd Essay.

The Facts of the Case

Question:

Describe about the Case Study of Chaser Ltd Company?

The primary issue on the given case is that in accordance to the Corporations Act, 2001, and the general law whether Anthony has breached any duty as a director in the company, Chaser Ltd.

The facts in the case state that there are four directors in the company Chaser Ltd whose primary business is related to wine bottling. As a result of the decreasing economy and the entry of new wine companies the market s gradually becoming stiffer. Due to this reason the directors in the company decided to invest in some other business ventures. One of the directors, Anthony was advised by Wayne, a friend that investing in tidal energy would be a good chance to revive the falling business. He had explained that tidal energy being a new form of energy that was gaining momentum in Europe and USA. The energy was environment friendly and during the time no company in Australia was using this form of energy. Wayne who also worked for a green energy company in Norway was invited to give a presentation in the company Chaser Ltd. After an impressive presentation, the directors of Chaser Ltd were impressed with the new strategy of the tidal energy and decided to invest in the tidal energy business. The investment made in the company was $20 million and gave the sole contract of the tidal energy to the Norway Company. After three months the entire business failed as the water in Australia was not suited for the tidal energy since the Great Barrier Reef was present in the country. Later the directors discovered that Wayne was not any expert in tidal energy and neither did he hold any good position in the Norway Company. Further the directors also found out that Anthony was a major shareholder in the Norway Company.

The individuals who are being appointed as the directors in the company they are required to obey with the Corporations Act for carrying out the duties (Harris, 2009). In accordance with the Corporations Act it is a must for the directors to act with good faith and for an appropriate purpose, they are required to avoid any improper use of any information, they are required to avoid any improper use of information and they are further required to disclose any interests.

The primary duty of the director is to act in good faith and accordance to the benefit of the company. Section 181 of the Corporations Act states that the directors along with the secretaries and other officers of any corporation have a civil duty to exercise appropriate powers and conduct their duties in good faith and in best interests of the organization. For instance the Act states that the directors are not allowed to benefit for themselves or for any third party and only for the interests of the corporation as a whole. When the director does not follow according to the section it will be considered as a breach of the duty. Section 184(1) of the Corporations Act, provides for the breach of the duty being a criminal offense when the breach arises as a result of the recklessness or dishonesty of the director in the corporations. The duty to act with care and diligence of the director has been given under section 180 of the Corporations Act. It provides that the directors have the civil obligation to exercise a reasonable amount of care and due diligence under all circumstances while exercising the powers of a director and during the discharge of the duties. The Act further defines ‘reasonable’ as the degree of care and diligence which any reasonable person in the similar position in the company would exercise under the same circumstances. The director and officer would generally require exercising a reasonable degree with regard to care and diligence. The director would make any judgment of good faith and for appropriate purpose. They should not have any personal interest in the subject matter in the judgment. They should inform the other directors the subject matter of the judgment to that extent to which it can be appropriate and reasonable. The acts of the directors should be rational and for the positive interests of the corporation. In such cases where the directors are not able to satisfy the appropriate degree of care, skill and due diligence by the way of delegating authority to the colleagues and the sub ordinates in the company and also do not pay proper attention to the company. At least, the directors are required to take active interests in the affairs of the company and also get a general understanding of the business of the company. They are required to pursue anything that is annoying and has come to their attention (Harris, 2009).

The Duty of a Director According to the Corporations Act

According to Section 183 of the Corporations Act, a civil duty is upon the director to obtain information as they are or have been a director or any officer or any other employee in the company and they must not use any information for any improper purpose and such information should not be used to take any advantage for themselves or for any other person and cause loss or harm to the corporation (Tomasic, Bottomley and McQueen, 2002). This particular duty has a huge amount of significance where the director has a lot of interest to which the Government Board can relate to. Section 184 (3) of the Corporations Act provides that the directors, the officers, the employees of the company are not permitted to commit any criminal offense for use of information in a dishonest manner.

The directors have the duty to avoid any inappropriate use of position (Wiffen, 1994). Section 182 of the Corporations Act, 2001, states that the directors or the officers or the employees have the civil duty to not make any improper use of the company and in order to gain any advantage for them or for anyone else or cause any loss to the company. With regard to the duty of the directors to reveal any interests, according to section 191 given under the Corporations Act, that the director of the company having any material interest in any matter relating to the affairs of the company is required give the other directors notice of such an interests (Christensen, Kent and Stewart, 2010). Such a notice is required to include the details of the nature of the interests or the extent of that interest in that matter. For instance, if the director has any personal interest in any contract in which the company enters then such interest should be informed to the other directors of the company (Tomasic, Bottomley and McQueen, 2002).

In the case of any breach of statutory duty by the directors as given under the Corporations Act the penalties may be up to $200, 000. Both under the common law as well as under the Corporations Act, the officers are required to pay appropriate compensation or give accounts for the profits. Further the law also allows the directors to be disqualified from the office (Langford, 2011).

In the case of ASIC v Lindberg (ASIC v Lindberg, [2012]) Justice Robson from the Victoria Supreme Court had laid down penalty judgment during the proceedings of ASIC against that of ASIC who was the former managing director of AWB reached an agreement during the settlement of the proceedings. In his judgment Justice Robson provided guidance on the duty of care and due diligence that is required to be carried out by the directors and officers in accordance with the Section 180 (1) of the Corporations Act 2001 (Cth) (Nortonrosefulbright.com, n.d.). In his judgment he also restated some of the fundamental principles with regard to the imposing of pecuniary penalties and orders of disqualification in the case of any breach under section 180 (1). In a brief, it can be stated that in cases of high profile businesses, the person who is the managing director or the Chief Executive Officer of the company, should be more careful while personally monitoring or investigating the possible inconsistencies or mistakes (intended or unintended) and also make sure that all the relevant and significant facts are brought to the attention of the board (Nortonrosefulbright.com, n.d.).

Penalties for Breach of Statutory Duty

Further in the case, the judge held that the evidence was satisfactory to prove that Mr. Lindberg had contravened section 180 (1) of the Corporations Act. Mr. Lindberg had further admitted to the acts of negligence made by him while was performing his duties as the director and officer of the company. Even though the contraventions carried out by Mr. Lindberg could not be proved to be done deliberately or dishonestly or with any moral turpitude, he did fail to perform his proper duties that any other reasonable director in his place would have done when placed under similar situations. According to section 180 of the Corporations Act, 2001, Justice Robson stated that this portion is extremely essential with regard to the Corporations Act (Nortonrosefulbright.com, n.d.). This is mainly because in the market economy the entire corporate structure relies on the investments made by the shareholders in the company which is to be appropriately managed by the directors and the officers in the corporations.

With regard to the penalties it was stated by Justice Robson that the contraventions to the Corporations Act was serious and the penalties given to the director was pecuniary penalty and a certain period of disqualification and both these penalties were considered to be appropriate by the judge. Justice Robson later exercised his jurisdiction in order to impose these penalties and disqualifications accordingly.

In another case in 2007, the civil penalty proceedings were brought against the seven former directors along with three other former directors and the company secretary counsel for breach of the duties under section 180 (1) of the Corporations Act. The plaintiffs had alleged that the directors did not exercise due diligence and care while dealing with the release of the information to the share market and hence they breached their duties as directors in the company. The Supreme Court of New South Wales held that all the seven directors had breached the Corporations Act since they approved their announcement to the company and misled the company by conveying that the creation of the trust for funding the asbestos and related diseases claims would have enough funds in order to meet the present as well as the future claims. This judgment of the Supreme Court was overturned by the High Court and it did not agree that the company had failed to satisfy the burden of proof about the drafting to the company’s announcements and the approvals of the board meetings. These announcements and the board meetings were considered to be enough evidence to figure out the truth of the matters, as opined by the High Court (Christensen, Kent and Stewart, 2010).

In another English case, Regal (Hastings) Ltd v Gulliver (Regal (Hastings) Ltd v Gulliver, [1942]), the UK company law was involved. The case involved the breach of the duty of loyalty by the directors and the officers due to the fact that they took corporate advantages. The English Court in the case held that when a director takes advantage of any opportunity which the company would have been interested and for the director he was unable to take advantage then it will be held as the breach by the director (Chartrand, Millar and Wiltshire, 2009). Nevertheless, such a breach may be resolved if the shareholders ratify to it. The House of Lords, reversed the decision of High Court and the Court of Appeals and further held that the director had profited from the reasons and fact that they were directors of that company and the acts were done while in the course of business and execution of office (eprints, n.d.). Hence they are to be accounted for the profits made by them to the company (Talbot, 2008). The High Court further held that in accordance to the rule of equity if any person being in the fiduciary position make any profit, then he or she would be liable for the accounts of the profits and such profit should not be dependent on fraud or absence of good faith or questions on whether property should have gone to the plaintiffs or not or whether the plaintiff would have been benefited by the actions of the defendant (eprints, n.d.).

Conclusion

In the given case, applying the Corporations Act, 2001, it can be stated that one of the directors Anthony influenced the other directors to invest in the tidal energy. According to the Corporations Act, 2001, being a director Anthony had the duty to act in good faith and in the best interests of the organization (Tomasic, Bottomley and McQueen, 2002). Directors are also required to look at the best interests of the company and not be committed towards gaining advantage for him or any personal interests. In the given case he was gaining personal advantage from the deal between his company and the Norway Company on tidal energy. This was because Anthony was a major share holder in the Norwegian Company. This indicates that the director of the company, Anthony had personal interests in making the deal with the Norwegian Company. Hence as a director of the company he had breached the duty of a director under the Corporations Act, 2001.

Further in accordance to section 180 (1) of the Corporations Act, Anthony did not take due care and diligence which any person in the similar position would have taken and this was also stated in the case of ASIC v Lindberg (ASIC v Lindberg, [2012]). Since Wayne was a friend of Anthony, it was possible and in his duty for Anthony to investigate properly about Wayne before making the directors agree to the investments.

In accordance to the general law, too, Anthony would be held liable for the breach of his duty as a director since under the law directors have a duty of loyalty towards their company. This was stated in the case, Regal (Hastings) Ltd v Gulliver (Regal (Hastings) Ltd v Gulliver, [1942]), where the House of Lords held that if a director takes advantage and due to this the company is unable to take any advantage then it will be considered as a breach of the duty by the director. Even under this law, the director Anthony is responsible for the breach of duty. Hence Anthony is liable to the company for the breach (Wan, 2011).

Keeping in mind the scenario in the present case, the other directors would not be held liable under the Corporations Act or the general law, but the director Anthony would be liable for breach of duty both under the Corporations Act as well as under the general law (Foster, 2000). Due to the breach of duty Anthony would be liable for pecuniary compensation and also he may be liable for disqualifications under the Australian Corporations law. Hence in the given case, Anthony is only liable for the breach of duty among all the directors and he would be only held liable according to the given law.

References

ASIC v Lindberg [2012]VSC p.332.

Chartrand, M., Millar, C. and Wiltshire, E. (2009). English for contract and company law. London: Sweet & Maxwell.

Christensen, J., Kent, P. and Stewart, J. (2010). Corporate Governance and Company Performance in Australia. Australian Accounting Review, 20(4), pp.372-386.

eprints, (n.d.). Regal (Hastings) Ltd v Gulliver (1942). [online] Available at: https://eprints.whiterose.ac.uk/75080/1/Regal_Landmark_Cases_in_Equity_Ch_17.pdf [Accessed 13 Feb. 2015].

Foster, N. (2000). Company Law Theory in Comparative Perspective: England and France. The American Journal of Comparative Law, 48(4), p.573.

Harris, J. (2009). Corporations law. Chatswood, N.S.W.: LexisNexis Butterworths.

Langford, R. (2011). The Duty of Directors to Act Bona Fide in the Interests of the Company: A Positive Fiduciary Duty? Australia and the UK Compared. J Corp Law Studies, 11(1), pp.215-242.

Nortonrosefulbright.com, (n.d.). The James Hardie Decisions: Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission [2012] HCA 18. [online] Available at: https://www.nortonrosefulbright.com/knowledge/publications/66582/the-james-hardie-decisions-australian-securities-investments-commission-v-hellicar-ors-hca17-shaf?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original [Accessed 13 Feb. 2015].

Regal (Hastings) Ltd v Gulliver [1942]UKHL p.1.

Talbot, L. (2008). Critical company law. Abingdon, Oxon: Routlege-Cavendish.

Tomasic, R., Bottomley, S. and McQueen, R. (2002). Corporations law in Australia. Leichhardt, NSW: Federation Press.

Wan, M. (2011). Book review for the Major Issues in Company Law (with Chinese and English Comparative Law Notes). Frontiers of Law in China, 6(2), pp.332-333.

Wiffen, G. (1994). Corporations law. Sydney: Butterworths.