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Companies & Securities Law, General Law, Relevant Laws Add in library

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Question:

Advise the directors of Chaser Ltd whether they have breached their directors duties under both the Corporations Act 2001(Cth) and general law. Also Explain Duties of Directors under Corporations Act 2001, General law, Relevant Laws, Consequences and Conclusion in above case?

 

Answer:

Main facts of the case

There are four directors of Chaser ltd. The company is in the business of wine bottling. Competition has increased in this field so they are planning to go into a new business. Antony, one of the director met with his old friend during the vacation namely Wayne. He was the director of Westpool Pty Ltd. This company was in the business of producing tidal energy. Antony thought that this business was profitable and wished to expand Chaser Ltd into this business. For this he invited Wayne to explain the project to other directors. Directors were convinced and investment was approved for by them. They invested $20 million. After investment they came to know that production of tidal energy requires natural conditions which were absent in the Great Barrier Reef. The project failed. Antony was the major shareholder of Westpool Ltd

 

Analysis and Judgements

Section 180 Care and Diligence –civil obligation only

This is one of the duties of the director. A director is required to conduct the affairs of the business in diligent manner. He or she should conduct the business as if all the assets of the company belong to him or her. He should use the rights in the best interest of the company and should obey all the duties. The decision regarding the business venture should be taken in good faith. There should be no material interest in the any proposal offered by the directors. If there is so then it should be conveyed to all the directors before the meeting. Any negligence of such duties will held the directors liable for civil punishment under section 1317E

Section 181 Good Faith—civil obligation

As per this section a director should use their power and fulfil their duties in best interest and in good faith of the company. The objective for which the asset should be utilized should be in the interest of the company. In case of violation of such rights the director will be liable for civil penalty

Section 190 Responsibility for actions of delegate

A director can appoint a person to assist him in performing their duties. He can delegate certain tasks and the responsibility for completing such tasks to the delegate but the overall responsibility of completing the duty is on the director only but in case if the director has acted on good faith and is held innocent regarding the work delegated by him to the delegate, he can avoid penalty

Present Case

Here we can see that the Antony had a personal interest in Westpool Pty Ltd as he was a major shareholder of this company. He did not disclose the fact when introducing Wayne to all the directors. Further Wayne somewhere knew that that Australia is not a perfect location for tidal energy business. So it was a malicious attempt to defraud the company. In case if this fact was known to Antony than he is also liable for negligence in performing his duties. The other director should have done a feasibility analysis. They should not have relied on the theoretical facts stated by Wayne in the presentation. Wayne has a good convincing power but the directors should be practical enough. They should have investigated the matter in depth

 

Conclusion

This case has certain characteristics of the case Australian Securities and Investments Commission v Fortescue Metals Group Ltd (FMG). We can conclude that Wayne has cheated the company and has fooled the directors so he is liable to repay $20 million and compensate the company for the loss suffered during the project. In case if it is found that Antony had known the fact from the beginning that the project was not feasible then even he is liable for civil penalty under section 1371E. The other three directors have not acted in a bonafide manner so even they are held responsible for negligence of their duty. Hence all the directors along with Wayne are required to compensate the company. 

Duties of directors

Basic duties of directors (Expected by ASIC and Shareholders)

  1. Duty not to do any act that lead to insolvency: This is explained in detail later
  2. Duty to maintain and preserve books of accounts: Recoding a transaction is a statutory requirement. The director has to ensure that the company fulfills this requirement and maintain up to date books of accounts. Around 18000 directors were reported to for misconduct by ASIC
  3. It is the duty of the director to stop insolvent trading under section 588G of Corporation Act

 

 

References

Commonwealth Consolidated Acts, (ND), “Corporation Act 2001-Sect 180”, viewed on 27th January 2015available at, https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html 

Commonwealth Consolidated Acts, (ND), “Corporation Act 2001-Sect 181”, viewed on 27th January 2015available at, https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html 

Commonwealth Consolidated Acts, (ND), “Corporation Act 2001-Sect 190”, viewed on 27th January 2015available at, https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s190.html 

Commonwealth Consolidated Acts, (ND), “Corporation Act 2001-Sect 188”, viewed on 27th January 2015available at, https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s188.html 

Bartier Perry, 2011, “Business Judgment Rule - Recent lessons for all Company Directors

“viewed on 27th January 2015available at, https://www.bartier.com.au/publications/publicationDetail.aspx?PublicationID=264 

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