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Question:

Students are to research analyse and synthesise current issues facing companies, directors and boards in Australia, in accordance with those concepts and principles taught in the subject?

 

 

Answer:

Facts:

  • Anthony, Ben, Catherine and Daniel are the directors of Chaser Ltd.
  • The Chaser Ltd is a company deals in the wine bottling business.
  • Due to the increased competition for the Chaser Ltd, business became tough, especially in Asia due to downturn in economy and the entry of new countries in the wine market.
  • Directors of Chaser Ltd think to invest in some other business opportunities.
  • Anthony meets Wayne, his old friend who works for a Green Energy Company in Norway, which specializes in Tidal Energy, a new form of energy, becoming popular in Europe and the USA.
  • None of the Energy companies in Australia used this form of Energy.
  • At the invitation of Anthony, Wayne, founder of the company Westpool Pty. Ltd., which makes tidal stream generators, comes to speak to all the Directors of Chaser regarding investment in tidal energy business.
  • Wayne presents the directors of Chaser Ltd the 3D pictures of steam generators that his company makes.
  • After Wayne’s presentation, all the Directors get impressed and find it to be a profitable business for the company and without much discussion they all agree to invest $20 Million in this venture and give the sole contract to supply Tidal steam generators to Westpool Pty. Ltd.
  • Three months later the new business of Chaser Ltd fails, because of the discovery that the Australian Waters is not suitable for Tidal energy.
  • The Directors of Chaser Ltd also discover later that Wayne was not an expert in tidal energy and also held a small position in company in Norway.
  • Directors of Chaser Ltd also in the end come to know that Anthony was the major shareholder of Westpool Pty.

Legal issues involved:

Did the directors breach their duties under The Australian Corporation Act 2001 (Cth) and common law.

 

Relevant laws:

Common Law duties:

The common law/general duties of the Directors fall into the following categories:

1. A director should act bonafide and it should be in the best interests of the company as a whole.

2. A director should exercise his powers only for the purpose, for which those powers have been conferred and not for any improper purposes.

3. A director should exercise care and diligence about the position of the company, means he is required to inquire about everything and just not accept everything, whatever is presented before him.

4. A director has the duty that he should not enter into such a situation, where his powers as a director, get restricted.

5. The director has a duty to avoid being in a position of conflict or interest.

A director should not misuse or abuse the company’s opportunities, which imply he should not exhaust his powers for his personal benefits.

Fiduciary Duties:

The Directors also have some fiduciary Duties, which are as follows:

  • Any director should not improperly use his position for the purpose of gaining any undue advantage for either himself or someone else.
  • Must not do any act, which can prove to detrimental to the company.
  • Must not misuse any information, which he got on account of his position as a director, to gain any undue advantage for someone or for himself.
  • A director has the duty to inform other directors of the company, in case of any material personal interest as well as about a conflict, which may take place in the company. A material personal interest implies any matter which is connected with the affairs of the company.

Statutory Laws:

1. Section 180 (1) of the Australian Corporation Act (ACA): The test for the amount of degree of care and diligence, required of a director of a company in the discharge of his duties and the exercise of his powers would be the same which can be expected from a reasonable man in the same circumstances, if he would be the director of the company.
 
2. Section 181 (1) of The Australian Corporation Act 2001 requires that the directors should always act in the best interests of the company. They are deemed to be in a fiduciary relationship with the company and have to use the rule of best judgment while managing the affairs of the company (Lowry, 2012).

Section 180 (1) is subject to a Business judgment rule incorporated under section 180(2) of the Corporations Act 2001.

3. Section 180 (2): According to this rule, the following elements should exist with regard to a director:

  • His business judgment was exercised in good faith as well as for the appropriate purpose
  • He had no material/personal interest in the subject matter of his decision.
  • He informed other directors of the company about his judgment decision.
  • He logically and truly believed that the decision taken by him was in the best interests of the company (Langford, 2011).
 

Consequences of breach of duties:

If a director of the company makes breach of any of the duties, which have been conferred on him as a director, either under the general laws or the statutory laws, then he is liable for the civil penalties (Gilligan, Bird and Ramsay, n.d.).

According to the general rule of Equity, it is essential that the director should not allow his personal interests to conflict with his duties, as a director of the company.

As explained above, under Section 191 (1), a director is duty bound to notify other directors of the company, when any of his personal material interest conflict with the interests of the company. It is essential that the director should give a notice to the board of directors, which should declare as well as include:

  • About the nature along with the extent of the director’s interest.
  • The connection between the interest and the business of the company.

This notice should be given by the director soon after, it comes to his knowledge about the interest, which is in conflict.

The corporations Act 2001 (Cth) also provides for criminal offenses. The criminal offenses are contained in section 184 of the Act and are as follows:

1. When a director has either acted carelessly, or has been intentionally dishonest while exercising his duties and powers and has not acted in the best interests of the company.

2. When a director makes misuse of his position with dishonest intention or recklessly for the purpose of gaining an advantage directly or indirectly, for himself or some other person, or for causing detriment to the company.

3. When a director uses the information, which he gains on account of his position as a director, with dishonest intention or carelessly for the purpose of gaining an advantage for himself or some other or which he knows is detrimental to the company (S., 1961).

As per Section 260 E, a director cannot be relieved from any of his duties provided in the sections 180, 181, 182, 183 and 184 or the fiduciary duties, with regard to any transaction just on the basis of the ground that such a transaction was authorized either by a provision under this Act or that it had the consent of the members of the company by a resolution (Tomasic, 2001).

 

Application of law:

In the given case, Anthony was a director of Chaser Ltd, conspired with his old friend Wayne, about whom Anthony knew beforehand that he was not an expert in tidal energy and also about the fact that Wayne held a small in his company in Norway.

1. As mentioned above under section 180, Anthony neither exercised due diligence nor care in discharging his duties as a director. Nor did he apply the business judgement rule. As a director of the company, it was his duty to take decisions of the company rationally and after proper inquiry about a business, before making any investment in that business, which he did not do. He neither inquired into the business of tidal energy nor about its prospects in Australia before keeping a proposal of investment into that business before the directors of the company. As per the business judgment rule, a director should make a judgment in good faith and without any personal interest in any of the company’s transaction. However, in the given case, as specified Anthony was already a major shareholder in the company to whom the sole contract to supply the steam generators was given by Chaser Ltd, so he had a material interest in the investment in that company.

Apart from breach of statutory duties, Anthony also made a breach of the general duties under the Corporations Act 2001 because he misguided other directors of the company and exercised his powers in an improper way, which is prohibited under general laws. Moreover, he had this knowledge that the investment into the business of tidal energy may lead to a conflict between both the companies. Also, he knew that his personal interest was in conflict with the interests of the company and in spite of this knowledge, he did not notify or declare the same to the other directors of the company, thus making a breach of general duty again. Anthony also breached the fiduciary duties, which he had towards the Chaser company as a director of the company. Since he did not disclose his personal interest in the Wayne’s company, Westpool Pty, where he was a major shareholder.

 

Moreover, under section 191, as explained above, Anthony had the duty to notify the other directors through notice in a meeting about the nature and extent of the interest, he possessed in the investment and transaction with the Westpool Pty company. Instead of giving notice, Anthony acted with dishonest intention and tried to convince the other directors of the company that investment in the business of the tidal energy would be beneficial to the company. The section 191 (1) clearly provides that where a director has a personal material interest in a transaction he has a duty to declare that at a meeting of directors. A notice must be given by the director to the board of directors. Anthony never disclosed about his interest in the Westpool Pty company which was a sole contractor supplying the steam generators for the new venture of tidal energy by the Chaser Ltd.

Further, section 195 (1) of the Corporations Act 2001 provides that the director having a personal interest in a transaction is not allowed to vote or participate in the process of passing a resolution on any transaction of the company. Whereas, Anthony in spite of having and knowing about his personal interest in the transaction with the Westpool Pty not only actively participated in, the board meeting related to that transaction, but also induced the other board members for passing the resolution in favor of that.

Anthony would also be liable for criminal offenses incorporated under section 184 of the Corporation Act. First, Anthony acted with dishonest intent while convincing the other directors of the company for making an investment in the Westpool company. Moreover, he did not reveal the fact to the directors of the Chaser company that he was a major shareholder in the Westpool Pty.

Reference can be made to case laws:

ASIC v Rich (2002) 41 ACSR 72, It was held that this cannot be considered as an appropriate explanation given by the director that if a crucial duty of financial transaction was delegated to a person and the director completely relied on that person. The court held that the director acted in an improper manner and recklessly (Bostock, 2012).

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, that irrespective of the fact as to what was the intention of a person, if it is found that a person gained some undue profit on account of his position as a director of the company is liable to pay for that profit.

Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260; 11 ACLC 761, a strict view was taken by the court that if a director is a director of two companies and , intentionally does not reveal the lack of resources of one company in paying the loan to another company and encourage the other company for giving loan to the first company, he makes a breach of fiduciary duty and is liable for such breach.

Conclusion:

On the basis of the above discussion, it can be concluded that Anthony has breached his duties as a director of the Chaser Ltd. for personal benefit and caused huge loss to the Chaser Ltd. and would be liable for both civil and criminal penalties.

References:

Bostock, T., 2012. The Corporations Act 2001. ac, 2002(39).

Gilligan, G., Bird, H. and Ramsay, I., n.d. Regulating Directors' Duties: How Effective are the Civil Penalty Sanctions in the Australian Corporations Law?. SSRN Journal.

 

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.

Lowry, J., 2012. The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), pp.249-260.

S., N., 1961. Delegation of Duties by Corporate Directors. Virginia Law Review, 47(2), p.278.

Tomasic, R., 2001. Governance and the evaluation of corporate law and regulation in australia.Corporate Governance: The international journal of business in society, 1(3), pp.24-32.

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