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Duties And Responsibilities Of A Director

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Question:

Discuss about the Duties and Responsibilities of a Director.
 
 

Answer:

Overview

The report states about the duties and responsibilities that a director must possess with complete adherence to the regulations of the Corporations Act 2001. The study further goes into an in-depth identification of the duties and responsibilities that were duly contravened in the case of ASIC v Lindberg [(2012). In this case, the defendant that is Lindberg under the sections of Corporations Act were accused of breaching the corporation norms and the duties of the directors by the plaintiff, ASIC. 4ASIC (2016) has highlighted upon few general duties that are mandated by the Corporations Act on the officers and directors of companies. Some of the basic duties were not to exercise improper control of the given position for personal advantage and harm the functioning of the company, not to rely on improper information, performing duties and responsibilities under good faith and finally performing them with utmost diligence and care. In Australia, the directors of the company are duly expected to undertake their assigned responsibilities and duties with close reference to the common and statutory laws (4ASIC, 2016). Contextually, the report further identifies specific reasons that led the defendant to breach the duties and the tribunal decisions that were announced for the case of ASIC v Lindberg [(2012).

Case Introduction

Australian Securities & Investments Commission (ASIC) is considered to be the regulator of markets along with that of the corporate and financial services of Australia. It is a self-governing body that effectively contributes in the management of Australia’s wellbeing as well as economic reputation by effectively conducting the financial activities duly supported by potential customers and investors (1ASIC, 2016). In 2007, this government body filed a civil penalty case against Mr. Lindberg, the former chief executive of Australian Wheat Board (AWB). ASIC accused Mr. Lindberg of breaching the regulations of Corporation Act, whilst functioning at AWB as a managing director. The proceedings were duly conducted in Victoria’s Supreme Court on contravention of UN resolutions relating to Iraq. The settlement agreement for the case ASIC v Lindberg [2012] VSC 332 highlights upon the directors’ diligence and duty of care (Austin & Reynolds, 2012). The allegation that the plaintiff brought into proceedings in 2007 against the defendant was that he breached the standards set by the Corporations Act. He did so by permitting AWB Limited to enter into contracts for supplying wheat to Iraq that resulted in exploitation of the UN’s Oil-for-Food Programme (OIP) (Board Matters, n.d.).

 


Throughout the case, four major contraventions were mentioned by Victoria’s Supreme Court, to which the defendant duly agreed. First contraventions entail the debt to be recovered from Tigris, where the defendant failed to make proper inquiry as a director. Secondly, failure to report on the viability of the project Rose, followed by the existence of inaccuracies in the agreement of Tigris and the collection of the debt. In this context, the defendant was accused of not informing the Board about the Tigris Agreement, in which misdescription of payment of the service fees was also investigated. The fourth contravention finally states that the defendant had failed to notify the Board that, the Independent Inquiry Committee (IIC) of UN had been acknowledged with evidence from the former Government officials of Iraq (AustLII, 2012).

Identifiably, six former officers as well as directors were filed for the penalty proceedings of AWB including Mr. Lindberg. After prolonged conciliation with ASIC, the defendant admitted that he had committed contravention to the Victoria’s Supreme Court and subsequently, a fine of $100,000 was charged. Moreover, he was also sentenced disqualification from his designation of the company’s managing director for a span of two consecutive years.

Duties/Responsibilities Breached

Director’s duties are designed specifically to govern the company for supporting the shareholders and for promoting as well as ensuring good governance. Furthermore, to assure that the directors’ act in accordance with the companies’ interest, their duties are effectively designed (Australian Institute of Company Directors, 2016). The Corporation Act 2001 defined the term ‘director’ as the person who has been genuinely selected as a director or an equivalent director. In addition, the duties and responsibilities assigned to them are effectively performed with immense diligence and care. Moreover, these duties are subjected to make effective business decision, thereby requiring a director to provide a judgment with proper purpose and good faith [s 181]. In other words, they must exercise their judgment in a legitimate manner with close reference to the company’s interest [Re Smith and Fawcett Ltd. [1942] Ch 304] (Legal Services Commission, 2012; Dermansky, 2009). Additionally, the judgment must not bear any materialistic or personal interest and must be to the best interest of the company [Wagner v Gill [2013] NZHC 1304] (Legal Services Commission, 2012; Cavell Leitch, n.d.). Under Corporation Act 2001, any erroneous activities committed by the director and other officers, if proved to be accusable are regarded as a criminal offence (Legal Services Commission, 2012).

 


With reference to the Corporation Act 2001, under sec 181, the Supreme Court of Victoria found that the former managing director of AWB had breached his duties. In 2012, the infringer (Mr. Lindberg) acknowledged four of the major contraventions committed fell under the Corporation Act 2001 under section 180 and 181. Under section 180 of the Corporations Act, the director’s of the company must perform their respective duties with diligence and care and is further reinforced under section180(1) (Queensland Council of Social Service, 2011). In this context, ASIC was investigated to have faulty contract links with Iraqi Grain Board (IGB) under UN Oil-for-Food Program on the grounds of their payment procedures of transportation. The issue was that the money, duly received from an escrow account of the UN was purportedly used for certain means other than payments for assigned commodities. The payments were made to a Jordanian company (Alia). The plaintiff further alleges that besides Mr. Lindberg, other AWB officers were also aware of the facts and to a great extent violated the Corporation Act under section 180(1) through their unethical code of conduct (2ASIC, 2007).

Conversely, section 181 of the Corporation Act requires that all the duties performed by the directors must be carried out with good faith considering the interest of the company for adequate purpose. This state that the directors must not perform any unreasonable and contradictory action that would indirectly or directly affects the aims of the company. In other words, it indicates that the directors carefully implement their given powers and release their duties in good faith [Permanent Building Society (in liq) v Wheeler (1994)] (Langford & Ramsay, 2014; Schweizer Kobras, 2011).

With close relation to the above alleges by ASIC, it can be inferred that the duties were breached and the defendant agreed upon the major contraventions committed. Under the Corporation Act, a major attribute that a director must provide is the judgment after making accurate inquiry of any occurrence. With close reference to this, it had been found that the breach was caused due to improper inquiry of the exact facts. Under section 180(2), the directors are considered duly responsible for informing the appropriate subject matter by examining the reliability of judgment. This is linked with the second contravention, where the offender failed to inform the associated limitations and risk of a particular internal project that AWB dealt in [Westpac Banking Corporation v The Bell Group Limited (in liq) [No. 3] [2012] WASCA 157]. With regards to each of the above mentioned situations, it is evident that under section 180(1), majority of the contacts were breached (Barker, 2015; 3ASIC, 2012). Thus, with reference to this, it can be inferred that the breach of the Corporation Act was primarily as result of failing to formulate adequate enquiries in relation with the wheat contracts that made the managing director of AWB to subsequently fail in performing under section 180(1) in-spite of exercising reasonable diligence and care.

 


Evidently, the duty of the directors is highly related to proper implementation that does not cause prejudice to the company in any situation [Walker v Wimborne (1976) 137 CLR]. Breaching the duties may have variety of rationale but the ones most commonly observed are misrepresentation of facts, fraud and mistake. With context to the case of ASIC v Lindberg (2012), possible reason for contravening the duties as AWB’s director relates to the failure of notifying illegal deals to the board members. Furthermore, it was evident that none of the contraventions under the Corporation Act was caused with the intention of moral turpitude, dishonesty or involvement in wrongful deeds. Nevertheless, each of the contraventions was considered serious under the Corporation Act 2001 that directly relates to the incapability of maintaining and performing the best duties of a reasonable director (Donovan, 2012).

Critical Analysis of the Court’s Decisions

Contraventions related to certain contracts in the Corporation Act 2001 led to encompass major consequences for the one who is accountable for such breaches. In this context, court proceedings are common, where legal actions are taken over the subject matter and penalty is changed once the defendant is proved to be guilty of the act (Boardmatch Ireland Ltd, 2012). With close relation to the case of ASIC v Lindberg [2012), civil proceedings were commenced by the plaintiff in Victoria’s Supreme Court. To this, ASIC further urged the court to declare that each of the six former directors contravened the law under Corporation Act to impose a maximum of $200,000. Additionally, the plaintiff asked for disqualifying the defendants from the managerial roles as per the view-point of the corporation (2ASIC, 2007).

In this context, referring to the previous authorities, the court noted that pecuniary penalties and disqualifications are not merely a standardized method to protect the interest of the public but is also mandatory for the general and specific deterrent. Penalties for breaching laws under the Corporate Act 2001 are highly exemplified by negligence, rather than malfeasance [ASIC v Donovan (1998) 28 ACSR 500]. Moreover, after conducting lengthy negotiations, both the parties namely ASIC and the defendant mutually agreed to settle the further proceedings. Based on the fact that the defendant had agreed to the allegations made, the court only charged $100,000 as pecuniary penalty for breaching the norms under section 180(1) along with disqualification from functioning as a director for a stipulated period of time. The above judgment was purely based on the contraventions admitted by the defendant and through the observations of their conduct. Moreover, the court largely considered that the defendant did not try to hide the contraventions using any means of dishonesty or by any other underlying intention for causing such actions and hence settled the case only with pecuniary penalty and a statement of temporary disqualification and (Board Matters, n.d.).

The above decision made by the court can be critically justified with the Corporation Act 2001 under section 180(1). With close relation to the penalties, under this section, the court can impose a pecuniary penalty of up to $200,000, if the declaration is self made by the defendants regarding the breaches that have already been committed. The decision of the court can further be justified by referring to the Corporation Act, specifically under section 206C that enables the court with the authority to successfully disqualify the defendant from further functioning as manager against the committed contravention. However, under section 206G of the Corporate Act, the defendant can appeal to the court for granting leave in order to manage the corporation. Identifiably, the court possesses the authority to grant relief to directors as well as other officers from the further civil liability only if the defendant is found to stay honestly and diligent throughout the period (Queensland Council of Social Service, 2011). The case situations, in which ASIC was involved with more or less similar contraventions were ASIC v Adler and Ors, ASIC v Rich, ASIC v Vizard and ASIC v Vines (Queensland Council of Social Service, 2011). Moreover, breaching any regulations under section 180(1) does not facilitate the court to punish the defendant for just committing errors in judgment (AustLII, 2012). Therefore, according to the norms under the Corporations Act, the tribunal decision for ASIC v Lindberg [(2012) can be considered appropriate.

 

Summary

Directors are considered to be in fiduciary relationship with their company and are therefore mandatory to conduct and maintain loyalty and good faith relating to their duties and responsibilities with due care, diligence and skill. Failing to comply with these stated aspects, would directly lead to breach of the duties and responsibilities under Corporate Act 2001. Under this Act, the existence of the sections is the deciding factors, to which if the defendants are found guilty under any circumstances would be directly liable for legal action. Similarly, in this case, the defendant was found to commit four major contraventions, for which civil proceedings were taken by ASIC. In this case, the defendant readily agreed to the contraventions. Moreover, at the end of the tribunal decision, stress was given on the significance of deterrence while imposing penalties on the defendant.

 

References

ASIC, 2016. Our Role. For Business. [Online] Available at: https://www.asic.gov.au/about-asic/what-we-do/our-role/ [Accessed December 16, 2016].

ASIC, 2007. 07-332 ASIC Launches Civil Penalty Action against Former Officers of AWB. Media Centre. [Online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2007-releases/07-332-asic-launches-civil-penalty-action-against-former-officers-of-awb/ [Accessed December 17, 2016].

ASIC, 2012. Attachment to 12-109MR: Statement of Agreed Contraventions: Andrew Alexander Lindberg. Media Centre. [Online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2012-releases/attachment-to-12-109mr-statement-of-agreed-contraventions-andrew-alexander-lindberg/ [Accessed December 17, 2016].

ASIC, 2016. Directors - What Are My Duties As A Director? Insolvency. [Online] Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/ [Accessed December 18, 2016].

Austin, R. & Reynolds, C., 2012. Minter Ellison Alert | Asic V Lindberg – More on the Duty of Care and Diligence. Minter Ellison. [Online] Available at: https://www.minterellison.com/publications/asic-v-lindberg/ [Accessed December 18, 2016].

AustLII, 2012. Australian Securities & Investments Commission [ASIC] v Lindberg [2012] VSC 332 (9 August 2012). Supreme Court of Victoria. [Online] Available at: https://www.austlii.edu.au/au/cases/vic/VSC/2012/332.html [Accessed December 18, 2016].

Australian Institute of Company Directors, 2016. General Duties of Directors. Resources. [Online] Available at: https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors [Accessed December 17, 2016].

Barker, W., 2015. 3002LAW Corporate Law Notes. Media, pp. 3-58.

Board Matters, No Date. AWB Managing Director Fined and Disqualified. Newsletter. [Online] Available at: https://www.boardmatters.com.au/newsletter/awb-managing-director-fined-and-disqualified [Accessed December 18, 2016].

Boardmatch Ireland Ltd, 2012. Penalties for Breaches of Company Law. A Quick Guide, pp. 1-8.

Cavell Leitch, No Date. Directors Must Perform Their Duties Properly or Face Potential Liability. Business. [Online] Available at: https://cavell.co.nz/articles/2016/core-directors-duties [Accessed December 17, 2016].         

Dermansky, P., 2009. Should Australia Replace Section 181 of the Corporations Act 2001 (Cth) With Wording Similar To Section 172 of the Companies Act 2006 (UK)? Data, pp. 1-29.

Langford, R. T. & Ramsay, L. M., 2014. Conflicted Directors: What is required To Avoid a Breach of Duty? Journal of Equity, Vol. 8, No. 2, pp.108-127.

Legal Services Commission, 2012. General Duties of Directors - Corporations Act 2001 (Ctth). Company Directors [Online] Available at: https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php [Accessed December 17, 2016].

Queensland Council of Social Service, 2011. A Guide to Directors’ Duties and Responsibilities for Non-Listed Public Companies and Proprietary Companies in Australia. Guide Directors, pp. 1-14.

Schweizer Kobras, 2011. Directors’ Duties and Obligations. Directors, pp. 1-6.

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