Statutory And Common Law Positions Of Directors: Borisda Builder Pty Ltd Essay.

Duties of Directors under the Corporations Act, 2001 (Cth)

Borisda Builder Pty Ltd has five directors: Vesna, Sergey, Ilyych, Mikhail and Zviad.

Mikhail and Zviad are working directors. They manage the day - to - day operations of Borisda Builder Pty Ltd. The company is engaged in all aspects of home building.

Ilyych is an accountant and he helps out with the production of monthly financial reports for all the directors.

Vesna has attended University and holds an engineering degree and a Masters of Business Administration (MBA). She has a good knowledge of the building industry and the way company finances work.

Sergey is Zviad’s brother and has had a long history of depression and lack of self - esteem. Zviad supported Sergey’s wish to become a board member even though he offered little by way of expertise. Zviad thought that it would help Sergey’s personal development by giving him a different focus.

Borisda Builder Pty Ltd had a record year in 2010. The government’s first home buyers grant meant that the company had many building contracts. The directors met in July and decided to pay a dividend of 9c per share.

The company has experienced a severe decline in new contracts in the last two months. This is due in part to a number of cut - price builders offering cheap building contracts. This has placed the company in financial difficulties.

Mikhail and Zviad have been with the company since day one and are attached to the company. It is their main focus and provides them with emotional and financial wellbeing.

Sergey has never read any financial statements that have been sent to him. He did not check the company’s financial returns for any of the years before he was appointed and he has never read any reports since he was appointed.

Shareholders of Borisda Builder Pty Ltd number 15 and include the directors and members of the founding family who have held onto shares but take little interest otherwise.

Vesna’s brother Doug has a building design company, Doug the Designer Pty Ltd, and Vesna attends its Board meetings and gives advice. Because of her education and experience the Board of Doug the Designer Pty Ltd follows her directions. Recently, Borisda builders Pty Ltd contracted with Doug the Designer Pty Ltd. It was Vesna that convinced the rest of the board of Borisda Builder Pty Ltd to enter this contract. It was also Vesna who collected all the quotes for this contract work, which all exceeded Doug the Designer Pty Ltd’s quote. This is due to the fact Doug the Designer Pty Ltd put in a quote below the cost price of the work because Vesna promised there would be more work from Borisda Builder Pty Ltd in future.

Ilyych attended a Borisda Builder Pty Ltd board meeting a few days ago and brought with him what he believed was a great idea. His proposal was that the company become involved in construction cubby houses for children out of the left over materials from around the company’s building sites. The other board members were not so convinced, but Ilyych, being an accountant, produced some very impressive figures based on information from the company’s files. The board voted against the proposal after Vesna, with her MBA training, argued that the company should focus on it’s main area of housebuilding.

Ilyych is disappointed but yesterday signed a deal with another building company known as Canweafixdat? Pty Ltd. The deal involves Ilyych being paid a commission of 10 percent for every cubby house sold and a place on their board.

Borisda Builder Pty Ltd is having financial problems, yet the board continues to allow the company to trade without considering the consequences.

Discuss the statutory and common law positions of the directors.

There are several duties that have been mentioned for the directors of corporations by the common law, statutory law and company's constitution. The statutory duties imposed on the directors are mentioned in the Corporations Act, 2001 (Cth). In this work, the statutory and common law position of the above-mentioned directors has been discussed.

In the present case, Vesna convinced the board of Borisda Builder Pty Ltd. that it should enter into a contract with Doug The Designer Pty Ltd. this is a company owned by Vesna's brother, Doug. On the other hand, the duty mentioned in s181 of the Act mentions that the directors should use their powers and discharge their duties: (i) in good faith and in best interests of the corporation; and (ii) for proper purpose. These provisions are consistent with the fiduciary duty of the directors which requires them to bona fide and for the benefit of the corporation (AWA Ltd v Daniels, 1992). In contrast, this duty will be considered to be violated by the directors, where it has been found that the directors have used their authority for improper purpose though the directors believed themselves to be performing sincerely.

There is a common law duty imposed on the directors, according to which they should avoid any conflicts of interest. The law presumes that the directors have fiduciary duties in favor of the company (Statewide Tobacco Services Ltd v Morley, 1990). This is a significant legal relationship and it is important that the directors always prefer the interests of the corporation as compared to their own interest (Woolworths Ltd v Kelly, 1991). As a result of this duty, the directors should not place them in a situation where they can be conflict between their personal interests and the interests of the corporation as they are bound to protect these interests.

This section contains the duty of care and diligence imposed on the directors (R v Byrnes, 1995). The duty is also present under the common law. However, it has been reinforced by adding in s180(1) of the Act. According to this provision, the directors of the company are under an obligation to use their powers and discharge the duties with the same level of care and diligence that can be expected from any reasonable person in such person was the director of the company under similar circumstances and occupied the same office with same responsibilities. Due to the reason that a reference has been made to a reasonable person, it can be stated that an objective standard of care that is consistent with the equivalent fiduciary duty is applicable (ASIC v Vines, 2006).

Vesna Violation of Duty Imposed by S181

It is the possibility of the directors that they should maintain a balance between the probable advantages that can be reasonably anticipated from the conduct in question against the probable risk of harm that may be caused to the business (ASIC v Stephen William Vizard, 2005). This section also contains the business judgment rule.

In this regard, s588G of the Act imposes a duty on the directors. This duty requires that the director should prevent insolvent trading (Woodgate v Davis, 2002). This section provides that when a person is a director, at the time when it incurs a liability and the corporation is insolvent or may become so due to incurring the debt and there are reasonable grounds to suspect that either the company was insolvent or it may become so and the director knew regarding these grounds or any other reasonable person would have known regarding these grounds under like conditions but the director failed to prevent the company from incurring such a debt.

Vesna is a director of Borisda Builder Pty Ltd. She has university education and an engineering degree as well as a Masters of Business Administration. In this way, Vesna has good knowledge regarding building industry.

Ilyych is an accountant and helps the company in creating monthly financial reports. He strongly recommends to the board of Borisda Builder Pty Ltd that the company should become involved in constructing in cubby houses for children around the building sites of the company. However, the board of the company decides to focus on the main area of house building. Under these circumstances, Ilyych signs a deal with another building company, Canweafixdat? Pty Ltd. according to this deal, Ilyych was going to be paid a commission of 10% and also a place on the board of the company.

Sergey: In this case, is the brother of another director of the company, Zviad. He has a long history of depression and lack of self-esteem. Although he did not have any relevant inexperience, still he was made, a member of the board. Sergey never reads the financial statements of the company. Similarly, he never checks the financial returns of any year before he was appointed and never read any records after his appointment.

Mikhail and Zviad: Along with these two directors, the other directors of the company can also be held accountable for the violation of duty to prevent insolvent trading. In this case, the directors allowed the company to trade even if the company was facing financial problems.

Conclusion

Vesna had violated the duty imposed by s181.

Therefore this case, it can be stated that Ilyych had breached the duty which requires the directors avoid any conflicts of interest.  

Under the circumstances, it can be stated that Sergey is responsible for the violation of duty mentioned in s180.

Therefore in this case, it can be said that Mikhail and Zviad, along with other directors of the company can be held liable for the violation of duty to prevent insolvent trading.

References

ASIC v StephenWilliam Vizard [2005] FCA 1037

ASIC v Vines [2006] NSWSC 760

AWA Ltd v Daniels (1992) 7 ACSR 759

R v Byrnes (1995) 130 ALR 529

Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405

Woodgate v Davis (2002) 55 NSWLR 222

Woolworths Ltd v Kelly [1991] 22 NSWLR 18