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Disrupting untrustworthy pre-insolvency advisors and improving information for creditors

Foreign directors of Australian companies put on notice

The policy and practice of enforcement of directors' duties by statutory agencies in Australia

Discuss and critically ANALYSE the court/tribunal decision and the reason for the decision in view of the Corporations Act

Where possible and applicable, the relevance of the decision to the development of Australian corporations law or the impact of the decision on the operation of companies in Australia.

Rights and Duties of Directors under Australian Corporations Act

Introduction

The case of ASIC v Parker r [2003] 21 ACLC 888; [2003] FCA 262 deals with dittoes of the directors and what penalties are attached in cases when the director fails to perform in accordance with the terms of the duties. The directors in a company are in a fiduciary relation with the company and also the employees and are in a bona fide relation. The work of the director is to act in accordance with the agreements that have been entered into between the director and the company. Therefore, the function of the director is to act in good faith towards the benefits of the employees and the directors have to act in the best interest of the company. The director’s duty is to act in the best interest of the employees so that the goals and aims of the company are upheld.

Body of report

The rights and the obligations of the directors are upheld by the Australian Corporations Act. The directors therefore have a duty to comply with the statutory requirements of the Act and in cases when the director breaches his duties, he shall be liable for the breach. The liabilities incurred shall bear both civil and criminal penalties. The civil penalties shall be in the form of paying damages and fees and compensate the aggrieved party. On the other hand, the criminal penalties are attracted in cases of company fraud.  The director shall exercise duty of care and shall ensure that the decisions he takes are in the best interest of the company. The degree of care that the director has to take should be equivalent to what a reasonable man would take to further his obligations. The Australian Corporations Act states that the director has the duty to act in good faith and in the best interest of the company. The directors are not only responsible for the functioning of the company and the employees, but also responsible for the interests of the shareholders. The steps taken by the company are to reach some goals and ensure that the decisions are for fulfilling some certain purpose. Therefore, the director has to make sure that the purpose of the decision is fulfilled and to reach that purpose, the director cannot be said to be indulging in unfair business practices.  The director is also liable to the company in a way that ensures that the duties that the director owes to the company are fulfilled by him. The functions of the director also include that the director has to make all the necessary declarations about the trade that he is participating in and the declarations have to be honest and truthful and the director shall not dupe the employees into believing in the truthfulness of the business. Therefore, the director is duty bound to be informed about the conditions of the company. The director has to make all the profit declarations about all the business that he is dealing in and they should be truthful and also to the best interest of the company. The director has to exercise care and due diligence so that your actions do not cause any harm to the Employees in the present case it was held that the directors and breach the statutory duty of care that the out to the company and that they had acted in violation of the principles of the Australian corporations Act as a result of which civil penalty proceedings were initiated against the directors and the proceedings were brought against the four defendants who were also the directors in the company come to the facts of the case. One. Tel Limited  is an Australian limited company and the case was brought against the 2nd and the 4 defendants named John David mark Silverman and Rich. In this case which is the Director and he is also one of the executives of the company and Mr Silbermann  is the finance director of the company. Here the plaintiff is the Australian securities and investments Commission and the case was brought by ASIC against the defendants namely Silverman and Rich. In the year 2001 other than the executive director there were other several directors and non executive directors and one of the executive directors Mr Packer was involved in the day to day of shares of the company two other members were also included in the boat but later depositions changed. 

Case Facts and Proceedings

It is worthwhile to note that ASIC started its proceedings against the non executive chairman and the other executive directors who were 4 in number. The proceedings were not brought against directors. The contention was that the directors did not disclose the true financial position of the company and with the intention to mislead the company gave out wrong information about the financial position. Here it is pertinent to mention that for ASIC to initiate any proceeding it is not important to consider whether the defendants lied about the true financial position. Even though they knew where the company was standing, they did not inform the authorities. This is a clear breach of the director’s duty because he owes a duty of care and diligence and it is his responsibility to ensure that the company functions in the best interest of the employees and does not mislead the company about its financial position or insolvency. It is the duty of the directors to make the company know about the financial position and the executive directors failed in their beauty to inform the true position and how much expenses the company can bear. ASIC started its enquiry to find out the true financial position and whether the directors have knowledge about the condition of the company and it came to the knowledge of ESIC that the cash flow the position of the creditors debtors the liquidity where was then what was shown in the report by the directors and therefore there was a clear propaganda to mislead the company into believing that it had a sound financial position to enter into business transactions. 

Therefore all the information provided by the director to the board had no logical basis and they were without any concrete backing. By investigation the Australian securities and investments Commission also came to know that the directors were fully aware of the condition of the company and after knowing the truth they had failed to make a proper disclosure of the financial position to the board. After the case was presented by the Australian Securities and Investment Commission to the court the directors, that is, the defendants in the case filed a counter suit where they wanted to show that the groups actual financial position was what they have shown in the report and had convert to the board and that they were not in any malafide intention to deceive the board. The company said that their claim was on the ground that they had made clear submissions about the true financial position of the company they did not provide any expert accounting evidence. Now coming to the judgment of the case it is important to first understand that the defendants in the case made an allegation that the findings of the Australian securities investment Commission where outside its power and the evidence submitted by them were beyond the scope of the case.

Judgment and Analysis

Duty of the director entails that he has to make declarations about the status of the company and the financial position. The courts have unanimously decided what actions of the directors constitute a breach of the duty. Therefore it is difficult to state whether just making a disclosure would have absolved the director and would have been held that he has not reached his duty or whether even though the disclosure was made they would have been a breach nonetheless because the director has not taken the required steps to ascertain that he was acting in the best interest of the company. Applying the provisions of section 180(1) of the corporations act it is held that the director has to discharge his duties with proper care and diligence and the directors have proper responsibilities towards the company where he is working. Peter MacDonald is the first defended in the case and he is also a chief executive officer and the director of the company and it was held that he has violated section 180(1) of the corporations act because he had failed to lodge an enquiry to ascertain whether the foundation was properly funded or not the director have also reached his duties in the sense that he did not advise to board regarding the draught announcement we misleading or false. The ASIC is of the opinion that the director was obligated to disclose all the information to DOCI and by failing to do so the director has reached his duties under the corporations act. The biggest contention raised by ASIC is that the company has reached its statutory duties of care and diligence why not with holding the true position of the company. The directors under the Corporation Act or mandated to make a disclosure of the information they have received about the company and also disclosures that will be relevant for the transaction of the company in such cases the director self take the decisions keeping in mind they will influence the course of trade and the profit maximization of the company. One way for the directors to escape liability in cases of breach of fiduciary duty is to obtain proper consent from the shareholders. Applying all these provisions of duty of care of the director and the duty to act with diligence and care when applied to the present case it can be stated that the company shall not indulge in any unfair or illegal means to obtain profit. Furthermore it is the duty of the director to disclose all the relevant information before entering into any trade and buy a wording to disclose the financial position of the company the directors of acted in breach of the duties. The provision of section 180 (1) talks about the duties of the director and what constitutes a breach of those duties under the Corporations Act. In the present case it was held that even though the director was very well aware of the final position of the finances of the company, he did not advance and did not act in the promotion and betterment of the company. Section 588G of the Corporations Act states that a company shall not trade while it is insolvent and it is the sole responsibility of the director to ensure that the company is in a financially stable position to trade.

Directors' Duty of Care and Diligence

FODARE PTY LTD SHEARN (2011) NSWSC 479 is an important case that talks about the good faith duties of the director and the Court had applied section 181 and 588G of the Australian Corporations Act to state that it is the duty of the director to ensure that he exercises his duties in the best interest of the company and does not breach his duties. In the above mentioned case, the sole director was held to have acted in violation of her contractual obligations to the company. The company was not in a financially stable position but the director did not inform the board and encouraged the company to indulge in trading being fully aware that the financial condition of the company did not permit insolvent trading. Therefore, in that case it was held that the director shall be held personally liable in cases when the director forces the company to indulge in trade. The case also tried to understand the role of ASIC as the regulator of corporate undertakings and whether it was an effective regulator or not. The case tried to shape the course of penalizing the director for corporate misconduct and the case also talked about civil and criminal penalties in case the directors breached their duty.

Conclusion

This is a landmark case because it spoke about the rights and duties of the director and held that if director acts in contravention of his duties, he shall be made liable. In this case, the court also held that a director cannot escape liability of his fiduciary obligations by absenting himself from the meeting. He shall be held liable for passing a resolution of enacting loan knowing very well the financial condition of the company. Therefore by proposing a loan and gaining fees out of it, the director was held to be liable for breaching his duties to act in good faith. Therefore the director shall be held liable for failing to make proper disclosure and also for remaining absent from the meetings. The judges held that fiduciary duty cannot be judged on disclosure or absenteeism, but also on the failure to act honestly in the interest of the company.

Video script

  • The case in question deals about the rights and duties of the directors under the Corporations Act. In this case, it was alleged that the directors had violated their rights by acting in breach of their fiduciary duties. According to section 180 and 588 G of the Corporations Act, it is clear that the directors have to act in good faith and they have to exercise due care and diligence in taking decisions.
  • ASIC plays the role of a perfect regulator of commercial transactions and it is responsible for ensuring that the director acts for the purposes for which he is responsible and he performs the duties that he owes to the company.
  • The directors are responsible to make perfect declarations about the financial condition of the company and based on the opinion of the director, the company shall indulge in trading.
  • In this case, the director did not declare that the company was facing financial problems and therefore was not in the position to make profits out of the current conditions. Te director being aware of the financial difficulties, proposed a plan of loan and also derived profit out of it.
  • The director is responsible for carrying the best interests of the company and has to put his interests ahead of the interests of the company which the director failed to do in this present case.
  • The director therefore violated the rights that have been enforced on them by virtue of the legislature and has acted in personal interest and not in the interest of the company.
  • The company has also indulged in trading and violated section 588G of the Corporations Act because even though he was aware that the company is undergoing financial turmoil, he acted in self interest.
  • This case reaffirms that the relation between the director and the company is that of fiduciary and the director is obligated to act in good faith.
  • In case it is found that the director has breached his duties, civil and criminal liabilities shall be imposed on him.
  • This is an important case because it laid down that the director is responsible to act in good faith and not be negligent in their dealings.

References

ASIC v Mariner Corporation Limited [2015] FCA 589.

ASIC v Parker r [2003] 21 ACLC 888; [2003] FCA 262

ASIC v Sino Australia Oil and Gas Limited (in liq) [2016].

Australian Corporations Act, 2001 sec 180(1)

Australian Corporations Act, 2001, section 588G

Brown, Adrian. "ASIC: Disrupting untrustworthy pre-insolvency advisors and improving information for creditors." Australian Restructuring Insolvency & Turnaround Association Journal28.3 (2016): 46.

Fodare Pty Ltd Shearn (2011) NSWSC 47.

Hargovan, Anil. "Corporate law: Foreign directors of Australian companies put on notice: No leniency for ignorance of duties." Governance Directions 69.1 (2017): 37.

Hedges, Jasper, et al. "The policy and practice of enforcement of directors' duties by statutory agencies in Australia: An empirical analysis." Melb. UL Rev. 40 (2016): 905.

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My Assignment Help (2020) Critical Analysis Of ASIC V Parker Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/hi6027-business-and-corporations-law/improving-information-for-creditors.html
[Accessed 20 May 2024].

My Assignment Help. 'Critical Analysis Of ASIC V Parker Essay.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/hi6027-business-and-corporations-law/improving-information-for-creditors.html> accessed 20 May 2024.

My Assignment Help. Critical Analysis Of ASIC V Parker Essay. [Internet]. My Assignment Help. 2020 [cited 20 May 2024]. Available from: https://myassignmenthelp.com/free-samples/hi6027-business-and-corporations-law/improving-information-for-creditors.html.

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