Directors' Duties And Limitations: Dividend And Bonus Share Payment Essay.

Director Duties and Bonus Shares

The assignment deals with the duties and limitations of directors towards the payment of dividends and bonus shares to shareholders. The paper also deals with the circumstances in which a first and second strike may arise and what is the relevance of the second strike on the directors of the company. The paper answers the three questions through the provided scenario related to Waldmart Ltd. The paper identifies the legal issues of the provided scenario, analyzes the legal provisions related to the facts and them applies them to the circumstances in order to obtain an appropriate solution. The Corporations Act 2001 deals with matters related to corporate law in Australia. The relevant sections of the legislation which deal with the issue of bonus share and dividends are Section 254A and Section 254SA - 254W respectively.  The provisions related to second strike have been added to the Corporation Act through Corporations Amendments (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Cth).

The issue is to identify the powers of the company to issue bonus shares

As per Section 254A the directors of the company have been provided the power under Section 124 of the CA to issue bonus shares. A bonus share is a share where the company is not entitled to any remuneration for the issue of such shares.

According to section 182 of the CA the directors have an obligation of not using their position to secure an advantage for themselves or others causing harm to the company. The directors must also act with due care and diligence and in good faith according to Section 180 and 181 of the CA respectively.

In the case of The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (No 9) [2008] WASC 239 it was held by the court that the directors of the company had violated their duties by failing to consider the interest of the shareholders and the company in order to make personal gains. In the case of ASIC v Fortescue Metals Group Ltd FCAFC 19 it was held by the court that the directors of the company had not observed due care and diligence towards the company’s affair and taken decisions in favor of personal interest oven the interest of the shareholders and the company.

Bonus shares can only be issued by the directors of the company in case it does not bring any detriment to the position of the company to pay back its creditors and shareholders.

Payment of Dividends and Director Duties

With respect to the first issue related to the scenario the provisions of section 254A and rules related to the issue of bonus shares have to be applied. Section 254A of the CA allows the directors of the company to issue bonus shares legally. The only consideration the directors have to consider is that the company is not indulging in any insolvent trading and the issues of bonus shares do not hamper the company’s ability to pay its creditors. However in this case it is clear that the directors are doing so in order to intimidate the shareholders to approve their remuneration report and such issue can be a detriment for the company. Therefore this action by the directors is a clear breach of director’s duty under section 180-182 of the CA. the directors are not only breach the duty of due care and diligence but also the duty to work in best interest of the corporation and giving priority to the company’s interest over the interest of the company. Thus in this case the shares holders of the company have the right to take legal action against the directors of Waldmart Ltd and also to oppose the decision at the AGM.

The issue is to identify the powers to the company to issue dividends

Section 254 T of the CA provides for circumstances in which a dividend can be paid by a company not limited by guarantee. The company may only pay dividends if the assets of the company are more than its present liabilities and such excess is adequate to pay the proposed dividend. The company also has to ensure that there is fair and reasonable cause behind the payment of such dividends with respect to the share holders. The company also has to ensure that such dividends do not hamper the position of the company to pay the creditors. The payment can be said to hamper the position of the company with respect to payment of creditors if such payments make the company insolvent. Directors of the company are not entitle to indulge in any trading when the company faces insolvency under Section 588G of the CA.  

It had been confirmed in the case of QBE Insurance Group Ltd v AISC (1992) 8 ACSR 631that dividends are only payable when the profit of the company has increased and there is a clear increase in the assets of the company which have become more than its liabilities. If the directors of the company pay dividends which are for the purpose other than excess profit and cause a reduction in share capital they are liable under the provisions of Section 256B - 256D. It was held in the case of Bond Corp Holdings Ltd v Grace Bros Holdings & Ors [1983] 1 ACLC 1009 that dividends can only be paid by the directors of the company out of profit and not for any other reasons.

Consequences of Second Strike on Directors

Shareholders of a company who have a minimum of 5% of the vote which can be cast in relation to a general meeting of the company have the authority to initiate a meeting themselves or force the directors to hold a meeting.

In relation to the second issue with respect to the issuing of dividends by the directors of Waldmart Ltd the provisions of Section 254T of the CA and other rules of dividends as discussed above have to be applied. According to section 254T of the CA Waldmart are only allowed to issue dividends if the issue does not hamper the position of the company to pay its creditors along with assuring that such issue is fair and reasonable with respect to the creditors of the company. However in this case it is clear that the only intention of the directors towards the issue of dividends is to lure the shareholders to approve and vote in favor of the remuneration report. Given the present market conditions it is clear that in case dividends are issued by Waldmart ltd it will definitely be against the development of the company and can subject the shareholders to losses. In the QBE Insurance Group case the court had made it clear that the directors of the company are not allowed to issue dividends if such issue would cause detriments to the company. Further applying the principles of section 254T of the CA in this case there is no just and equitable cause which Waldmart ltd has towards issuing the divided to its shareholders. There have been several cases in which the shareholders have taken legal actions against the directors of the company when the directors have been found to not obey their duties towards the company such as Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464 and 8 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2001) 164 FLR 268 where the court held the directors liable for not obeying their duties.

The issue is to identify the consequences which would arise if Waldmart Ltd has to face a second strike with respect to the remuneration report of the directors.

The two strike rule has been enacted to hold the directors of a company accountable with respect to bonuses and remuneration of the executives. According to the rule the whole board of directors can be subjected to re-election in case there is disagreement on part of the shareholders with respect to the remuneration to be paid. The first strike takes place when the report of remuneration for directors receives vote of less than 25% of the shareholders off the company. The second strike takes place when the subsequent remuneration report also fails to get minimum of 25% vote of the shareholders. In case of a second strike the shareholders determine that whether or not all directors of the company have to be subjected to re-election or not. This is done in the same AGM and is known as a spill resolution. A spill meeting has to be scheduled within 90 days in case a spill resolution is passed. In this meeting all existing directors of the company would be subjected to re-election except the managing director who has been permitted to continue to run the affairs of the company.

Conclusion

The third issue in this scenario is related to a second strike which might arise due to the disagreements between the directors and shareholders of Waldmart ltd in relation to the remuneration report. As discussed above in a second strike arises if there is no agreement between the shareholders and the directors in relation to the remuneration report and the report has faced to attain the minimum number of votes from the shareholders. In case similar circumstances arise for Waldmart Ltd than a spill resolution would be passed by the shareholders in order to initiate a spill meeting within 90 days of the resolution. In the resolution the shareholders will decide the directors who would be subjected to a process of re-election at the spill meeting. All the directors of Waldmart Ltd can be changed in the election process by the shareholders of the company in case of a second strike.

Conclusion

Thus it can be concluded through this paper that although section 254A of the CA gives powers to the directors of the company to issue bonus shares the duties imposed on the directors by common law and the CA give the shareholders the power to initiate legal actions against the directors and oppose their wrongful decisions. Thus the issue of bonus shares by the directors can be opposed by the shareholders.  With respect to the payment of dividends by the directors of a company are strictly restricted from issues dividends in circumstances which might cause detriment to the position of the company. They have to ensure that the assets of the company are more than the liabilities before the debenture is issued. Thus the shareholders can oppose the decision of the directors. In case of a second strike the directors of Walmart Ltd would be subjected to re-election.

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