Breach Of Director's Duties And Fiduciary Obligations

Problem-Question 1

The question is concerned about the potential breach of director’s duties. Directors are supposed to act according to statutory and general law. According to statutory duties, they are required to disclose certain interests, not misuse their positions, act in good faith for the required reason and the best interest of the company, and act with reasonable care and diligence (Bilchitz & Jonas, 2016). Generally, they have a duty to retain discretions, avoid conflicts of interest, act in good faith, use their powers properly, and act with reasonable care and diligence. The issue here is whether the two directors, Mr. Eric and Mr. Morton act according to the directors’ duties as defined in the Corporations Act.

Before making any decisions to get involved in the dealing with Tricky Partners, both Eric and Morton are supposed to find out the interests of the two companies, Walker v Wimborn (1975 – 1976) (Stapledon, Ramsay & Hanrahan, 2017). Of course, Tricky Partners would wish that GoldCoin accepts their offer, but GoldCoin would only wish to get involved if it is profitable to them. By so doing, the directors will be able to make the right decisions and act with reasonable care and diligence according to s180CA and, thus, avoid conflicts of interest, act in good faith in the interests of the company and employ their powers for the proper purpose (s181CA).  As such, to test whether there is a breach of the directors’ duty, is whether the two directors could have reasonably alleged that their choices in the issue was for the benefit of GoldCoin as demonstrated in the case Charterbride Corp Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997). Ss191-196 requires directors to disclose certain interests so that they can help avoid the conflict of interest (Stapledon, Ramsay & Hanrahan, 2017).

Apparently, the deal with Tricky Partners would only be a good one if it only benefits GoldCoin, and not because of offering Mr. Eric a huge bonus. Therefore, despite offering him the incentives, Mr. Eric and Mr. Morton should be able to argue that at the end of it all, it will be beneficial to GoldCoin and thus they have to support it. If it is not beneficial, then Mr. Eric should not push for it simply because of his interests and Morton on the other hand should prevent the company from getting into an unworthy dealing by disclosing Eric’s interests.

Consequently, the decisions of the directors should be in line with the best interests of GoldCoin. If Eric goes for it because he is aware of the huge bonus he will get by convincing the other directors to vote in favor of the deal, then he will be doing that because of his own interests, which is against ss181, 182 and 183 of the Corporations Act (Horne, 2017). On the other hand, Morton has a right to avoid conflict of interest (Nolan, 2017). As such, boycotting the board meeting so that he does not vote against the dealing makes him breach ss191-196 that requires him to disclose the interests of Eric.

Problem-Question 2

Bricks Construction Co. is a company that builds railways. Out of the four directors with equal shares, three of them were in dispute with the fourth director known as Oistrakh. They started a negotiation by excluding as the directors of Bricks, however, before signing a new contract the three set up their own company known as Bluffer. They convened a meeting and used their votes to pass resolution that Bricks was not interested in the Swift contract, and that the company will sell part of its equipment to Bluffer at lower cost. Therefore, it is clear that the three directors have breach the statutory duties owed to Oistrakh.

The three directors owe the statutory duties to Oistrakh as demonstrated in Brunninghousen v Glavanics case. It is clear that there is a relationship of trust and confidence between the three and Oistrakh. It is because the four had equal shares in Bricks; hence, owed one another statutory duties. Other than that, they were in a position of particular advantage when they decided to set up a new company without the knowledge of Oistrakh (Valsan, 2016). They owe him the duty of good faith and fair dealing and the duty to disclosure. Other than that, they breach fiduciary duty by failing to disclose some information, misrepresentation in relation to statement of fact, and misuse of influential position. Further, he can claim for damages that the breach has caused him. The fiduciary duties govern by the state such the duty of board members to represent the interests of the shareholders (Davis & Whitley, 2009).

It is evident that the three directors disregarded their duties of trust and confidence when they decided to exclude Oistrakh in the negotiation that was between Bricks and the Swift Railway. It means that they breached their duty of trust and confidence. They also failed to act in good faith for welfare of the company that could have benefited the four directors, but instead decided to satisfy their own personal gain (Valsan, 2016). Conversely, has the right to information disclosure, but in this case the three directors decided not to inform him about the negotiations that were held on behalf of Bricks. Moreover, they also refuse to inform him about the existence Bluffer Company. They also used their number to influence the decision of the board of directors for their personal gain (Davis & Whitley, 2009). They did this so that they may benefit through their new company and to stop Oistrakh from benefiting. It shows that there was a misrepresentation of the facts, which also amounts to breach of the statutory duties.

To conclude with, it is evident that the three failed to act in good faith and to benefit of the company. It shows that they breached statutory duties owed to the company. They also breached the rights to information discloser and misrepresentation of facts. The three directors failed to owner the fiduciary duties controlled by the statute by not representing the interests of the shareholders.

Problem – Question 3

Problem-Question 3

Ms. Hawker is a CEO and a director of the Comet Pty Ltd. She is also one of the directors in AvantGarde Pty Ltd. In her position in AvantGarde she discovered that an accountant has been embezzling the company’s funds. The level of the embezzlement is high that it has affected the cash flow of the AvantGarde Company. Because of being afraid of her reputation damage as a CEO of Comet, she decided to transfer funds from Comet to AvantGarde without Coment’s director’s knowledge to cover up the AvantGarde’s cash shortfall. Because of this she contravened her fiduciary obligation to both Coment and AvantGarde under the statute law (Scharffs & Welch, 2005).

It is evident that there was a fiduciary relationship between Ms Hawker and Comet Company at the time when the dispute occurred. Comet shareholders and the directors placed confidence and trust in her with he full knowledge as a CEO. Therefore, she is bound to exercise her rights and powers in good faith for the benefit of the company as stated under the general law. However, she failed to protect the company from incurring debt; hence, breaching s 588G(2). Additionally, she failed her statutory duties under Corporation Acts s 9 (DiCarlo & Hootkins, 2017). Other than that, Comet became insolvent after she transferred funds to AvantGarde. Besides, she violated her duty of care to the company by secretly transferring cash.  She breached her duties by misappropriating funds (Waxman, 2014). Due to the money transfer, Comet suffered damages contributing to its insolvency.

On the other hand, she also owes AvantGarde fiduciary duty. It is because she transferred funds to the company without the knowledge of the board of directors. This means that she has contributed to the debt that AvantGarde owes to Comet. She failed to perform her obligation duty of acting in good faith, fair dealing, and full discloser (Davis & Whitley, 2009). Additionally, she breached her duty by failing to disclose information.

Hawker failed to exercise her rights and power in good faith for the benefit of the company; instead she transferred the cash for her own personal gain. For example, she was protecting her image instead of safeguarding Comet’s funds. Other than that, she secretly transferred the money without disclosing her intention to the board of directors of Comet. Similarly, she failed to disclose misappropriation of funds to the board of directors and shareholders of the AvantGarde, and instead added debts to the company (Waxman, 2014). Because of breaching fiduciary duties, the lawsuit will recover the actual damages incurred. The lawsuit might also recover punitive damages if the breach could be proven to have been committed out of fraud (Scharffs & Welch, 2005).

To conclude with, it is vital for all the company directors and CEOs to avoid putting personal gain ahead of the company’s benefits for them to avoid breaching their fiduciary obligation. Besides, the law states that directors should act in good faith and for the benefit of the company, and that they have a duty to disclose information concerning the company. Therefore, they should know that they are in contract with the company, board of directors, and the shareholders and they must abide by the contract terms.

Task 1

This question is concerned about the application of the duty to act with reasonable care and diligence towards the company at general law and in accordance with s180 of the Corporations Act, 2001 (Cth). With regards to the case, the chief operating officer was given the chance to recruit a team of new experts to work on a feasibility study for the company’s new project. The chief operating officer, however, recruited her friends who were bright and young but inexperienced resulting to the company’s substantial loss. Therefore, the issue here is whether the chief operating officer breached the duty of care and the possible defenses she could use.

Since the chief operating officer is entrusted by the Board to select a new team, she has a duty to act with care and diligence (Nolan, 2017). Therefore, the test of whether she failed to comply with the law is to find out if she was negligent. According to the negligence law, negligence is defined as failure to apply reasonable care resulting to harm to the company or to another party (Pagura, 2015). The Chief operating officer is obliged to exercise her powers and discharge her duties with reasonable care and diligence (s180 (1) CA) (Bilchitz & Jonas, 2016). Therefore, an individual or company becomes generally liable when they injure another party in a negligent way (Mullender, 2005).

The possible defenses include: (1) Reliance on others (s189CA). After making an independent assessment, the chief operating officer found that her friends were bright and young and could be able to prepare the report for the new project. Besides, she had good faith in selecting her friends. Her reliance on the selected team is reasonable unless the Court proves otherwise (Mullender, 2005). Nonetheless, the case of ASIC v Healey proves that reliance defense does not always work (Stapledon, Ramsay & Hanrahan, 2017). Nonetheless, (2) the business judgment rule can work as a defense in this case (s180(2) CA). Apparently, not all decisions made in business will always be good. Instead, most of them take in a degree of risk. Besides, if the decision made was not right then it does not imply that it is a breach of duty.

Of course, the choice of friends to work for a project does not necessarily imply that the decision is wrong (Stapledon, Ramsay & Hanrahan, 2017). They could be friends who are bright and competent even if they are inexperienced. Everything starts from somewhere. It could be the best chance for the young individuals to learn about new things and work for them to help them gain experience.

As such, despite having chosen inexperienced young friends, the chief operating officer could still be working in the best interests of the company. This does not imply that she breached the duty of care because the chosen team was bright and could be competent. Besides, it is reasonable to choose young individuals to carry out a project as compared to the old. Aside from that, the law accepts that not all decisions made will turn out to be good and advantageous to the company. Instead, they have a degree of risk as they can sometimes fail as what happened with the decision of the chief operating officer.

Task 2

This question is concerned about the application of the directors’ duties on care skills and diligence in the workplace. The newly elected directors were required to prepare a feasibility study for the ShaleRock’s new project. To carry out their duty, they were not only supposed to work on the technical needs but also to report on the accuracy of the predicted oil reserves. However, the individuals were inexperienced as they were bright young people fresh from school. As a corollary, they failed to detect some issues in their reports which in turn led to the company experiencing some substantial loss. Therefore, the issue in this question is whether the directors had potential breaches in their duties with regards to their qualifications to work for the company and whether they have any possible defenses.

According to AWA case, all directors are obliged to have a basic understanding of the business in their organizations and familiarize themselves with the business fundamentals (Bilchitz & Jonas, 2016). Besides that, they are supposed to be informed about the activities of the company. According to s180(1)CA, the statutory duty of care requires that directors are obliged to discharge their duties reasonably with care and diligence. There are high chances that the employed directors breached the Corporations Act for being inexperienced but still carried on to prepare reports for ShaleRock’s new project. In this regard, it is also clear that the directors also breached the negligence law.

Nonetheless, according to CACL, there are possible defenses for these directors. For instance, the business judgment rule, indicates that directors can meet the statutory and general law duties if they exercised their business judgment in good faith, for the required reason and if they believed that what they judged was in the best interest of the company (s180(2)CA) (Horne, 2017). Moreover, the directors thought the investment would actually be highly successful. The business judgment rule is in support of this as it clearly indicates that not all the business decisions will end up being good, ASIC v Adler (2002) 41 ACSR 72 (Stapledon, Ramsay & Hanrahan, 2017). They have a degree of risk as sometimes they will fail.  

It is evident that the selected directors were inexperienced and incompetent. This is seen as they were unable to detect the flaws in the investments and their reports clearly indicated that the investment would be highly successful to ShaleRock. Unfortunately, their predictions did not work as expected. Being that they worked in the company without fully understanding the company’s business, activities and requirements, they breached the Corporations Act as stated in AWA case. Despite having these issues, it is possible for the directors to defend themselves according to the business judgment rule.

Nonetheless, it is not right for business directors to go against the law, as they can highly cause damages to the company, which in turn will make them punishable in the court of law. The directors must understand the organization’s business meaning they must be experienced in what they are doing.

Here, the question is about the application of the statutory law on preventing insolvent trading as a director’s duty (Hedges, Bird, Gilligan, Godwin & Ramsay, 2017). In order to minimize ShaleRock’s losses and insolvent risk, the directors opt to transfer the company’s funds and start a joint venture with a major transnational company. The issue is how the directors’ decision could not prevent insolvent trading leading to a breach of the statutory duty and the defenses available for them.

When a company is at risk of being insolvent or is already incurring debts, directors have a duty to prevent the company (Marsh & Roberts, 2017). S588G of the Corporations Act applies if the directors were already in their positions when the company incurred the debts. Nonetheless, the directors were already aware that ShaleRock was at risk of incurring the debts as defined in section 95A of the Corporations Act, but still went on with their decision to transfer the company’s funds.

The test to show that the directors contravened s588G(2) of the Corporations Act is showing whether they failed to prevent the company from insolvency despite the fact that they could suspect the risk (Stapledon, Ramsay & Hanrahan, 2017). Additionally, the cashflow test shows that delays by creditors to enforce the payments cannot stop the owed amounts from being counted as debts, Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213. Clearly, the directors were aware that the company was already incurring debts and their decision was not in the best interest of the company. This action could only be in favor of the partner company but not to ShaleRock.

However, there are possible defenses to the breach of this director’s duty. For instance, the law in s588H(2) of the Corporations Act provides that there are reasonable occasions when solvency can occur in a company (Stapledon, Ramsay & Hanrahan, 2017). This is demonstrated in the case of Metropolitan Fire Systems v Miller (1997) 23 ACSR 699 (Ponta, 2015). Aside from that, Deputy Commissioner of Taxation v Clark (2003) 21 ACLC 1,063 illustrates s588H(4) on the absence from management (Horne, 2017).

Generally, directors have a duty to prevent insolvent trading as demonstrated in s588G. The cash flow test and section 95A of the corporations act, on the other hand, explains how a company is said to be incurring debts (Marsh & Roberts, 2017). However, s588G describes how directors can be held liable of breaching the law that prevents insolvent trading. For instance, if they are aware of the company’s risk of insolvency, they are supposed to prevent it, otherwise, they are said to breach the law. As a consequence, the court may order for civil penalty or compensation to benefit the unsecured creditors (s588MCA). Nonetheless, they may have defenses under s588H(2), s588H(3), s588H(4), s588H(5) and s588H(6) of the Corporations Act. There are reasonable ways to show solvency, to rely on others, to prevent the company from insolvency and work without the management.

References

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