Business Corporation Act.: Research Essay

Question:

Discuss about the Business Corporation Act. for Research Essay.

Answer:

Introduction:

Section 9 of Corporations Act, 2001 provides the meaning of the term “director”. According to this section, director means a person who has been validly appointed as a director of the corporation or as an alternate director. It also means a person, who has not been validly appointed as the director, if such person has been making in the position of the director or in other words a de-fecto director. This section also provides that the term director also includes a person who has not been validly appointed as such but the directors of the corporation are used to act according to the instructions of such a person or a shadow director. In the present assignment, the duties of the directors have been evaluated and at the same time, the evolution of the role of directors has also been traced to the evolution of the duties of the directors.

In Australia, there are three main sources of law that provides the duties and obligations of the directors of solutions in Australia. These resources are common law, statute law that is merely provided by the Corporations Act, 2001 and the company's constitution. The duties have been introduced for the directors with a view to promote good governance. These duties require that the directors should raise the interests of the corporations ahead of their personal interests. The common law also imposes certain duties on the directors, for example the duty to a bona fide and in the interests of the corporation.

These duties require that the directors should act in good faith and in the interests of the corporation. In order to see this duty has been properly discharged by the directors, the subjective test of scrouplousness can be used. A director will be held liable for the breach of this duty if the director fails to give consideration to the interests of its population properly. For example, such a situation may arise when it has been assumed by the director that the interests of the corporation correspond with the personal interests of the directors and as a result, the director does not consider the interests of the corporation as being a separate entity.

The common law has also prescribed a duty for the directors which require that they should not ask for an improper purpose. The purpose behind this duty is to make sure that the directors do not use their powers for any inappropriate purpose. Such a purpose may include the situation where the director has taken a personal advantage or tried to defeat the voting power of the shareholders with the help of creating a new majority. In this regard, the common law provides that raising capital or trying to take the benefit of a genuine opportunity that may be commercially available to the corporation will be a proper purpose. Therefore in such a case, when the directors are involved in promoting the interests of the corporation, they may also promote their personal interests indirectly. In order to make sure that the directors use their powers for the proper purpose, an objective test can be used. For example, when the corporation is going to borrow money, it has to be seen in the alleged need to borrow the money was really present for the corporation or not. Similarly even if the inappropriate purpose can be considered as the main reason on among one of the reasons behind the decision, such a decision can be treated as invalid when, other than the improper purpose, the directors would not have taken such a decision. In order to deal with such cases, it has been provided by the law that when the directors are using their powers for any improper purpose, the corporation needs to avoid such acts of the directors.

Another duty imposed on the directors is the duty of care and diligence. For the purpose of fulfilling his duty, it is very important that the directors are aware of the financial position of the corporation, including the solvency of the company. The law provides that it is a significant responsibility imposed on the directors, and is decreased even in cases where the directors have delegated their responsibility to another person (Sweeney, O’Reilly and Coleman, 2013).


The law also provides that the directors cannot hide behind their own ignorance related with the affairs of the corporation, particularly when such ignorance has been created by themselves. The result is that it is obligatory for the directors to ask questions regarding the information that has been put before them. This is necessary to make sure that all the information related with the company, represents the accurate position of the corporation. Therefore the directors should not straightaway accept all the information that has been given to them by the employees of the corporation (Harris, Hargovan and Adams, 2013). For fulfilling his duty, it is also necessary that the directors should be independent and informed judgment regarding all the matters that they have to decide in the board meetings. The role of the directors is to maintain a position where they are able to guide and monitor.

Another duty that has been imposed on the directors of corporations is the duty to use discretion. According to this duty, the directors have been prohibited from placing themselves in the circumstances where they are not in a position to make favorable decisions for the corporation. An example of such a situation can be the commercial transactions where the directors are not in a position to take decisions on behalf of the corporation (Gooleyet al., 2011). The result is that the directors have been prohibited from entering into such transactions where they have to give preference to the interests of third parties as compared to the interests of their own corporation. In this regard, a duty has been imposed on the directors to avoid conflicts of interest. There are certain fiduciary duties that the directors owe towards their corporations. The position of director is a very significant relationship and therefore utmost good faith is involved in it. The result is that it is very significant that the directors give preference to the interests of the corporation as compared to their personal interests. In the same way, it is also required that such situations should be avoided by the directors where they may have a personal interest that conflicts with the interests of the corporation. This is very important as it is the duty of the directors to protect the interests of the corporation (Fletcher, 2007). Such situation may occur when there is a real possibility of conflict between the two types of interests. The conflict of interest can be direct or indirect. The directors are under a duty to avoid their personal interests when transiting with the corporation. But it will be considered that the directors have breached this duty if they enter into a transaction with their corporation. But in some cases, it may be expressly provided by the Constitution of the corporations that the directors may be allowed to have personal interests that conflicts with the corporation's interests. In this way, the constitution of the corporation can alter the fiduciary duties of the directed to such an extent.

The directors are also under an obligation according to which they should not disclose the confidential information related to the corporation. Of particular information is considered as confidential if the owner of such information is of the reasonable belief that in case of the disclosure of such information, it will be detrimental for the person or may prove to be advantageous to another person (Ciro and Symes, 2009). Information is also considered as confidential when as a result of the trade usage or custom, the information is worth protecting. The directors can be held liable for the breach of this duty, for example when they have disclose the details to third parties related with the client software Corporation or its suppliers under the circumstances where this information can be treated as confidential. Another example of the breach of this duty is when the director involves an insider trading.

The directors are also under an obligation according to which they should not abuse corporate opportunities. As a result of this responsibility, the directors of corporations to avoid the situations where there may be a conflict between their personal interests and the corporations interests. Such a situation may take place when the actions of the directors are so related with the affairs of the corporation that they have been done in the course of management of the corporation and by using such opportunities in view of their special knowledge (Baxt, Fletcher and Fridman, 2008). For this purpose, an occasional connection is required between the fiduciary obligations of the director and the opportunity available. If a connection is present between the two, it can be said that the director may have misused such an opportunity. For this purpose it is not relevant if such opportunity could not be exploited by the corporation itself.


The common law duty of care and diligence has also been provided by section 180 of the Corporations Act, 2001. This section also contains the defense of the directors that is provided by the business judgment rule. It has been provided in this section that the directors should exercise the same care that can be expected from other reasonable person. As there is a mention of reasonable person, and objective standard of care is applicable (Austin and Ramsay, 2013). The consequence of this duty is that the directors are under an obligation to maintain the balance between the advantages of their conduct and the foreseeable harm of such conduct. In the same way, it has been mentioned in section 181 that the directors have a duty to act in good faith. This duty describes that the powers should be exercised by the directors in good faith (ASIC v Adler, 2002). The statutory duty imposed on the directors can be compared with their fiduciary duty according to which they should act bona fide. This duty has imposed an obligation on the directors to act with honesty. It can be said that this duty has been breached, and the directors of user power for improper purpose even if the directors were under the impression that they were acting with honesty. An obligation has been imposed by section 182 according to which the directors did not make improper use of their position in the corporation (ASIC v Vizard, 2005). The result is that the directors should not misuse the position for achieving personal advantage or with a view to cause a loss to the corporation (ASIC v Rich, 2003). It can be a breach of this duty if the directors are involved in above-mentioned conduct and it is immaterial if such a benefit or loss has been caused or not. For example if the directors continue to act even when they know that the financial position of the company is unstable, it can be said that this duty has been breached by them (ASIC v Vines, 2003).

Under these circumstances, it is very important that the directors are aware of their legal duties and obligations that have been imposed by the Corporations Act, 2001 and also by the common law and the constitution of the company. On the other hand, the failure to fulfill these obligations can have serious consequences for the directors which include five-year jail term, civil and criminal penalties that may go up to $200,000, disqualification by the court from managing a corporation in future and ultimately, the director may be held personally liable for the debts of the corporation.


Regarding the future of the directors’ duties in Australia, it can be said that the directors of corporations will need to act in a legal environment that is going to change and reconsideration. The basic reason behind this situation is the willingness of the government to boost economic activity, create employment opportunities and stimulate small business. The leading issue in this regard is the need for maintaining a balance between the legal position of the director and lifting the performance of the duty. The main long-term challenges faced by the directors of corporations in this area will be the result of two inter-connected engines of change, that are technology and globalism. However, among all these challenges and change, the main purpose of corporations should not be forgotten which is to make rational investments and to take measured risks. Therefore in future, the directors of corporations in Australia should maintain the brilliant idea behind the introduction of corporations and at the same time, adapt to the times of unprecedented changes.

References

Austin, R.P. and Ramsay, I.M., 2013, Ford's principles of corporations law, 15th edn, LexisNexis Butterworths, Chatswood, New South Wales.

Baxt, R, Fletcher, K and Fridman, S 2008, Corporations and associations: cases and materials, 10th edn, LexisNexis, Butterworths, Sydney, New South Wales.

Ciro, T, and Symes, C 2009, Corporations law: in principle, 8th edn, Thomson Reuters (Professional) Australia, Pyrmont, NSW, pp. xv-xix

Fletcher, K.L., 2007, The law of partnership in Australia, 9th edn, Lawbook Co, Pyrmont, New South Wales.

Gooley, J, Russell, D, Dicker, M, & Zammit, M, 2011, Corporations and associations law: principles and issues, (LexisNexis Butterworths, Chatswood, NSW) 75-98

Harris, J, Hargovan, A and Adams, M, 2013, Australian corporate law, 4th edn, LexisNexis Butterworths, Chatswood, New South Wales

Sweeney, B, O’Reilly, J & Coleman, A, 2013, Law in Commerce, 6th edn. 2015, Australian Corporations Legislation, LexisNexis Butterworths/CCH (Vol 1)

ASIC v Adler & 4 Others [2002] NSWSC 171

ASIC v Rich & Ors (2003) 44 ASCR 341

ASIC v Vizard [2005] FCA 1037

ASIC v Vines [2003] 48 ACSR 322

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