Commentary And Case On The Law Of Business Essay

Question:

Discuss about the Commentary and case on the law of business.

Answer:

Who is a director

The person who has the responsibility of managing the business affairs of the company is known as a director. The term director is defined by Section 9 of the Corporation Act 2001 (cth). According to Section 9 a person can also be a director of a company if he or she has not been elected in a valid way as a director. Any person who performs a duty which is reasonably expected to be performed by director in relation to the governance structure and operation of the organisation is also deemed to be a director of the company.

The Australian Corporation law through the CA sets out duties of directors which are owed to the organisation. In addition to the statutory duties of directors under this legislation the directors of an organisation are also bound by equitable duties of directors under common law (Tricker, 2015).

Duty of Care and Diligence

There are several provisions which deal with directors’ duties as set out by the CA. Section 180 of the legislation imposes and obligation on the directors and other officers of a company registered in Australia to discharge their duties by observing utmost care, skill and diligence. The business judgment rule as provided by common law is also contained in this provision. The Section clearly sets out a test through which it is analyzed whether the directors have been able to successfully comply with the duties imposed on them or not. That test functions in the same way as the objective test under common law. Through the application of this test the court analyses weather the act or decision taken by the directors of the organisation would have been taken by a reasonable director placed under same situation. Where the court come to the conclusion that any reasonable director would have taken the same decision as it has been taken by the original directors it is deemed by the court that the directors have complied with the duty under Section 180. On the other hand if a reasonable director would not have taken such decision the directors of the company are found to be in violation of the principles provided under Section 180.

In the case of ASIC v Cassimatis (No 8) [2016] FCA 1023 the defendants were the sole directors and shareholders of the company. They had design the financial advice model which involved giving advice to those who are nearing retirement or having financial difficulties. Due to the advice provided by the company these people had loaned their houses and had suffered severe losses. It was found by the court in this case that the directors of the company under Section 180 of that our duty to the company only and not to its shareholders. However the duty is of such a nature which also involve the reputation of the company and not only financial losses. As a wrongful advice model led to the fall in reputation of the company in the eyes of the public the directors was found to violate Section 180 of the act.

Duty to act in Best Interest

Under Section 181 of the legislation the directors have been improved with the responsibility of discharging their functions towards the company in good faith, for a proper purpose and for the best interest of the company. The duties provided under Section 181 is the same which has been provided by the equitable duty relating to achieving the best interest of the organisation by the director.

Duty to avoid conflict of interest

Section 182 on the other hand reciprocates the duty to avoid conflict of interest by directors of the company. Under this Section the directors a forbidden from misusing the position which has been provided to them within the company in a way so as to cause loss to the company in order to pursue personal gain. Under his duty whenever a situation arises in which the directors have to choose from their own interest and the overall interest of the company they have the duty to always give priority to the interest of the organisation. The directors have a fiduciary duty towards the organisation they work. This means that they have a duty to protect the interest of all shareholders and as they have been provided with the power to manage the company and to conduct it's affairs they cannot use such powers in such a way as to cause determine to the shareholders in order to make personal interest.

In the same where Section 182 Section 183 of the legislation for with the directors of the company from misusing any information which they have collected from the organization in such a way as to call detriment to the organization overall or its shareholders so as to Trigger personal gain or game for any third party who they are directly or indirectly related.

Criminal Liability

All the above mentioned duties have a civil liability provision however under Section 184 of the legislation the directors of a company can be held criminally liable under Section 6.1 of the criminal court if they are found to intentionally and recklessly violet the duties provided under Section 180- 183.

Duty to disclose

Under Section 191 of that the directors have a duty to ensure that get this close all information with reasonable director would have disclosed in relation to personal interest in a particular transaction of the company to the board.

Insolvent Trading

In order to prevent the directors from the defrauding the creditors and investors of an organization the legislation through Section 588G prohibits the directors of the company to undertake insolvent trading. Insolvent trading refers to the act when the directors know or have reasons to believe that the company is already bankrupt or is likely to become bankrupt because of a particular transaction. Apart from these duties the directors have a duty to make timely and accurate disclosures in relation to the companies account and do not violate the rights of the shareholders. The shareholders have also been provided the right to claim any operative remedy under Section 233 of the legislation.

Evolution of Directors duties in Australia

The statutory directors’ duties in Australia have evolved from the directors’ duty of care towards the company. The directors are provided all the powers to run the operations of the company where they are not the owners. The company is actually owned by shareholders however as there are many shareholder in a company it is not possible for all of them to have a say in the management of the company (Allen & Kraakman, 2016). Thus the directors are appointed by the shareholders for the purpose of successfully managing the company. In such a situation of fiduciary Duty arises in relation to the directors to manage the company in order to protect and place of the creditors and the shareholders as a company cannot function on its own. The director’s duties have been provided with various defenses such as the business judgment rule and defense under Section 588H of the act in order to ensure that the directors are properly able to manage the affairs of the company without imposing additional burden on them with respect to the duties (Knepper et al., 2016).

Directors of Public and Private Company

The duties which are owned by the directors of a public company are much more as compared to those which are owed by the directors of a private company. This is because a public company is allowed to raise fund through the public and there is a much greater risk that the directors of a public company can be brought the creditors and investors of the company. The number of shareholders in a public company is much more as compared to that of a private company. The directors of a private company do not have strict financial reporting obligations as compared to those of a public company. The directors of a public company are subjected to a two strike rule in relation to their remuneration. If the shareholders find the remuneration structure of the directors to be unreasonable they can make first strike where the directors have to propose a new structure. However if the new structure is not accepted by the shareholders then they can call a second strike through which the whole board of the organization would be subjected to re-election (Coffee, Sale and Henderson, 2015).

Consequences and remedies for breach of directors duties

When the directors of the organisation violet the duty which has been imposed to them a civil or criminal penalty provision can be triggered. Under Section 1317E of the legislation the directors prosecuted for civil penalty provisions. The Civil penalty provisions for directors may include fines and penalties along with suspension from managing the affairs of a company up to 5 years under Section 206C of the legislation. In relation to the breach of the duty to act in good faith the directors can be imposed with an imprisonment of five years and a penalty of up to 2000 unit is which accounts to A$360000. Other penalties which may be imposed on the directors of the company includes personal fines up to A$200000, disqualification to act as directors, derivate action by shareholders, legal claim for damages and compensation orders. Under the criminal code in relation to bribery a director can be imposed with a fine of A$1.8 Million and imprisonment which may extend to ten years. In case of fraud the directors may be subjected to prosecution by the Australian Investment and Securities Commission, civil penalties which may extend to $200000 and imprisonment of up to five years. The liabilities of the directors can be provided relief by the court under the provisions of Section 1317s of the CA.

In Australian Securities and Investments Commission [ASIC] v Lindberg [2012] VSC 332 both the defendant and the plaintiff agreed that director had violated Section 180 of the Corporation Act by not deploying due care and diligence towards the affair of the organisation. The ASIC imposed a penalty on the directors according to which he was to be suspended for managing the affairs of the company for 2 years and pay a financial penalty of $100,000. However the court provided that for the establishment of such penalties it has to be proved before the court that the directors have violated Section 180 of the legislation. During the trial it was established before the food that the director have actually violated Section 180 of the legislation and therefore the fines and suspension which was imposed by the ASIC was granted by the court.

Future of directors duties in Australia

With the enactment of the Australian investment and security Commission corporate frauds are being rapidly identified and directors who have any sort of fraudulent intentions are always kept under pressure that they are being watched. There have been several cases in relation to the duties of directors in relation to the organisation and most of which have been ruled by the court in favour of the ASIC such as ASIC v Maxwell & Ors [2006] NSWSC 1052, Australian Securities and Investments Commission v Healey [2011] FCA 717 and Australian Securities and Investments Commission v Rich (2009) 236 FLR 1. The Australian approach towards the duties of directors is one of the best in the world and it's almost same as the approach which is taken by the United Kingdom. In order to ensure that functions of the company are governed properly in the future the implementation of such system has to be kept under continuous root any by the government. Although the governing body is doing a very good job in relation to identifying corporate frauds it must not let down its Momentum in relation to its duties so that it can be insured that the director’s duties would be properly complied with in future (Bruce, 2013).

References

Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business organization. Wolters Kluwer law & business.

ASIC such as ASIC v Maxwell & Ors [2006] NSWSC 1052

ASIC v Cassimatis (No 8) [2016] FCA 1023

Australian Securities and Investments Commission [ASIC] v Lindberg [2012] VSC 332

Australian Securities and Investments Commission v Healey [2011] FCA 717

Australian Securities and Investments Commission v Rich (2009) 236 FLR 1.

Bruce, M. (2013). Rights and duties of directors. Bloomsbury Publishing.

Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.

Knepper, W. E., Bailey, D. A., Bowman, K. B., Eblin, R. L., & Lane, R. S. (2016). Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

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