Essay About The Corporation Law

Question:

Write an essay about the Corporation Law.

Answer:

The Corporations Act, 2001 is a commonwealth law, but due to many constitutional difficulties, the Act became a combination of territory, state and commonwealth legislation. The source of law that is important for understanding Australian company law is common law and the terms are often used interchangeably[1]. The Australian Securities Exchange (ASX), earlier that known as Australian Stock Exchange, played a very vital role in the regulation of the laws and rules in the area of Australian Companies. However, due to major changes the responsibility was shifted to Australian Securities and Investments Commission (ASIC)[2]. The ASX shall continue to play a major role in the listing of exchange and securities. Other regulators who are responsible for overlooking the operations of companies are their directors, officers and the Reserve Bank of Australia. This essay shall discuss about the duties of directors of companies and it shall also discuss about the implications of contravention of duties of the directors[3].

In Australia, the period between 2009 till 2011 was very turbulent and an important year for the directors and their officers. In consonance with the influence of overseas and the robustness of economy in Australia, there occurred a large number of corporate collapses. Some of the corporate collapses were high profile in nature while some were of minor importance[4]. As a result of increased disturbances in media and elsewhere, a need for further legislation was required and many policies pertaining to companies and their directors were incorporated. The duties and responsibilities of the directors is an origination of not only the Act, but also from the common law[5]. Common law is a body of precedents containing cases that have been decided in Australia and in other jurisdictions. The directors and officers need to be aware of the rules and their obligations as officers or directors of the companies. Therefore, the Corporations Act, 2001 containing a detailed discussion of the rights and liabilities of the duties of the directors[6].

The duties of the directors are almost same in proprietary companies and public companies. The roles and responsibilities continue to be the same; the only difference lies in their applicability of their role depending on the nature and working of their business. The basic roles and responsibilities continue to remain the same. The common law duties of directors include duty to act “bona fife”. This means directors should act in good faith and in the advantage of their company and not for personal gain[7]. Often directors fail to recognize the needs and requirements of the company and they act in favor of their personal interest. Directors are supposed to act in good faith and their decisions should be in favor of the interests of the company rather than their personal gain or advantage.

Directors of the companies should not act for a wrong or improper purpose. This means that directors should not misuse their power for improper or wrong reason. Directors of the company are endowed with huge powers and responsibilities. The directors should not misuse their powers in a way that gives them personal benefit. If directors begin misusing their powers for their personal advantage then the voting powers of the existing shareholder shall reduce. Inclusion of such a duty was for promotion of the interests of the company and not for promotion of personal interests of the director.

Another common law duty of directors is that they have the duty of care and diligence, meaning that directors have the duty to be informed about the financial affairs of the company including the solvency of the company. This duty of the director is not diminished by delegation of their responsibility. They are required to be informed about the decisions that are taken in their behalf or in their absence. Hence, it is the duty of the directors to avoid conflicts of interest, directors are known for having “fiduciary duties”[8]. This means that there is existence of important legal relationship between directors and their companies. Fiduciary duties are not part of the statutory law; it is part of the common law duties. In a situation where there is conflict of interests between the directors and the company, the director should choose for the interests of the company and not their personal interest. An additional duty to the fiduciary role of directors is not to disclose confidential information of the company to outsiders[9]. This means that directors of the company should not disclose the information of the company to some other person who may be considered as competitors of the company. However, this may also mean that directors of the company should not use the confidential information of the company for their personal advantage or gain. A director of the company should be careful in this regard.

As a director of the company, one may have many corporate opportunities and functions. Hence, directors of the company should not exploit corporate opportunities[10]. Directors should avoid situations where there personal interest is in conflict with the interests of the companies. The common law duties of directors stay focused on the fiduciary duties. However, the Corporations Act, 2001 give a detailed description of the statutory duties of the directors.

Chapter 2D of the Corporations Act contains a detailed description of the duties of the directors. The duties of the directors include duties of care and diligence, improper use of position and good faith. Other related provisions include duties regarding insolvency, financial benefit to the related parties and reporting of financial information[11].

Section 180 of the Act deals with duty of care and diligence, this duty was part of the common law duty and is reinforced as a statutory provision under section 180 of the Corporations Act, 2001. According to section 180 (1) of the Act, a director should act exercising his ordinary sense of care and diligence. Section 180 (2) of the Act imposes a duty on the director whereby he should make his judgment for a proper and justified purpose in favor of the company. According to section 181 of the Act, a director should act in good faith, meaning that the director should act in the best interests of the company and for a justified purpose[12]. A director of the company should not make improper use of the position of which he is given responsibility of. It was seen in many cases that directors of the companies misuse their power to obtain personal benefit from it and cause detriment to the interests of the companies. If directors are seen in engaging in such act that willfully causes detriment to the interests of the company then he may be held liable for breach of section 182 of the Act.

To gain advantage for themselves, a person who is a director should not use information of a corporation for their personal advantage thereby causing detriment to the company. This is contained in section 183 of the Act and a director who is seen engaging in such activities shall be held liable for breach of section 183 of the Act. Section 184 of the Act deals with criminal offences in which the directors of the company may be held liable. According to section 184 if the director of the company commits any offence which is reckless or dishonest in nature and as a result of such reckless activity the director failed to exercise his duties in good faith then he may be held liable for breaching section 184 of the Act. Additionally, if the director of the company uses their position with dishonest intention to gain personal advantage for themselves or others or if the director uses personal information of the company for his personal gain, then he may be held liable for criminal offences under section 184 of the Act.


Part 5.7B of the Corporations Act, deals with the duty of the directors to avoid insolvent trading and the consequences of breach are explained in this section. According to section 588 (1) and 588 (2) of the Act, where a company incurs debt at the time when the company had become insolvent and the director of the company was aware of such a fact and despite of being aware of such a scenario he failed to prevent the company from trading, then the director may be held liable for breach of their duty. Section 191 to 195 imposes a liability on the director to disclose matter of personal interest to the company. It is the duty of the director to expose the nature and extent of dealing with the company. A proper disclosure should be made by the director to the company. Failure to do so may make the director liable for breach of his duty. Sections 209 till 210 deals with the financial benefits that are related to the public companies, this section requires shareholder approval in matters that are related to financial benefits. Contravention of this section shall lead to breach of section 208 of this Act and directors may be held liable in this context. Sections 285 till 318 deal financial reporting of the companies where the directors are to exercise their power with care and diligence. Failure to report the financial records correctly may make them liable for breach of this section. Other sections such as section 189, 190 and 198 D of the Corporations Act, 2001 imposes liability on the directors to act woth care and diligence on the information that is available to them of the company.

In the case of ASIC v. Adler[13], the Court held the directors liable for breach of section 210 of the Act, wherein the directors did not take approval of the shareholder before dividing financial benefits. In the case of ASIC v. Rich[14], it was held that Chartered Accountants may be considered as directors of the companies depending on the responsibilities that he or she is given. In this case the Chartered Accountant was held liable for breach of his duty as a director. He was held liable under section 180 sub section1 of the Act. In the case of ASIC v. Vizard[15], Vizard was held liable for breach of section 183 of the Act. As per this section, a director should not use confidential information of the company for their personal advantage. In this case, Vizard was held liable for using confidential information for his personal benefit. Similarly in the case of ASIC v. Vines[16], Vines was held liable for breach of section 180 and sections 190 till 195 of the Corporation Act, 2001.

Breach of section 184 and section 588G would attract would attract criminal liability and directors may have to face criminal proceedings for contravention of this section. Contravention of section 180 (1), 181, 182,183,588G (2) and 209 may make the directors liable for breach of civil liabilities. For breach of liabilities, the Court may impose penalty up to 200,000 dollars under section 1317G of the Act. Additionally, a director may also have to pay compensation to the company for the contravention of their duties and sometimes this may also result in disqualification from managing corporations. This is enumerated in section 206C of the Act.

With this we may draw a conclusion that there are significant challenges that are to be faced to make the Corporations Law more effective and efficient. This may be achieved by balancing theory along with practical applications. Today we are at a stage of early development along with policy and research agenda. We have seen that much effort is been put into making new legislations for development of new strategies. However, much remains to be done in making sure that regulator and Courts focus on enforcing enforcement strategies in regard to the Corporations Act, 2001.

References:

ASIC v Adler & 4 Others [2002] NSWSC 171; (2002) 41 ACSR 72

ASIC v Stephen William Vizard [2005] FCA 1037

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229

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