The Boards of Both Coco Delights and De-Caffeine - Thesis Example

University: Corporation Law: Case Study. Name: Date: INTRODUCTION. According to the case study presented, we see a variety of acts carried out by the directors, either deliberately, or without foreknowledge, that contravene with the Australian Corporation laws. While the directors are supposed to conduct oversight of the operations of the corporation and guide in the decision making process, we see instances where they do not take this role and as such, act in a manner amounting to breach of their duties. The cases presented here includes the Issues, the necessary rules guiding the analysis and finally the conclusion to each cases. The following are some of the issues: Issue: Whether it was the best interest of Coco Delights that its prime office was sold to De-Caffeine Delights at $500,000 Rules: Directors must not use their powers for an improper purpose. This would include obtaining an advantage for themselves1. Analysis: In carrying out of their duties, we do realize that Raj and Elliot Chloe, who incidentally happen to sit on the boards of both Coco Delights and De-Caffeine delights agreeably allow sale of the Coco-Delights to De-Caffeine Delights at a very low price. As such, it may be noted that the directors ‘ act of authorizing a transaction with Coco Delights on the financial basis that it will be in the interest of De-Caffeine Delights amounts to breach of its duty not to act for an improper purpose. The improper purpose in this scenario is the sale of the prime office with the knowledge that the selling price of the property was not at all consistent with the actual market value of the property. Undeniably, the sale of the prime offices is highly undervalued with the consideration that the directors were supposed to be fully aware of the actual price of the prime offices as $5.5 million and they do not raise alarm when another company proposes purchase at far much lower prices. It can, therefore be argued that the directors indirectly promote their own interests while trying to act to the interest of De-caffeine Delights and as such they are still liable for breach of their duties by acting in a manner to obtain an advantage for themselves. Conclusion: It is, therefore, not to the best interests of Coco Delights that its prime office is sold to De-Caffeine limited at the $500,000. Issue: Whether there was conflict of Interest in the transactions arising between De-Caffeine Delights and Coco Delights. Rules: Directors have a duty not to have personal interests in a transaction with the Company either directly or indirectly2. Directors cannot put themselves into situation(s) where they have (or may have in future) a personal interest that conflicts (or may conflict in future) the interest of the company that they are bound to protect3. Analysis: Conflict of interest arises where the rights and obligations of an individual in the corporation interfere with the rights and obligations of the corporation. This, therefore means that if the interest of the individual conflict with those of the corporation, a conflict of interest is inevitably bound to result. A critical analysis of the transactions revolving around the two companies indicates beyond reasonable doubt that there is a serious conflict of interest with the regards to the roles played by the directors, who duplicate as directors to both the Coco Delights and De-Caffeine Delights. Moreover, there is an indirect conflict of interest judging by the fact that the directors in De-Caffeine Delights engage in a contract to buy Coco Delights offices at an unbelievably low price in a bid to bail it out. The fact that this sale is not objected by the directors who duplicate in both companies is a clear indicator that these directors’ interest is on De-caffeine Delights and tis ultimately conflicts with the interest of maintaining good performance of coco Delights. In addition to this, the fact that this sell out leaves Coco Delights in a compromising situation financially further infringes the legal obligations of the directors to act in manner that should amount to conflict of interest. Conclusion: There is, therefore, an arising conflict of interest in the transaction arising from the two companies. Issue: Whether the directors breached any of their duties by accepting the CFO’S financial report as it was. Rule: Directors have a duty to be informed on actual financial affairs of their company, including its solvency4. Directors cannot hide behind ignorance of the affairs of the Company, where that ignorance is of their own making5 Analysis: The directors are physically present during the proceedings of the board meeting. Moreover, they take the financial statements circulated by the Chief Financial Officer as the unquestionable truth without going through the document to ascertain the extent to which the report given may have been true. The fact that the directors have delegated this responsibility does not in any way diminish their duty to question the truth and fairness of the financial statements. It is from analyzing the financial statements that directors are able to make critical decisions on the future prospects of the company. However, since the firm is found not to have kept its financial statements as required by law from February to August 2013, it is questionable how the directors have played their role in this firm. As such, the directors failed to put themselves in a position of influencing and correctly guiding the company and monitoring its management and instead, breached their duty of care and due diligence by failing to ensure it was a true representative of De-Caffeine ‘s financial position. In addition to this, the fact the company had been drastically reduced in sales figures that month should have given the directors enough reason to go through the financial report thoroughly Conclusion: The directors breached their duty of care and due diligence by accepting the CFO’s statement as it was. Issue: Whether Su Lin’s holidaying during the proceedings of the board meeting amounted to breach of his duties as a director. Rule: A director must not improperly use their position either to their advantage or that of someone else, or to the detriment of the corporation, whether or not advantage or detriment occurs in fact6. Analysis: It can be correctly argued that Su Lin was fully aware of the arrangement that there was to be a board meeting at that particular time and date. Moreover, Su Lin’s absence during such a critical meeting begs serious questions with regards to how well he makes use of his position as a director in light of the fact that the company was in a critically unstable financial position. While holidaying is no crime, the outright lack of offering sound advice to the corporation at such a critical time certainly makes it hard to believe that the director is carrying out his duties as required by law. These factors indicate that the director acted in a manner that contravened his duty and the overall progress of the company as a whole. Conclusion: Su Lin holidaying during the meeting amounts to breach of his duties by making improper use of his position Issue: Whether Elliot Chloe and Raj acted within their legal capacity in disclosing and using the information on Coco Delights to the advantage of De-caffeine Delights. Rule: A person who obtains information as a result of being a director of a corporation must not use the information improperly as to gain an advantage for someone else or themselves, or to lead to detriment to the corporation7. Analysis: A critical analysis on the acts committed by Elliot and Raj, whereby they use their influence as sitting boards of directors of Coco Delights and de-Caffeine Delights to push for the sale of the prime office raises eyebrows on the motive of the two directors on the financial well-being of Coco Delights. In as much as Coco Delights is not in a serious financial situation before the sale, the directors use the information of the great performance of Coco Delight to its detriment by approving the sale of its property. The vindication that De-Caffeine is in a seriously frail financial position is not justifiable since the two are different and separate entities and as such, the performance of one should not in any way affect the other. Thus, the directors purposely engage in a conduct that acts to benefit De-Caffeine delights while out rightly leading to the detriment of Coco Delights. This can be deduced to be so since the directors are fully aware of the poor performance of coco delights and in their action of trying to leverage its financial position, they use the information on the stellar financial position of Coco Delights to save de-Caffeine Delights. Conclusion: Elliot Chloe and Raj do not, therefore, act within their legal capacity in disclosing and using this information to the advantage of De-Caffeine delights. Issue: Whether the directors of Coco Delights breached their duty of good faith in permitting the sale of its Prime office. Rule: A director of a corporation must exercise their powers and in the discharge of their duties must act in good faith and in the best interest of the corporation8 Analysis: directors of corporations are obliged by Australian Law to act honesty at all times, even amid other conflicting duties. Even in situations where directors may believe that their actions are honest, they are guilty of breaching this duty where their power is carried out for an improper purpose. In giving a go ahead for the sale of Coco delights, the two directors Elliot and Haj act inconsistently with their obligation. The fact that they do understand the financial crisis in De-caffeine delights does not in any way put them in a position to exercise their powers as directors to push for the sale of the coco Delights prime office. It is also a criminal offence that these directors use the information on the good performance Coco Delights to intentionally act dishonestly and recklessly with an aim of gaining undue advantage for de- Caffeine delights. Selling the prime office at a highly undervalued selling price ultimately justifies their action as having been guided by dishonesty that results to the poor performance of Coco Delights. The directors, therefore, fail to comply with the fiduciary duty that requires them to act bona fide for the ultimate wellbeing and benefit of Coco delights. Conclusion: the directors of Coco delights breach their duty of good faith in allowing the sale of their prime office. Issue: Whether Elliot and Raj put themselves in a position where they were likely to contravene their duty to retain discretion. Rule: Directors must not put themselves in a commercial transactions where it would result in situations where they cannot take part in decision making for the company9. Analysis: These two directors who duplicate as the directors of both De-Caffeine delights and coco Delights place themselves in a position whereby, if a decision is to be made regarding the sale of the Coco Delights property, they are involved. By law, the two directors should not have intervened in the sale of the prime office as this contravenes the duty of the directors with regards to maintaining discretion as they are a placed in a situation where the interest of other parties, in this case De-caffeine delights, is put ahead of the interest of Coco Delights, as evidenced by giving the go ahead on the sale of its prime office at a very low value. Conclusion: The two directors place themselves in a position where they contravened their duty to retain discretion REFERENCES Adams, M.2001. Australian essential management law. 1st ed. [S.l.]: Routledge Cavendish Austr. DU PLESSIS, JEAN JACQUES, MCCONVILL, JAMES, & BAGARIC, MIRKO. 2005. Principles of contemporary corporate governance. Cambridge University Press.  CAMPBELL, D., & CAMPBELL, C. T. 2007. International liability of corporate directors. Salzburg, Austria, Yorkhill Law Pub. KRAMP, O. 2009. The role of the administrator in the corporate rescue process in Australia and Germany a comparison. München, GRIN Verlag. SEALY, L. S., & RIDER, B. A. K. 1998. The realm of company law: a collection of papers in honour of Professor Leonard Sealy, SJ Berwin Professor of Corporate Law at the University of Cambridge. London, Kluwer Law International. Read More