Duties of Directors - Essay Example

? Duties of Directors Introduction The idea behind the duty of a Director is to promote good governance and to shield the company as well as its stakeholder from facing legal issues. It can be observed that there are basically three sources of law that indicates the responsibilities of Directors of unlisted companies. The first source law depicts statute Corporations Act 2001 and subordinate regulations as well as rulings. The other source law is common law that intends to understand the Act and creates obligatory authority. While, the third source law is the company constitution. Notably, it is the company constitution that offers the board of directors with the adequate power to administer the business of the company (Katz, Lipton & Katz, 2011). In simplest terms, delegation of power means effectual allocation of resources to people with adequate skills and knowledge. It is to be mentioned that delegation is quite significant for the senior management to attain all the required tasks in a timely manner. It is applicable in all industry sectors along with government. Hereby, a delegate is considered to be the person who is responsible to carry out the role, authority as well as duties of, or to act on behalf of, or symbolize others (Tomasic, Bottomley & McQueen, 2002). It is worth mentioning that there are numerous duties that the director is accountable for. The main objective of this paper has been to comprehend the nature and the extent of statutory duties imposed on directors by Corporation Act. The discussion will further try to incorporate a critical analysis of the nature, application along with effectiveness of the two statutory duties of the directors under the Corporation Act. The two statutory duties are ‘duty of good faith’ along with ‘duty of care and diligence’. The study will also attempt to briefly discuss the duties of directors as well as relevant common laws which tend to control the role of these directors. Background The decisions rendered by the director needs to be examined very carefully in order to comprehend the fact what could have been done so that the company could have obtained greater benefits from that director (Turnbull, 2012). If the director is found to violate his duty, the company possesses the right to sue the director for causing damages. There are numerous general responsibilities of the directors which comprises of various specific duties. For instance, it is quite significant for the directors to exercise carefulness (Turnbull, 2012). This implies that the directors are supposed to utilise their informed judgements in order to administer the company in a proper way being capable of entrusting their judgments on certain measures. Furthermore, the delegation can be considered to be valid if it is done in a proper manner in the best interest of the company (Turnbull, 2012). Under the common law, it is the duty and right of the directors to deliberate. This implies that they are supposed to make good efforts in order to get involved, discuss, consider and thus make use of their judgment while acting on the matters of the company. It has been observed that it is the duty of the director to make use of their power for adequate purposes. If the power is being used for a wrongful reason, it is considered to be invalid. For instance, a director of the company may not be acting with an ethically sound purpose while the new shares tend to be issued. In such circumstances the company intends to restructure itself or to issue gifts in terms of compensation from the company’s resources so that the power of the director can be enhanced. Any act of the director which does not have a proper purpose might be considered as invalid, for instance, issuance of the shares to the public in order to defeat a takeover or to retain control of the company (Turnbull, 2012). It is the duty of the directors not to get involved in any kind of conflict of interests. Directors tend to have fiduciary duties which are generally outstanding to their company. This can be regarded as a noteworthy legal association and is a duty related to trust as well as good faith. In such circumstances it can be revealed that the directors of the company are supposed to put greater emphasis upon the interest of the company instead of their own. It is worth stating the fact that directors are not supposed to put themselves into a situation where they tend to possess a personal interest conflicting with the interest of the company (Turnbull, 2012). This can be more explicitly understood with the help of the case of Aberdeen railway Co v Blaikie Brothers (1854). It was noted that Blaikie Bros made a contract with Aberdeen Railway for the manufacturing of iron chairs at an amount of ?8.50 a ton. However, it was noted that they prosecuted to enforce the contract. It was argued by Aberdeen Railway that they were actually not clear since during that exact period, the Chairman of their board of directors, Sir Thomas Blaikie, had been the managing director of the company (Blaikie Bros). This gave rise to conflict of interest. The case headed ss 40-1 of the Companies Act 2006, offering director’s unconstrained capacity to connect the company with those dealing in good faith. However, if the activities of the directors tend to be more important than their authority or in violation of some fiduciary obligation, in such circumstances they can be made individually accountable. Blaikie Bros would now have been capable of implementing the contract. However, Aberdeen, might in such conditions personally, sue the directors for the damages flowing from any loss because of the ineffective decision taken by that director. The director is not supposed to earn himself by making use of the opportunity that takes place during the course of business at the expense of the company. Along with this it can be mentioned that the director is not supposed to compete with the company, utilise the property of the company for their personal use or make his personal presence to make viable any official contract for the supply of the good and services until and unless he has made full disclosure to the company. Notably, this basic rule was generated in Cook v Deeks (1961) UK. It is in this concern that Section 232 was evaluated in a proper manner by the NSW Court of Appeal in AWA Ltd in Daniels v Anderson (1995) NSW. It revealed the fact that each company must maintain a register and thus record particulars of each director’s shareholding. Hence, one of the major duties of the director is to make disclosures of all shareholdings, options, debentures and contracts and to disclose any alterations relating to them according to section 236 of the Company Act. As per Chapter 6 of the Act, the director is needed to disclose the interest as well as shares in case of taking over a company. According to Section 237 of the Company Act of Australia, the companies are not allowed to offer the directors with compensation or any kind of benefit in case of losses caused by them from his or her position, until and unless particulars in relation to the proposed consideration has been adequately disclosed to the members of the company who have approved that the director would offer such benefits. This is significantly aligned with the common law position in cases such as Regal (Hastings) ltd v Gulliver (1942) UK, where, for the purpose of acquiring two media brands was that the whole undertaking could be sold as a individual concern. It was often noted that the directors as well as their friends subscribed for numerous shares that was sold at a profit at a later date (Chapple & Lipton, 2002). Furthermore, it is significant for the directors to avoid any kind of appearances or probability for a conflict to occur within the organisation. If any kind of conflict of interest takes place in an organisation, a director is supposed to disclose the interest to the company. Hence, a director not asserting a personal interest in an issue that tends to impact the company is actually committing an offence. If an interest is declared, then in such circumstances other directors of the company might not permit that person to vote on that issue. The directors are not supposed to abuse confidential information that they acquire because of their position. The information tends to be considered confidential in cases where the owner perceives that if he/she would have disclosed the information, it would have been disadvantageous to him/her or might have been advantageous to others (Chapple & Lipton, 2002). This can be explained with reference to the approach to the court in Thomas v Farr Plc (2007) where the question related to the ex-employee’s confrontment to confidential information was termed to be adequate to endorse a post-termination area agreement as dealt. Furthermore, it was noted that the judge asked himself if appointment of Mr. Thomas’s as the managing directors of the company has uncovered him to the information which Farr was supposed to keep secret after the cessation of his employment. Therefore, it can be revealed that the managing director of the company was breaching his duties related to maintaining confidentiality (Chapple & Lipton, 2002). Duties of Good faith Section 181 of the Company Act of Australia determines the duty of good faith. This section explains that it is quite momentous for the director of a company to practice their powers and thus release their obligation in good faith. However, they must do these in the best interests of the corporations. Furthermore, they are supposed to do these for an adequate purpose. The directors are supposed to act within the supremacy of the company and are not supposed to yield personal benefits from their status as being a director. They must not gain control of the company for their personal benefits or to attain better return through unethical means. This can be comprehended with the assistance of the case which was discussed in Howard Smith Ltd v Ampol Ltd (1974) UK where an appeal was made to the Privy Council from the NSW Court of Appeal. It was observed that the directors were given the power to issue new shares. Therefore, few shareholders could have altered the balance of power while taking up such shares by means of number of shares then posed by them. When such cases take place it becomes significant for the court to look at the objective behind the share issues and must also identify the purpose of such act. If it is noted that the issue of shares tend to weaken the previous majority control, it can be revealed that the intent of the issue might have been improper (Sievers, 2010). Moreover, shareholders are capable of contracting on the matters how they will like to vote in the near future. Directors are not capable of doing it. In Thorby v Goldberg (91964) HCA, it was generally noted that when the contract is bargained on behalf of the company, the bona fide of the director presumes it in the best interest of the organisation as a whole, comprehending the fact that transactions need to be entered into and must be put into practice. It was also comprehended that they would affix themselves in any agreement to do what they feel is required to effectuate it (Sievers, 2010). In Re Country Pallative Loan & Discount Co; Carmell’s Case (1874) UK it was observed that the board might not delegate its discretion to others if there is no ‘express authority’ which is widely regarded as the authority or power given to the director through explicit forms, i.e. written or even oral. This provision is quite reliable with the fiduciary duty in order to act bona fide for the advantage of the company offering an obligation to the directors to consistently act in an honest manner, even though they often need to deal with other conflicting duties (Sievers, 2010). Duty of care and diligence and the business judgement rule Section 180 of the Company Act of Australia describes the duty of care and diligence as well as the business judgement rule to be followed by a director within a company. It is worth mentioning that the duties of care and diligence are characterised majorly under the common law (Sievers, 2010). It is generally reinforced under Section 180 (1) of the Corporation Act. Section 180 (1) offers that a director or any other officer of the corporation needs to use their influence and thus release their duties with higher level of care and diligence. This is to be implemented by the rational person if in case they were either a director or officer of a business. This would further be exercised if they engaged the office held by and had the similar accountabilities within the corporation as a director or an officer. Contextually, the indication to a reasonable person demonstrates an objective criterion of care which is reliable with the creation of the equal fiduciary duties (Schipani, 1993). This has been explained in the case of State-Wide Tobacco Services Ltd v Morley (1990) 2 ACSR 405. The predictable danger of harm tends to be equalised against the potential advantages that could sensibly have been expected to impact the company from the conduct of the question. This has been explained in the case of Halsbury’s Laws of Australia [120-7456]. The court also takes into consideration the subjective components of the position of an officer along with the specific contexts of the pertinent corporation in evaluating whether the duty has been violated. This has been demonstrated in the case of AWA Ltd v Daniels (1992) 7 ACSR 759; 10 ACLC 933. The typical statement related to duties of care and skill for the directors was stated by Romer J in Re City Equitable Fire Insurance Co (1925) UK. In this regards, Section 180 integrates a business judgement rule under Section 180(2) of the Corporations Act, whereby the director are supposed to make their own judgement in good faith for an adequate purpose. The directors are not supposed to have any kind of material personal curiosity in the subject matter of the judgement. Hence, the directors need to notify themselves regarding the subject matter of the judgement to the level that they reasonably believe as suitable. Furthermore, the directors are supposed to logically believe the fact that the judgement best serves the organisation. It is to be mentioned that the directors are supposed to fulfil these requirements for the purpose of satisfying the statutory duty of care as well as diligence in lieu of the particular judgement. A business judgement implies taking or not taking any sort of decisions or actions in lieu of a matter which tends to be pertinent to business operations of the company (Flood, 2009). Hence, to an extent, the above mentioned duties tend to overlap the common law duties possessed by the directors. The statutory duties are generally imposed by ASIC. If the manager tends to violate the statutory duty, it may lead in civil penalty orders or criminal penalties. In case of civil penalty orders, the director may be ineligible from the management of the companies. The director may as well require bearing $200000 as compensation to the company. In case of civil penalty action, the standard of proof tends to be the balance of probabilities (Keay, 2001). A director is said to have committed an offense if deceitfulness is noted to be a component in an officer’s violation of any of the duties to proceed in good faith for an ethically sound and profitable purpose. The director is also said to have committed an offense if he misuses the officer’s position or any sort of information. In the similar manner if the director is incapable of preventing the company from trading while the insolvent has been found to be dishonest, the director is said to have involved himself in criminal activities and thus is said to have committed an offense. It is worth mentioning that the director might have to bear fines amounting upto $220000. He/she might be imprisoned for upto five years as well (Roach, 2010). The problems related to the directors’ duties as well as liabilities have gained significance since the past few years. There had been high-profile cases in this regards where most of the companies collapsed including HIH Insurance Ltd and One.tel Limited. It has been noted that in different cases in the year 2005, two personalities namely Rodney Adler and Ray Williams were sentenced to nearly four and half year of imprisonment after appealing guilty to numerous criminal charges that was generally introduced by the Director of Public Prosecutions. The point to be considered is that such misconduct as directors of HIH and in each case comprised a charge under S 184: ASIC v Adler [2005] NSWSC 274, ASIC v Williams [2005] NSWSC 315. It can be observed that in ASIC v Rich (2003) 21 ACLR 672, the court recorded civil proceedings. It was recorded against the executive directors of One.Tel (Jodee Rich, Brad Keeling and Mark Silbermann) because they violated the statutory duty of care as well as diligence according to Section 180 (1) of the Act. However, trials were also brought against the non executive chairman, Mr. John Greaves. It was brought with ASIC claiming the fact that Greaves’s duties were quite more in comparison to other non-executive directors of the company. It was in the month of September of the Year 2004 when ASIC reached a consensus with Greaves. The court stated that Greaves must not be allowed to manage the company for next four years. He was made to pay a compensation of nearly $20 million to One.Tel. The court also ordered Greaves to pay ASIC’s cost of nearly $350000. It was further noted that as part of the consensus, Greaves stated that he was incapable to ensure that he and the board of One.Tel were efficient to adequately control the management. He further stated that they were aware of the true financial position of the company (PwC, 2010). Analysis In Section 9 of the Corporation Act of 2001, a precise definition of the term officer and director of the company has been mentioned. It is to be observed that the definition offered by Section 9 of the Corporation Act, 2001 does not propose for the duties of the directors or office bearers of the company. Rather, it only refers to the appointment of the parties for numerous posts such as directors or alternative directors or for the post of the officers (McCabe & Nowak, 2007). Nonetheless, it has been restated in this section that a company functions effectively because of its officers. The officers are considered to be the one, who are capable of performing all the tasks that needs to be executed by the company in managing its various affairs. Furthermore, the statutory responsibilities of the corporations are also generally needed to be performed by the directors as well as the office bearers of the company (McCabe & Nowak, 2007). It is to be remembered in this regards that the duties of the directors are generally obligated to the company as a whole (Gilligan, Bird & Ramsay, 1999). Though it is quite difficult to clearly comprehend the above mentioned phrases; however, it implies that the directors are not supposed to favour any kind of shareholders which might lead to harm for other stakeholders (Gilligan, Bird & Ramsay, 1999). In this concern, it has been observed in Mills v Mills (1938) HCA that the directors are not supposed to live in any kind of unreal region of separate unselfishness. Furthermore, it was noted in Parke v Daily News (1962) UK that the interest of the employees are not pertinent. It is in this context that the situation of any company which is facing liquidity issues needs particular attention. For instance, in the New South Wales Court of Appeal decision of Kinsela v Russell Kinsela Pty Ltd (1986), it was found that a lease over property of the corporation has been implemented between the company as well as two of its directors, even though the company was in great danger of collapse. It was argued by the director that the lease had been granted with the unanimous approval of the shareholders (Fridman, 1998). In this regards, Street CJ summarised the pertinent law in relation to ratification in such type of contexts stating that where the directors do not adhere to their duties towards the company impacting the interest of the shareholders, in such cases the shareholders might either authorize such breach in prospect or might as well sanction it in retrospect (Fridman, 1998). Hence, it can be analysed that the directors in Australia are bombarded with numerous responsibilities. However, according to the statutory law, the director’s main duty is to perform their duties in good faith with the implementation of the power for a proper purpose. Their duty is also to exercise realistic care and meticulousness in their activities. It is in this context that directors who fail to observe their duties and obligations may have to bear fines and penalties. Conclusion The directors of the company are supposed to fulfil their duties in a proper manner. There are many duties such as common law duties and statutory duties which the director needs to fulfil successfully. If the director is incapable of dealing with the duties and thus infringes any of such responsibilities or is found to have committed an offense then in such cases he/she is liable to pay fines and penalties. He/she may as well be imprisoned for four to five years depending upon the severity of the case according to the Company Act of Australia. References Aberdeen Railway Co v Blaikie Brothers. (1854) 1 Macq 461. AWA Limited in Daniels v Anderson (1995) 37 NSWLR 438. ASIC v Rich (2003) 21 ACLR 672 ASIC v Adler (2005) NSWSC 274 ASIC v Williams (2005) NSWSC 315. AWA Ltd v Daniels (1992) 7 ACSR 759; 10 ACLC 933. Cook v. Deeks, (1916) 1 AC 554. Cartmell's Case (1874) 1553 Chapple, L. & Lipton, P. (2002). Dealing with officers and agents. Retrieved from http://cclsr.law.unimelb.edu.au/files/1010-Law_Mono21.pdf Fridman, S. (1998). An Analysis of the Proper Purpose Rule. Bond law review. 10(2): 163-183. Flood, M. (2009). Australian Business Law. Retrieved from http://pearson.com.au/MC_LinkedFiles/FREE/9781442587908/Vickery6eOnlineSampleB.pdf Gilligan, G., Bird, H. & Ramsay, I. (1999). Regulating directors’ duties - how effective are the civil penalty sanctions in the Australian corporation’s law? Retrieved from http://cclsr.law.unimelb.edu.au/research-papers/Monograph%20Series/Civil%20Penalties%20Final.pdf Hastings ltd v Gulliver (1942) UK 1 All E. R. 378. Halsbury’s Laws of Australia (120-7456). Howard Smith ltd v Ampol ltd (1974) UK AC 821. Keay, A. R. (2001). The directors’ duty to take into account the interest of company creditors: when is it triggered. Melbourne university law review. Katz, D. A. Lipton, W. & Katz, R. (2011). For directors a wakeup call from down under. Retrieved from http://blogs.law.harvard.edu/corpgov/2011/10/04/for-directors-a-wake-up-call-from-down-under/ Kinsela v Russell Kinsela Pty Ltd (1986) 10 ACLR 395. McCabe, M. & Nowak, M. (2007). Corporate governance: what is it. Retrieved from http://www.business.curtin.edu/files/Working_Paper_No_64_Corporate_Governance_What_is_it1.pdf Mills v Mills (1938) 60 CLR 150. PwC. (2010). A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia. Retrieved from http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf Parke v Daily News Ltd [1962] Ch 927. Roach, L. (2010). The Director’s Dutyof Skill and Care: Has the Law Commission Got It Right? Retrieved from http://port.academia.edu/LeeRoach/Papers/1372882/The_Directors_Duty_of_Skill_and_Care_Has_the_Law_Commission_Got_it_Right Romer J in Re City Equitable Fire Insurance Co (1925) UK Ch 407. Sievers, A. S. (2010). The liability of directors and committee members of non-profit associations in the 1990’s. Retrieved from http://eprints.qut.edu.au/12047/1/7R_Sievers.pdf Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405. Schipani, C. A. (1993). The duty of care standard in corporate governance: a comparative analysis of the US and Australian experiences. Retrieved from http://deepblue.lib.umich.edu/bitstream/2027.42/36073/2/b1703766.0001.001.pdf Turnbull, S. (2012). Employee governance. Retrieved from http://cog.kent.edu/lib/turnbull3.html Tomasic, R. Bottomley, S. & McQueen, R. (2002). Corporations Law in Australia. Australia: Federation Press. Thorby v Goldberg (1964) HCA 112 CLR 597. Thomas v Farr Plc (2007) IRLR 419. Read More