Principles of the Duty of Law - Essay Example

? Law Duty of Law 0 Introduction To control the management of the company affairs, its property and strategic decisions, board of director’s play an important role as an independent decision making body (Austin & Ramsay, 2013). The higher authorities of any company withholds within them the power and control to the decision making process of the corporate entity. The power which is enjoyed by the directors certainly involves certain legitimate interests that can affect the decision making process of the management as well as influence the company as a whole (York, 2011). It has been argued by Austin & Ramsay (2013), on the basis of this context that the party (the corporate entity) who entrusts its property to another party (directors) is at a great risk of losing its property due to the involvement of the other party in fraudulent practices and misconducts. Emphasising on this understanding, the essay will aim at addressing the principles mentioned under the Corporations Act 2001 (Cth) concerning the fiduciary duties of directors in a company. The essay will also aim at analysing the purposes and effectiveness of these statutory principles to restrict the directors from performing unethical conducts or wrongdoings, taking the opportunity of the power enjoyed by them. 2.0. Background Companies act as an artificial legal entity which can be managed with the enforcement of its human legislatures. The board of director’s form an important part of any organization as the decision making and the managerial powers remain mainly with its directors (Austin & Ramsay (2013). For instance, as stated in section 198A (1) of Corporations Act 2001(Cth), the directors are eligible to manage the company’s affairs under their jurisdiction. Again, section 198D of Corporations Act 2001(Cth), states that the directors of the organization have permission to delegate their powers to another director, committee of directors or to an employee or any other person unless the constitution of the company provides otherwise. Undoubtedly, these powers to work as an independent decision making body to control the organisational behaviour and performances on the whole, which also increases the probability of mismanagement and unethical behaviour from the end of the directors [AWA Ltd v Daniels {(1992) 10 ACLC 933}]. Previous instances have often illustrated unethical conducts performed by the directors, misusing their power or authority to satisfy the organisational interests above their personal objectives (Austin & Ramsay, 2013). 3.0. Duty of good faith 3.1. Code of conduct As stated under the section 181 of Corporation Act 2001(Cth), duty with regards to good faith bestowed upon directors in compliance with the interest of the management is to avoid conflicts which might arise from personal benefits (Milne, 2006). Under this provision, if the directors of a company decipher reckless attitude and/or depict behaviour of intentional dishonesty, which in turn hampers the interests of the corporation at large. In this context a director of any corporation must enforce or exercise the bestowed responsibilities and powers with regards to good faith and for a ‘proper purpose’. If the director violate this duty or responsibility they are liable for punishment under civil penalty provision under section 1317E of Corporation Act 2001(Cth) (The Legal Exchange, 2012). 3.2. Case Examples According to the case of Charterbridge Corporation Ltd v Lloyds Bank Ltd (1970) a test was conducted to find whether the decision made by the director in relation to that situation was valid. As per the case convictions, it was held that directors in a particular company owe a certain degree of responsibility towards the company’s creditors at the time of its insolvency (Sourdin, 2009). It is worth mentioning in this context that even though the provision unambiguously dialects the implications of good faith, it fails to render a precise notion of ‘proper purpose’ and thus can be deemed as subjected to the judge’s rationality when assessing directors’ strategies in concordance with the company’s interests (Bender, 2009; Tully, 2005). 4.0. Duty to disclose a material personal interest 4.1. Code of conduct According to Corporations Act 2001(Cth), under the subsection 183(1) it has been explained that directors, employees and executives of the organization must avoid improper use of information to benefit their personal interests or to benefit others’ interests that were imparted to them with regards to their position (Tully, 2005). The director of the company must therefore avoid the situations that are likely to cause a conflict between their duty towards the company and their personal interests and also between the stakeholders of the company thereby hampering the long run sustainability interests of the company on the whole. The section 195 of Corporations Act 2001 (Cth) states the duties of directors of the public company in relation to material personal interests. For instance, if the director is into professional relationship with a third party and proposals or outcomes in relation to that third party by the board, might influence the breach of contract between them, the actions taken by the director might be held questionable under this particular act wherein under sections 184(3) and 26(3), the directors as well as the officers or employees are liable for civil penalties (Milne, 2006). 4.1 Case Examples According to the case of Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd and Betta Products (Australia) Pty Ltd v Crampton, it can be apparently depicted that the importance of the director’s duties with regards to the disclosure of a material of personal interest is of crucial significance to the company’s sustainability. In accordance to this particular duty, the directors must disclose the details of their interest with regards to its nature and its extent and must comply with the affairs of the entity so as to ensure that the company’s interests are not hampered directly or indirectly owing to their personal connections (ACIS, n.d.). 5.0. Duty of Care and Diligence 5.1. Code of Conduct The duty of company directors, in accordance with care and diligence, aims to exercise significantly under the jurisdiction of common law. This particular duty is reinforced under the section 180(1) of Corporations Act 2001(Cth) which aims at maintaining an unbiased judgment in accordance with care and diligence by the directors. According to this duty of the directors, they must aim at exercising their powers and discharging of their duty with due consideration towards its aftermath with respect to the company performances (ACIS, n.d.). In accordance to the duty of care and diligence under section 180(1) of the Corporations Act 2001 (Cth), the law aims at maintaining fair decisions with respect to company objectives and exercising the powers by the directors with respect to the matter related to the business, thus binding the directors from performing any act in chase of financial gains for personal interests. The law hereby dialects that diligence is quite significant for company directors with the virtues of which, the executives, the senior managers and the directors can avoid liability in terms of business decisions by showing compliance between the decisions made and the resulting business profits (ACIS, n.d.). 5.2. Case Examples The duty of care and diligence, as described under the Corporations Act 2001 (Cth), the case example of Universal Telecasters (Qld) Ltd v Guthrie can be illustrated which depicts the significance and the probable consequences of directors’ negligence towards this particular duty. However, as the case exhibits, the duty of the director with regards to care and diligence is largely subjected to the situational context of the business affairs at the time of director’s decision making. As revealed in this particular case, it was proved that the decisions made by the director were not violating the system; rather the decisions were necessary in accordance to that particular situation mentioned in the case with respect to business growth. A similar conviction can further be observed with reference to the case example of Town of Kwinana v Woolworths (WA) Ltd. Nevertheless, from a critical point of view, it can be affirmed that duty of care and diligence bestowed on the directors of a company is largely subjected to the situations and other related parties in the business affairs which again spares a scope of negligence owing to the limited visibility of unambiguity (ASIC. (2011). 6.0. Duty to prevent insolvent trading 6.1. Code of Conduct The compliance of the director with the duty to prevent insolvent trading is enforced under the section 588G of the Corporations Act 2001(Cth). In accordance to this particular duty, the directors should avoid insolvent trading of the company. This particular duty complies with the directors and any third person who has not been appointed as a director, but is entitled to take decisions in respect to the position of the director (ASIC, 2010). In the context of this particular duty, it is expected that the director must prevent the company from incurring any debt if the company is in the position of insolvency or by incurring the debt (especially for the director’s personal obligations) the company will become insolvent (ASIC, 2010). If the directors are found guilty in compliance to this duty, civil penalty provisions against the directors are enforced under section 588G (2) of the Corporations Act 2001(Cth). The court takes decisions against the directors for violating the duty by providing any one of the orders among compensation order in which the directors are directly liable for compensating the loss, pecuniary penalty order in which the directors are liable to pay the pecuniary penalty to the commonwealth and disqualification from managing a corporation in which the court disqualifies the directors from corporation management for a certain period of time or a long term period (Australian Institute, n.d.). 6.2. Case Example In accordance to the cases of Sandell v. Porter (1966), Lewis v. Doran (2005), Metropolitan Fire Systems Pty Ltd v. Miller (1997) and Shapowloff v. Dunn (1981), the essence of the director’s duty with respect to prevent insolvent trading has been justified. Hence, under this provision, it is necessary that the decisions related to company’s insolvency, as taken by the director, must include appropriateness to avoid any violation of the duty. The court must also consider the situation and the need for such decisions by the director which violates the duty to provide unbiased justice (ACIS, n.d.). 7.0 Duties not to misuse (i) position and (ii) information 7.1 Code of Conduct The compliance of the duty of the director with avoidance to misuse the position and information has been enforced under the section 182(1) and section 184(2) of Corporations Act 2001(Cth), negligence to which is liable for legal punishment against the doers, i.e. the directors (Anderson, 2008). In this context, the duty aims at discouraging the directors from misusing their information and position for their own personal interests which might be in want of financial gains or anyone else’s personal benefits, who is of primary interest to the director. In compliance with the duty, if the director violates it with an intention of personal interest as well as with a purpose of obtaining due advantage from the information gathered and the power of the position, the director is liable for punishment, irrespective of the situational context. However, the extent of punishment sentenced to the directors might depend on their obligations, both at the professional and personal fields (Australian Institute, n.d.). According to the Corporations Act 2001(Cth), “the prohibition is against engaging in conduct with the purpose of obtaining a benefit or causing detriment to the organisation, regardless of the nature of the conduct itself, or of the benefit gained or detriment caused” (Anderson, 2008). 7.2 Case Examples The significance and the implications of this particular law of duty bestowed upon company directors can be well illustrated with reference to the case examples of James Hardie & Co Pty Ltd v Putt (1998). As can be evidently observed with reference to the case, the director of the company APLA was held liable to compensate the victims owing to their losses incurred due to his negligence of the duty for not to misuse the position and the information or either in quench of financial gains for personal benefits. Under this law provision, the directors and any other employee are also restricted from disclosing any confidential information with respect to their former employer(s) which might cause harm to their former employer company(s) which can be apparently observed with reference to the recent cases Spotless Group Ltd v Blanco Catering Pty Ltd, Blackmagic Design Pty Ltd v Overliese and RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (Anderson, 2008). 8.0 Analysis 8.1 Summarising the Duties of Directors The law and provisions mentioned under the Corporations Act 2001(Cth) aims at proper utilisation of the position and the power which the director holds being an independent decision maker of the organization. In accordance to the code of conduct complying with the duty of good faith states that the director must work or decide for the benefits of the organisation and its stakeholders on the whole keeping their personal interest as secondary to the organisational objectives and sustainability. A similar notion has been specified in other sections of the Corporations Act 2001 (Cth) where it has been explicitly mentioned that negligence of any of the duties shall lead to legal prosecution against the director of the company owing to which, he/she might also be held liable to compensate the victims of his negligence. In accordance to the duty to avoid conflicts of interest directors are viewed as having “fiduciary duties” payable to their company. This includes an important lawful relationship, and complies with the duty of trust and good faith. It is worth mentioning in this context that the laws mentioned under this provision, apparently indicates a direct relationship between the directors’ decisions and the company’s stakeholders. Hence, the duties of the directors in a company increases or rather expands by taking into the interests of other various bodies to which the company is deemed answerable (Austin & Ramsay, 2013). 8.1 Review With reference to the above mentioned case examples and the specific regulations mentioned under the provisions of Corporations Act 2001 (Cth) with respect to the duties of directors in a company, it can be argued that certain limitations persist which might reward a scope to directors to commit unethical behaviour to satisfy his/her financial gains or personal interests above the interests of the organisation. For instance, even though the laws mentioned under this provision tends to disregard any kind of discriminatory rules at the higher authority of the corporations, most of the provisions such as the duty of care and diligence and duty to disclose material personal interests, the judgements are mostly based on situational contexts which might be forged by the directors and thus avoid appropriate judgements. Furthermore, precise definitions to the verses used in this law such as ‘proper purpose’ are also lacking. Perhaps, these have been the reasons owing to which directors of companies are yet observed to hamper organisational interests in their personal ‘pursuit to financial gains’ (Austin & Ramsay, 2013). 9.0. Conclusion With reference to the above discussion it can be affirmed that in majority instances, the indications of the provisions were to regulate the behavioural decisions of the directors in response to their personal interests and professional obligations of commitment. It can be argued in this context that deciding upon their choices is the sole responsibility of the directors in an organisation where the legal provisions might not prove as effective as believed in generating ethical conscience amid these professionals. Hence, the liability relies upon the appointor of the directors and other related parties who are or shall be affected by the director’s decisions to regulate the doings and probabilities of wrongdoings of these professionals at the rudiment. 10.0 References ACIS. (n.d.). Fiduciary Duties. Retrieved from http://www.acis.net.au/bulletins/Directors_Duties.pdf Anderson, H. (2008). Directors' Personal Liability for Corporate Fault: A Comparative Analysis. Netherlands: Published by Kluwer Law international. ASIC. (2011). Directors’ meetings—voting restrictions. Retrieved from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg76-300311.pdf/$file/rg76-300311.pdf ASIC. (2010). Duty to prevent insolvent trading: Guide for directors. Retrieved from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg217-29July2010.pdf/$file/rg217-29July2010.pdf Australian Institute. (n.d.). Minutes of Directors' Meetings. Retrieved from http://www.companydirectors.com.au/Director-Resource-Centre/Director-QA/Board-Meetings/Minutes-of-Directors-Meetings Austin, R. & Ramsay, I. (2013). Ford’s Principles of Corporations Law (15th ed.). Sydney: LexisNexis Butterworths. Bender, P. (2009). NSX Ltd v Pritchard. Retrieved from http://www.commbar.com.au/uploads/Publications/Corporations/Corp___Sec_P_Bender.pdf Commonwealth Consolidated Acts. (2001). Use of position--civil obligations. Retrieved fromhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/index.html#s180 Milne, N. (2006). In depth look at directors' duties. Retrieved from http://www.conferenceworld.com.au/resources/other/Nancy%20Milne%20Thurs%20am.pdf PricewaterhouseCoopers. (2011). Common law duties. Retrieved from http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf Queensland. (2013). Corporations Act 2001 (Cth). Retrieved from http://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx Sealy, L & Worthington, S. (2008).Cases and Materials in Company Law. New York: Oxford University Press. Sourdin, T. (2012). Abstract. Retrieved from http://www.civiljustice.info/goodf/1 Tomasic, R., Bottomley, S. & McQueen, R. (2002). Corporation Law in Australia. Australia: The federation press. Tully, S. (2005). Research Handbook on Corporate Legal Responsibility. UK: Edward Elgar Publishing Limited. The University of Melbourne. (2009). Officers’ duties: responsibilities of Council members under the UoM Act. Retrieved from https://www.unimelb.edu.au/compliance/compliance-materials/Governance%20Responsibilities%20-%20Compliance%20Guide%20-%20May%202011.pdf The Legal Exchange. (2012). Summary dismissal. Retrieved from http://thelegalexchange.wordpress.com/ York, H. D. (2011). Director’s Duties and Personal Liabilities. Retrieved from http://www.hdy.com.au/Media-centre/News-Coverage/Directors-duties-and-personal-liabilities.html Read More