The Infringement of the Legal Duty of the Directors - Essay Example

? Word count without Bibliography 1831 words “Answer to Question No Area of Law Legal Issue” Fund-raising by an Australian based corporation is the area of law. The legal issue pertains to the fund raising commitments of Green Coffee Ltd. “The Relevant Law” The fund raising formalities and disclosure needs’ that administer the issue of shares in Australia is governed by the 6D of the Corporations Act 2001 (Cth). Under Australian Corporation Act 2001 (hereinafter will be referred as CA 2001), if a company wants to approach public for raising capital, it has to file a disclosure document like prospectus, profile statements or offer info statements with Australian Securities and Investment Commission (ASIC), unless there is an exception to the same under s 708 of CA 2001. According to s 715A, the offer document should be presented and worded in a concise, clear and effective style. An offer document should supply with all relevant information and material to the investor and by doing so, the company would help the investor to make a wise investment decision. Thus, an offer document should be prepared as the guidelines provided in CA 20011. A proprietary company in Australia is barred from fund raising from the public. Some types of demeanour by corporations in Australia pertaining to financial services and products like the making of deceptive or bogus statements or involving in deceptive or deceptive conduct is barred. However, under s 113(3), a proprietary company can raise funds from the general public if the fundraising does not require a disclosure document where there is an exception. A corporation is not required to file a lengthy prospectus if it is exempted under s 708 or if the quantum of money to be raised is $ 10 m or less from the public. A company is required to file only an offer information statement if the amount that is going to be raised is $ 10 m or less. During the initial offer, disclosure is necessary and under s 700(2), an offer includes “appealing for investment in the shares of the company2.” A detailed prospectus has to be filed with ASIC if a company wants to list its shares. An Australian company may issue also can issue a short prospectus in lieu of a full prospectus provided that it includes some documents already filed with the ASIC mainly targeting unsophisticated investors. If the issue size is $ 5 million or less, an Australian company may issue offer information statements in lieu of a prospectus. In Hurst v Vestcorp Ltd (1988) 12 NSWLR 394, it was emphasised the significance of proper disclosure documents by a company while inviting the public for investment in its shares3. It is to be noted that offer of securities obtained outside Australia will not fall under the 700 (4) of the Corporations Act 2001 (Cth). For example, if The Green Coffee Company Ltd, makes an offer of $7 million and $15 million in capital in Vietnam, then Australian laws will not be applicable. Further , if The Green Coffee Company Ltd wanted to raise $ 10 million or less , there is no need to issue a detailed prospectus or if is exempted under s 708. If it is intend to raise more than $ 10 million, it has to compulsorily file a detailed prospectus with ASIC and is bound by its statements. Application of Law The Corporation Act 2001 function to make sure that the investors are safeguarded when they make a decision to buy shares. Assuming that the Green Coffee Company Ltd and not a proprietary limited company , if the company wants to go for public issue , then it has to observe the provisions contained in Chapter 6D of the Corporation Act 2001(Cth). There are many options available for the Green Coffee company as regards to fund raising. It may go for a public issue or may approach bankers to advance loan or issue of debentures, etc. Thus, proper mixture of minimal public issue with loan capital may offer leveraging or gearing to the company thereby enhancing its Return on Equity (ROE). In a nutshell, Green Coffee Company may engage to release an offer information statement or full prospectus, but this will be footed upon the quantum of the finance that the company aims to mobilise through fundraising from the general public. The correctness of financial data and integrity of those responsible for the preparation of such documents is crucial when dealing in fundraising. Conclusion As long as Green Coffee Company Ltd does not contravene provisions of the Corporations Act ,2001( Cth) that govern fundraising in Australia , “Green Coffee Ltd” may pursue its plans of fundraising with considerable due diligence and care. Question No 2 “Area of Law / Legal Issue: The disclosure requirement of a public company in Australia is the area of law. The legal issue centres on the privileges and commitments that are applicable to (a) Green Coffee Company Ltd., (b) The directors of Green Coffee Company Ltd., and (c) Leaping Lizard Coffee Pty. Ltd as regard to fundraising and disclosure. “The Relevant Law” If a company issues a deceptive or misleading statement to attract investment, it will be punishable both under civil and criminal laws under Australian laws. S 9 explains disclosure means any statement though it may not be in written, but it may communicate a message. Under s 728(3) of the Australian Corporation Act, it is an offence to issue a prospectus with deceptive or misleading statement. The Australian Corporation Act does not define what is deceptive or misleading, but some guidance on the subject can be drawn from the court decisions on the subject. In general, misleading connotes “leading into error.” This has been held in Keehn v Medical Benefits Fund of Australia Ltd4 and in Versteeg v R, it was held that leading a public into error by reading such a statement or influenced by it. In Fraser v NRMA Holdings Ltd5, a prospectus was held to be deceptive or misleading under the s 52 of the Trade Practices Act In Phosphate Co-operative Co of Australia Ltd v Shears6, it was held that the deciding factor is to find out whether it would instigate a public to make an investment on the basis of such deceptive information. Further, s 734 (1) and (2) stipulates criminal liability to contravene the ban on publicising or advertising an offer of securities. Section 1041E and F prohibit a person to induce investment decision by issuing false, deceptive, misleading facts or concealment of material truths7. The main defence available to the directors of a company for misleading statement in a prospectus is the due diligence defence under s 731 , if they are able to demonstrate that they made all investigations that were practical in the scenario, and he has relied on the due diligence process made by an independent professional. In Australia, it is the normal practice to employ a committee system to carry our due diligence when there is issue of disclosure document. In Ingot Capital Investments v Macquarie Equity Capital Markets (2008) 73 NSWLR 6538 , it was held that due diligence certificate was deceptive and disingenuous in nature due to that the plaintiff was a passive casualty of such a misleading demeanour9. In ASIC v Maxwell [2006] NSWSC 105210, fund was raised in violation of Part 6D disclosure requirements and it was argued by ASIC in this case; the promotional and loan documents were deceptive. It was concurred by the court that the loans were unsecured and there was no room for security in the loan document and hence, it was a misleading advertisement.11 In ASIC v Adler [2002] NSWSC 171case, one of the directors lent money without the approval of board or shareholders. After the collapse of the company, directors namely Adler and Williams of HIH were awarded imprisonment12. In Fraser v NRM Holdings Ltd (1995) ALR 543, it was held that the non-disclosure should be of conscious in nature instead of just mere inadvertence13. In ASIC v Healey [2011] FCA 717, it was held that as the disclosure document did not contain vital data and hence, there was a failure on the part of the directors in exercising the due diligence. “Application of Law” “Green Coffee Company Ltd”, being a public company, has satisfied the legal obligation of filing prospectus with the ASIC. The company will not be held accountable for the unrealistic forecast sales and earnings data disclosed in the prospectus whereas its directors will be held liable for this as they have given their consent to the disclosure of misleading and deceptive information. Directors of Green Coffee can refute the allegation by substantiating their lack of knowledge, or by absolving that they exercised effort in evaluating the documents. This defense will be further corroborated if directors reveal their dependence on an independent accounting body in assuring the truth contained in the disclosure document. Leaping Lizard Coffee Pty. Ltd can initiate legal action against Green Coffee Company Ltd for the losses incurred as they relied on the unrealistic forecast sales and earnings data disclosed in the prospectus. However, Green Coffee may make a valid claim that the reason for its financial disaster is due to world-wide drop in coffee prices and not due to misstatement in the prospectus. Conclusion Each of the stakeholders in the issue has their own contribution of privileges and commitments. Nonetheless, the crux of the issue is the infringement of the legal duty of the directors and its negative effect on the company, on the directors themselves, and the shareholders like Leaping Lizard Coffee Pty. Ltd. Bibliography Barbara, Mescher. "Market Integrity and Disclosure Quality." Journal of Applied Research in Accounting and Finance (JARAF) 7.1 (2012): 23-31. Boulle, Laurence, The Law of Globalisation: An Introduction. (London: Wolters Kluwer, 2009), 80. Cassidy, Julie, Concise Corporation Law (Sydney: Federation Press, 2006), 147. Cockburn, Tina & Wiseman, Leanne. Disclosure Obligations in Business Relationships. (Sydney: Federation Press, 1996,), xx. Gillies, Peter. Business Law. (Sydney: Federation Press, 2004). Godsell, David. “Liability of Accountants and Auditors under The Trade Practices Legislation.’”Australian Accounting Review 3.5 (1993): 33-42. Hambrook, J. P.”Takeovers and Target Company Directors: A Brief Australian Perspective.” Corp. & Bus. LJ 2 (1989), 133. Jason Harris & Hargovan, Anil, and Austin, Janet. “Shareholder primacy revisited: Does the public interest have any role in statutory duties?” Company and Securities Law Journal 26 (2008): 355. Langton, R. “Material and Immaterial Omissions from a Prospectus: Reflections of a Puzzled Observer on the Decision (s) in Fraser v NRMA Holdings Ltd. “Australian Journal of Corporate Law 6: (1996), 410. Mescher, Barbara. “Market Integrity and Disclosure Quality.” Journal of Applied Research in Accounting and Finance (JARAF) 7.1 (2012): 23-31. Pearson, Gail. Financial Services Law and Compliances in Australia. (Cambridge: Cambridge University Press, 2009), 229. Tomasic, Roman, Bottomley, Stephen & McQueen, Rob, Corporation Law In Australia (Sydney: Federation Press, 2002,), 553. Read More