Advise Popper and Brown as to whether They Have Breached Any of the Directors Duties Owed to Electronics Ltd - Case Study Example

Advise Popper and Brown as to whether they have breached any of the directors’ duties owed to Electronics Ltd. Also advise Popper and Brown on their potential liabilities for the breach (es). Introduction In consideration of the directors’ duties to a corporation, two actions shared by two individual board members of friendly relations shall be discussed. One is involved at selling his daughter’s property which is threatened to have its value decreased due to zoning regulation, and by allowing the corporation to invest in speculative foreign exchange. Another is a friend of the same previous director mentioned, and also another board member who has passively participated in the decision to purchase the land as well as invest in the speculative foreign exchange market. This paper will try to find out possible breach of duty committed by Popper and Brown, as well as the potential penalties or liabilities once a contravention has been declared by the court. Discussion Popper as managing director and Brown as a senior member of the board of directors of Electrics Ltd. are required to provide care, skill and diligence for the corporation (Electrics Ltd). Likewise, it is their fiduciary duty to act honestly and in the best interest of the company as well as avoid conflict of interest in all their transactions. The Corporations Act 2001 Section 181 provides that the director’s civil obligation is to act in good faith. According to Daniels v Anderson (1995), “A person who accepts the office of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty of a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office.”1 While Popper did not form his own company to transact or sell the property to Electronics, he is personally linked on first degree to the vendor – his daughter who owned the land. Popper breached his director’s duties to Electrics Ltd by allowing the company to buy a land which will soon devalue. Had he not been aware of the zoning regulation that will lessen the value of his daughter’s property, he still acted with negligence on the matter because had the seller been another unknown person to him, he could have acted otherwise. Brown, on the other hand, has relegated his duty as senior officer or board member of Electronics Ltd. by endorsing the board decision when in fact, he was aware of the conflict of interest on the part of Popper. 1. How did Popper and Brown breach their director’s duties? It is provided for in the general law and statutory law that the directors duties of a company or corporation require two broad categories—(1) care, skill and diligence, and (2) loyalty and good faith.’ 2 a) Popper’s and Brown’s duty of care, skill and diligence Popper and Brown and other officers of Electric Ltd are under both common law and statutory duties to exercise a reasonable care and diligence.3 This is explicitly specified in s 180(1) of the Corporate Act and the general law. According to Vines v ASIC4, Lagunas Nirate Co v Lagunas Syndicate5, there is no substantial difference in s 180(1), common law tort of negligence and the equitable law duties. In the case Daniels v Anderson6, the decision of the Court of Appeal indicated that the directors of listed companies are required to take reasonable steps to guide and monitor the management of a company. In Electric Ltd, which is a public company, it is expected that the directors have the role of monitoring the management of the company. In the duty of care, directors may “delegate certain functions to others and relay on those people to perform the functions properly7. In addition, s 198D states that unless the constitution provides otherwise, the directors of a company may delegate any of their powers to any other person Only under proper inquiry or investigation that actions of delegates were found to be on reasonable grounds and in good faith that directors are freed of this responsibility. In the case of Electrics Ltd, Brown delegates his monitoring power of the land’s value as well as investment on speculative market to his fellow directors. Popper breaches his duty of care and diligence under s 180(1). A director is not an ornament, but essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto dummy director.8 This has been emphasized so that directors should take reasonable steps to monitor and guide their officers’ action as well as the corporation. b) Duty of loyalty and good faith Section 181 states that directors and other officer of a company should act and discharge their duties in good faith and in the best interests of the company. It is specified in section 181 (1) that it is the directors’ duty to act in good faith and proper purpose may be contravened even if directors “believe they are acting in the best interests if no reasonable director could reach that conclusion.”9 Popper is under a duty to avoid conflict of interest as strictly applied in Aberdeen Railway Co v Blakie Bros10. The Corporations Act, also specified this in s181- 183 .11 While there is an opportunity for Electrics Ltd to invest on a land, it is still their duty to investigate actual market value as well as possible zoning values in order to foresee possible gains, or in this case, loss. Information is accessible in many ways. Zoning regulators provide information to the public which the directors of Electric Ltd may have acquired through legal means. Likewise, property portfolio managers as officers are also duty-bound to protect the interest of the corporation. The directors should have relied solely on just any available information prior to any investment action. The Corporate Act was followed by Popper by disclosing that the land is the property of his daughter, as indicated in s 191 which is applicable for both public and proprietary companies. A company’s constitution may flex the obligation to disclose conflicts of interest to shareholders and allow disclosure to be made to the board.’12 Such rule can be found in Woolworths Ltd v Kelly13. Popper’s disclosure cannot affect whether he has breached his duty of loyalty and good faith. He did not inform the board about the zoning regulation that shall lessen the value of the land. 2) Whether Popper and Brown breached their directors’ duties As mentioned earlier in the Corporate Act and the general law, directors discharge their management power to make business directions and decisions. Although directors undertake investment research and preparations, the investment may cause a big loss to company due to some factors beyond the directors’ control. The loss of shareholders cannot directly inform the court to decide that the directors breach their duties of care and diligence. According to s 180 (2), “The principle that courts will not review the merits of business decisions made by directors is called the business judgment rule.”14 Popper and Brown discharged their management powers as a business judgment to invest in foreign exchange market even in a speculative one in order to have higher profit. Unlike the case of ASIC v Adler15, Popper and Brown did not gain anything in the investment. The directors’ investment action is in good faith and the best interest of the company. This is in line with the fiduciary duty of good faith and best interest of the company and statutory version of s 181. “It is necessary to balance risk and reward, or, more accurately, to be satisfied that the directors, acting reasonably and in the best interests of the company and employing their individual knowledge and skills and taking account of relevant circumstances, did so.” 3) Potential liabilities for the breach of Popper and Brown Electric Ltd is a corporation that has valid legal entity. It is comparable to a legal person (s124), a corporation is capable of bearing liabilities in tort, crime and contract as a natural person, but is a legal fiction which require human representatives to operate them on a day-to-day basis. Accordingly, statutory attribution of a corporation engaged in crime may be addressed through the Criminal Code Act 1995 (Cth) enacted to replace the common law principles on corporate liability in crime under the commonwealth statutes. Criminal statutes in states and territories may provide for corporate liability for crimes under state/territory statutes. If this Act or its equivalent does not exist, the organic theory or e attribution theory may apply. The organic theory states that “directing mind and will” of a corporation is the conduct and mind of the corporation16. The corporation is comparable to the human body with parts and functions, and that, “directors and managers […] represent the directing mind and will of the company, and control what it does. The state of mind of these mangers is the state of mind of the company and is treated by the law as such,”17 The attribution theory states that where junior officers or employees commit a breach, “could still be attributed to the company in criminal cases where failure to do so would frustrate the policy of the statute under consideration,”18 Under the Criminal Code, Division 12.4 (2), “negligence is a fault element in relation to a physical element of an offence; and […] fault element may exist on the part of the body corporate if the body corporate’s conduct is negligent when viewed as a whole.” In our case, Popper and Brown may be liable for negligence and breach and lead to court declaration of contravention. Possible penalties may include incapacity or denial of right to take action on their shares at Electrics Ltd, or obliged to reimburse funds to those who shall be declared as victims. Contravention is considered a less serious crime and punishment may include fines. Conclusion Popper and Brown breached their directors’ duties of care and diligence under the Corporate Act for common and fiduciary laws. Popper has conflict of interest in proposing to the board to buy the land owned by his daughter. In fact, he is seen to have kept the information about a new zoning regulation that will devalue the land from his fellow board members. In addition, Popper and Brown are duty bound to seek ways to act in the best interest of the corporation. By buying a property which Popper explicitly is aware to be decreasing in value is a contravention. The use power for proper purpose has also been contravened. Popper and Brown acted on bad faith by using their power to make the corporation lost invested fund. In the case of Brown, he has been like an accomplice. As a friend of Popper, he may be privy to the information known by Popper. By endorsing for the approval of the contract with Popper’s daughter, Brown has failed to uphold his duties as director. In the investment of Electric Ltd on highly speculative foreign exchange market, this decision by the board members is a business decision to gain possible income. The nature of the organization is business, therefore, profit-oriented. The Corporate Act specifies that the action has been a “business judgment act” and it takes more information and research to prove that a breach has been committed. References Brendan Pentony, Stephen Graw, Jann Lennard and David Parker, Understanding Business Law ，LexisNexis Butterworths, 2009 Pamela Hanrahan, Ian Ramay and Geof Stapledon, Commercial Applications of Company Law, CCH, Australia, 2007 Phillip Lipton & Abe Herzberg, Understanding company law, Lawbook Co., Australia, 2008 Roman Tomasic, Stephen Bottomley & Rob Mcqueen, Corporations Law in Australia, The Federation Press, Australia, 2002 Tony Ciro & Christophoer Symes, Corporations Law in Principle，Thomson Reuters, Australia, 2009 Read More