Analysis of a Concerning the Activities of a Managing Director - Case Study Example

Corporate Law Table of Contents Introduction 3 Case Overview 3 (i) Advise to MT Regarding the Removal of Chris as the Managing Director 4 (ii) Advise Whether BankEast Limited Can Enforce the Loan Contract against MT 5 (iii) Whether Chris Has Breached His Duties as a Director 8 8 Conclusion 9 References 11 Introduction Every organization, which is listed under the Corporation Act, has certain regulations that oversee the internal business operations. Usually these regulations encompass certain significant aspects such as appointment, authorization, removal and resignation of Directors in an organization. In this similar context, Section 134 of the Corporation Act states that internal management of a business organization can be directed by the replaceable regulation provisions of the Corporation Act, a constitution or by the mixture of both1. Based on this aspect, the essay analyses a case concerning the activities of a Managing Director in an organization and to provide recommendations on breach of duties. The objective of the essay is to understand Company Law and how it determines the activities of different parties in an organization. Case Overview In relation to the provided case, it can be apparently observed that Media Trends (MT) Private Limited has certain constitutions with respect to determine the authority of its founder and Managing Director, which has been described in clause number 6, 9 and 12. Such constitutions influence the contract between the organization with the organizational members i.e. shareholders and Board of Directors and the organization with the Secretary2. (i) Advise to MT Regarding the Removal of Chris as the Managing Director For a proprietary organization such as MT, the power of shareholders to remove a Director is usually contained in the organization’s constitution or replicable regulations of the Company Act. The Company Act and usually the constitutions also permit other Directors to be selected based on a resolution taken at the Annual General Meeting (AGM). Furthermore, a majority of the Board of Directors can also remove a Director, if the organizational constitution permits it. In addition, if an individual is an Executive Director, the organization require to be aware regarding the terms and conditions of the employment agreement concerning certain significant aspects such partial removal regulation and natural fairness requirements among others. Additionally, it is worth mentioning that removal of Director prior to expiry of the employment term can also lead the Director to take actions for the loss incurred such as loss of remuneration or loss of reputation3. With regards to the provided case of MT, clause number 6 of the organizational constitution states that Chris, the Managing Director has been selected for lifetime and can only be removed upon his death, retirement or any misconduct. On the other hand, clause 12 of the constitution of MT states that the organization can only borrow money with the approval of Board of Directors at the time when the borrowing surpasses AU$ 350,000. However, from the analysis of the case, it is apparent that Chris has used deceitful methods in order to secure a loan amount of AU$ 500,000 that surpassed the prescribed amount of clause 12. Briefly, the Board has refused to approve the loan and it was also been alleged that Chris forged the signature of the organization’s Secretary in order to secure the loan. Thus, this incident clearly signifies that Chris has violated the clause number 6 of the organizational constitution by misconduct. Hence, according to the rule of constitution, the board of directors can remove Chris from the position of Managing Director, if the allegations brought by the Board proved to be true in the court. (ii) Advise Whether BankEast Limited Can Enforce the Loan Contract against MT By taking into concern the duties of Directors, it can be stated that they are liable for administration of an organization and are empowered to use every authority of the organization for managing it properly. By the use of authority of an organization, the legal rights and liabilities can be changed. Unless there are no other provisions that are applicable to the use of authority of an organization, the Directors possess the power to bind the organization to any form of contract such as a loan contract. However, it is worth mentioning that Board of Directors Should perform mutually in utilizing the authority vested in the organization. The authority to bind an organization towards a loan contract is utilized by the Board of Directors in terms of making a valid verdict, typically by board resolution4. With respect to the case provided, it can be stated that an organization can only perform through its agents and the authority of agents to act on behalf of the organization, which is subjected towards general regulation of agency. The activities of agent are binding on two key aspects. One is that the agent possess actual authority and the other one is that the authority of the agents is ascended from estoppel5. In precise, actual authority is described as a legal connection, which exists between principal and agent in the form of development of consensual agreement based on which they on their own are regarded as the parties for making any loan contract. Actual authority can also be express or implied. In this similar context, express authority appears at the time when the Board of Directors authorizes a Managing Director to make a contract on behalf of the organization and implied authority is applied when the Board of Directors assigns a Managing Director with the insinuation that he/she may conduct activities that fall within the scope of the organization. The scope of actual authority of an agent relies on the constitutions of the organizations6. In this regard, Section 161 of the Company Act depicts that the activities of a Managing Director is valid unless it is revealed that: there was a flaw in the nomination he/she was prohibited as a Managing Director he/she has ceased to hold the position in the organization he/she was not permitted to vote on organizational matter7. On the other hand, an organization can also bound towards the activities of a Director at the time when it is estopped from rejecting the agent’s power. Directors do not usually have the authority to act alone, unless the Board has conferred on actual authority. However, Directors can conduct organizational business in every way of usual frameworks, either as approval of Board Members or independently. In this context, it can be stated that contracting a third party such as a bank for sanctioning a loan require the security of understanding that whenever the bank deal with a Managing Director, his/her activities can be trusted. Effective apparent authority serves this objective and make sure that the organization is still bound towards a contract, regardless of the presence of actual authority. Apparent authority in this context is the authority, which is observed by others. It is usual that Board can provide broad authority to a Managing Director and hence, he/she will possess fairly broad apparent authority. However, with such authority, Managing Director can manage business activities on behalf of the organization within certain limited area8. In the provided case, it can be apparently observed that Chris, the Managing Director has been provided with the actual authority to conduct business activities and act as agent within certain limited area. For example, he was allowed to secure loan on behalf of the organization without collectively agreed by the Board, unless the loan amount is below AU$ 350,000. In this similar context, it can be stated that he used apparent authority in order to approve the loan of such huge amount that exceeds the amount stipulated in the agreement. The position of Chris do not carry the authority to bind MT in a loan contract with a third party i.e. BankEast Limited without approval of the Board. Furthermore, Chris was declaring to act as an agent of MT and hence will be personally liable for BankEast Limited for the breach of loan contract. The Company Act also provides certain provisions with respect to providing loans or conducting similar transactions. The Company Act offers security for the creditors by prohibiting the grant of loans by banks or financial institutions to the Directors or the individuals who are attached with the Directors. According to section 234 of the Corporation Act, an organization (bank or financial institution) shall not indirectly or directly make loan: to the Director of an organization, spouse of the director or relative of the director to the Director of a business unit associated with an organization, spouse of the director or relative of the director9. Furthermore, section 230 of the Corporation Act also states that an organization shall not directly or indirectly provide guarantee or security in relation with the loan contract made or to be made by another individual. However, there are certain restrictions with respect to making a loan contract to the Director or providing security on behalf of the Director. The exceptions where an organization can allow loan to the director are: where shareholders provide their former support through certain resolution where the loan is honestly taken in order to incur expenses on behalf of the organization where the loan is regarded as an usual way of conducting the business of an organization where the loan is intended to enable Directors to purchase shares10. Concerning the case provided, it can be apparently noted that the loan was granted not for the purpose of performing business on behalf of MT, rather it was taken for personal use i.e. for opening a restaurant business for the son of Chris. The Corporation Act strictly restricts providing loans for spouse of the Director unless the shareholders provide support to this notion. As the loan contract is made by the Managing Director without authority, MT is not bound by the agreement. Hence, BankEast Limited might not enforce the loan contract against MT. (iii) Whether Chris Has Breached His Duties as a Director In an organization, a Managing Director is held liable for guiding and administering the organization through developing effective plans. Such plans are revised and permitted by the Board. Board approval provides a directive for the organization to conduct business affairs. In an organization, Directors have certain statutory duties THAT must be fulfilled. For example, section 180(1) of Common Law states that a Director must use his/her power with certain degree of caution and carefulness. In this similar concern, Section 181(1) of Common Law affirms that a Director should use his/her authority in good trust and serve for the best welfare of the organizations. On the other hand, Section 182(1) of Common Law denotes that a Director of an organization must not improperly use his/her position to attain competitive advantage or to cause harm to the organizations. Furthermore, section 191(1) of Common law depicts that a Director must disclose the personal interest and provides notice to the Board about his activities11. From the provided case study, it can be apparently observed that the Managing Director of MT had breached his responsibilities as a Director. This can be justified that Chris attempted to take full advantage of his position as a Director in terms of entering into a loan contract without taking prior approval. He did not notify this to the Board regarding his personal interest for granting such loan amount. Moreover, his activities were not in line with the best welfare of the organization, rather than fulfillment of personal interests. Thus, as a penalty of breaching common law along with statutory duties, proper legal actions can be taken against Chris such as imprisonment, execution of heavy fines and award of damages. Conclusion The Corporate Law is developed in order to safeguard individuals and organizations in opposition to the conduct of any fraudulent activity and also to provide better guidance on performing business effectively. The Law aids in determining how powers in an organization can be used in a proper way for securing the interests of concerned parties such as shareholders. It provides standards and determines the scope of responsibilities along with duties of the Director in an organization. The Directors are bound to perform such duties and breach of law along with these duties might result in their removal along with taking actions like imposition of huge fines. Thus, it should be noted that in any organization, Directors must act for the welfare of the business and comply with the organizational constitution as well as law. References Australasian Legal Information Institute, 2014. Corporations Act 1989 No. 109 of 1989 - Sect 234. Commonwealth Numbered Acts. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/num_act/ca1989172/s234.html [Accessed April 07, 2014]. Australian Securities and Investment Commissions, 2012. Constitution and Replaceable Rules. For Companies. [Online] Available at: https://www.asic.gov.au/asic/asic.nsf/byheadline/Constitution+and+Replaceable+Rules?openDocument [Accessed April 07, 2014]. Company Secretarial Services Pty Ltd, No Date. Removal of Director – Pty Ltd Company. Memo. [Online] Available at: http://www.companysecretary.com.au/board_briefings/RemovalDirector_PtyLtd.pdf [Accessed April 07, 2014]. Deloitte & Touche, 2006. The Duties of Directors: A Boardroom Brief Series Book. Assets. [Online] Available at: https://www.deloitte.com/assets/Dcom-SouthAfrica/Local%20Assets/Documents/za_audit_directorsduties07_140507.pdf [Accessed April 07, 2014]. Hanrahan, P. & et. al., 2013. Commercial Applications of Company Law. CCH Australia. Harris, J. & et. al., 2013. Australian Corporate Law. 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