Company Law-Based on Statute and Law by Using Australian Legislation - Case Study Example

Name: Course: Tutor: Date: Company Law based on Statute and Case Law by using Australian Legislation Introduction Australian company law is deeply borrowed from English company laws. Currently, its legal framework entails a single, national statute, that is, the 2001 Corporations Act. It is worth noting that Corporations Act provisions override case law. However, case law still plays a significant role in company law. This is evident in the fact that case law covers any form of loopholes within the Corporations Act; that is, there are some basic concepts attributed to company law that particularly have not been addressed in the Corporations Act (Flemming 84; Symes 2; Adams 1; Fu 262-263). This paper seeks to analyse company law in accordance with the statute law and case law through the application of Australian legislation. More specifically, this paper is aimed at analysing statutory duties imposed on company directors within the context of the Corporations Act. Definition of a Director Section 9 of the Corporations Act defines a company director as an individual who has been appointed to the status of a director or an individual who has been appointed to the status of alternate director and is executing duties in that capacity (LAC Lawyers). It is important to note that the Corporations Act Sections 201A (1) & (2) state that a proprietary company requires only one director, a public company on the other hand must have at least three directors (Duncan, 181; Harris et al). Delegation of powers to directors Directors have the company powers delegated to them through the company constitution. As with the several aspects of company law, this particular delegation is based on the principle that the constitution and any inherent applicable rules are a contract between the company, shareholders, and directors. Company constitutions vary in terms of the degree of power they delegate to directors. Companies will however invariably vest management powers to directors (Harris et al). The Corporations Act does not use the term Board of Directors as the expression is commonly known. This term is however applied to refer to the directors acting as a group. Therefore, the delegation of powers in reference to the company constitution implies delegation to the board of directors as opposed to respective individual directors. Since directors act on decisions of the majority, the delegation is meant for directors acting in that manner (Harris et al). Corporations Act Section 18A (1) indicates that the company business is to be managed by or under directions given by the directors. Corporations Act Section 18A (2) further states that the directors may put into effect all the company’s powers with an exception of those required by either the company’s constitution or the Corporations Act to be exercised by the company in a general meeting (Harris et al). Thus powers are effectively delegated to the directors through the rule with an exception of where the constitution or the law preserves specific powers to be exercised in general meetings by shareholders. In reference to a proprietary company where the only shareholder is the director, Corporations Act Section 198E provides the reality of such a framework. It permits the director to put in effect all the company’s powers except those laws required by the company’s constitution or the Corporations Act to be exercised in a general meeting. Section 201F (1) further permits the director of such a company to recruit another director by recording such an appointment and putting a sign into that agreement. It is worth pointing out that the director is allowed to append his signature only once as doing it twice would imply that the company is a two director one hence the section would not be applicable (Australia et al 180). Duties of directors In managing the company’s business every director is subject to a broad range of duties specified within the Corporations Act. It is worth pointing out that there are some circumstances where the director’s duties and obligations are imposed on an individual who even though may not have been appointed as the company director, still acts in the capacity of one. Some of the key duties imposed on the directors by the Corporations Act entail: the duty to act in good faith at all times; the duty to act in the company’s best interest; the duty to avoid conflict between the director’s interest and the company’s interest; the duty to practice due care and diligence; the duty to act honestly; and the duty to avoid insolvency trading. In the event of a company winding up, the director has the duty of assisting the liquidator by for instance giving any company records that might be in his possession to the liquidator (Australia et al 184; Harris et al; Keay 274). A director who fails to execute the aforementioned duties might find him/herself either attracting penalties or interests or being criminally liable or both. Offences and penalties that could be attracted by directors when they fail to perfume their duties entail a maximum prison sentence of five years or a penalty of $200,000 or both. Failure to perform the aforementioned duties by a company’s appointed director may lead to contravention of a civil penalty provision subject to a maximum penalty of $200,000. An appointed director failing to perform his statutory duties may be personally liable to pay damages to company or any other party who might have suffered any loss in any form attributing to their negligence. It is imperative to note that duties assigned to a director might still be exercised long after the company has been deregistered (Australia et al 184). This paper revolves around the key duties assigned to a company’s directors particularly the duties to avoid conflict of interest and insolvency trading. Duty to avoid conflict of interest The 2001 Corporations Act section 191 (1) indicates that a company’s director who has a material interest in an issue, subject or matter that relates to the company’s affairs is obligated to provide notice of that particular interest to other directors of the company. The director is also required to disclose his or her interests to other directors with regards to proposed contracts, contracts, property and offices. The duty of disclosure may however extend beyond the given scope (Cassidy, 36; LAC Lawyers). This implies that the powers of a corporation director may not be exercised by the director in such manner as to offer personal benefit to either that particular director or the director’s associate. There are several ways in which the director’s personal interests and that of the company may conflict. Conflicts may spew forth from situations like holding directorship posts that actually are or are deemed to be conflicting, creating and giving loans as well as making payments to directors, safeguarding a nominating shareholder’s interests within the corporation, using insider information for personal benefits, and through the director’s appropriation of company opportunity for either him/herself or an associate (Tomasic et al 342). Principles with regards to the director’s obligations to refrain from conflicts of interests have since been observed and established. A good example is the case of Aberdeen Railway Company vs Blaikie where it was observed that a corporate body can only act by agents, and it is the duty of those particular agents to act in such a manner that they enhance the corporate body’s interests whose business they are conducting. It is the duty of such agents to execute a fiduciary nature towards their principal. In addition, it is the rule of thumb that no individual who such duties are delegated to shall be authorised to enter into agreements where they have or can have their own personal interests or those of their associates conflicting with those he has been appointed and thus bound to protect. So this principle has to be strictly adhered to and thus no question should arise as to whether it is fair or not (Tomasic et al 345; LAC Lawyers 25; CCH Asia Pte Ltd110-112). A similar case is observed in the High Court of Australia in AM Spicer and Son Pty ltd vs Spicer, Starke J where it was stated that a company’s directors have the duty to execute a fiduciary nature towards their principal. And it is rule of thumb that in the dearth of any provision to the contrary, that no individual having such duties carry to out should be authorised to enter into agreements in which he can have or has personal interests or that of his or her associates that might possibly conflict or are conflicting with those that he is obligated and bound to protect courtesy of his or her appointment (Tomasic et al 345). Section 191 (2) of the Corporate Act deviates from section 191 (1) of the Corporate Act as reflected above. Section 191 (2) states that a director need not give notice of interest as required by subsection (1) if the interest arises due to the fact that the director is a member of the body corporate and is in the same level with other regular members of the company; is attributed to the director’s remuneration in his her capacity as the company’s director; is linked to a contract proposed by the company that is subject to endorsement by the members and will not impose on the company any obligation if it is not endorsed by the members; is related to a contract undertaken to potentially insure or to insure a director against any form of liability the director might incur during his tenure as the company’s director. Incidentally, the director need not give notice of interest when the company is a proprietary one and other directors are aware of the degree and nature of the interest and its link to the company’s affairs (Australian Institute of Company Directors 23; Harris et al). Duty to avoid insolvent trading The Corporations Act imposes liability on company directors in given situations where they let the company to incur debts when either the debt will lead to the company being insolvent or when the company is already insolvent. This is referred to as insolvent trading. In situations where the debt was incurred prior to 23rd June 1993, the appropriate provision is section 592 of the Corporate Act. Debts incurred subsequent to that date are governed by a different regime which encompasses sections 588G and 588H of the Corporate Act. Whereas several insolvent cases continue to be governed by section 592, there are significant areas where sections 592 and 588G of the Act conflict (Du Plessis et al 251; Parry et al 37; Campbell 51; Grantham and Rickett 135-137). The scope of Section 588G of the Corporate Act (i) Prerequisites Sections 592 (1), 588G (1) and (2) state that directors breach the section if they fail to stop the company from incurring debts while: they were the company’s director; the company incurring of the debt made it insolvent or the company was already insolvent; the director knew these grounds or a reasonable director in a similar position in a company in the same situation as such a company would know (Cassidy 263). Contrary to section 592 (1), this section does not expand liability to parties involved in the company’s management who are not directors. Further, section 558G is distinct from section 592 (1) in the sense that it imposes a constructive duty on directors to stop the company from incurring debts. This duty does not apply to directors selectively; rather, it applies to all directors of corporate bodies irrespective of their physical location registered in Australia (Cassidy 263). (ii) Incurring Debt Incurring debt is another prerequisite to this particular legislation. Where a debt is incurred it is significant to the legislation because either the debt made the company insolvent or the company was already insolvent by the time the debt was incurred. In establishing the period the date was incurred, the provisions on the deemed debt assist a great deal. Section 588G (1A) of the Corporate Act not only outlines certain deeds by the company to constitute a debt, it also outlines the period when the debt was incurred. For instance, the section indicates that a reduction in share capital is deemed as a debt and it takes place when the reduction becomes effective. Correspondingly, section 588F (1) states that debt is incurred by a company when it withholds an amount which it is liable to pay subject to the legislation outlined in section 588F (2) (Cassidy 265). To fully comprehend when other regular debts are incurred, it is imperative go through a few court cases addressing the same. In Chartered Bank of Australia Ltd vs Antico and Corporation Australia Pty Ltd vs Atkins, it was observed that a debt is incurred by a company, when on its own discretion it omits or does something which as a matter of commercial reality and essence, and makes it liable for debt which otherwise would not have been liable. For instance, in Commissioner of State Taxation vs Pollock; Shepherd vs ANZ Banking Group Ltd; and Hawcroft General Trading Co Ltd vs Edgar it is was observed that whereas as the matter has not been determined in a definite and absolute manner, a debt may still be incurred regardless of whether the it is contingent and amount in question is unclear (Cassidy 265). (iii) Objective Test Directors do not breach section 588G simply based on the fact that the company is insolvent. Section 588G (1) (c) states that there has to be a concrete basis to trigger suspicion that the company is insolvent when the debt is being incurred. Additionally, section 588G (2) states that the director has to be aware of the basis of suspicion. Section 588G supports the applicable test objectivity through the direct introduction of a reasonable director test. In Metropolitan Fire Systems Pty Ltd vs Miller, this amend clarifies that the directors will be judged based on the involvement and diligence outlined within the Corporations Act as opposed to the actual knowledge possessed by the director (Cassidy 265-266; Mugambwa et al 338). In Cf Sheahan Vs Verco & Hodge, the insertion in section 588G (2) of the phrase “in a similar position in the company’s situation” guarantees however that the particular situation of the company and the director’s specific position will remain relevant in establishing what is reasonable. In Rema Industries and Services Pty Ltd vs Coad, the language applied in section 588G clarifies that the director actually need not be implicated in incurring debt before triggering section 588G (Moens 126). In Elliot vs ASIC, it is failure of the director to prevent the body corporate from incurring debt that is the root for drawing liability. This is not to suggest that it has to be established that the director did not take any effective necessary measures that would have averted the debts from being incurred (Campbell 52). Nor must it be ascertained that the director contravened a particular duty, that is, under sections 180-183, by not preventing the company from incurring debt. In James vs Andrew; Elliot vs ASIC and Plymin vs ASIC, it is observed that it is sufficient that the director did not prevent the debt from being incurred while the body corporate was insolvent (Anderson 58). Conclusion Duties designated to directors in Australia are aimed at enhancing good governance to enable the directors to act on the best interest of the company. This is evident through the provisions highlighted above to ensure that any director appointed by the company will always put the interests of the company first while executing their duties in this capacity. It is therefore imperative that prospective company directors fully comprehend the provisions that govern their respective appointments as well as the execution of duties. Works Cited Adams, Michael. Essential Corporate Law. New South Wales, Routledge. 2002 http://books.google.co.ke/books?id=yFtQBPelkx8C&lpg=PP1&dq=Essential%20Corporate%20Law&pg=PA1#v=onepage&q&f=false Anderson, Helen, Directors' Personal Liability for Corporate Fault. The Netherlands. 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Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Cherry Street Burlington. Ashgate Publishing, Ltd. 2008. http://books.google.co.ke/books?id=vdI_ERXQiiIC&lpg=PP1&dq=Statutory%20priorities%20in%20corporate%20insolvency%20law%3A%20an%20analysis%20of%20preferred%20creditor%20status.&pg=PA2#v=onepage&q&f=false Read More