Analysis of the Investment Company Battman Ltd - Case Study Example

TABLE OF CONTENTS ISSUES 2 RULE OF LAW 3 Powers of delegation of a director, under the Corporations Act 2001 3 Extent of care and diligence in director’s duty 4 Duty to protect the best interests of the company 5 Company secretary’s empowerment to enter into contracts 5 APPLICATION 6 Whether Brown is liable for a breach of duty of care 6 Whether Brown is empowered to delegate powers of financial management 7 Whether the company secretary can enter into contracts 9 CONCLUSION 11 Company Law Assignment The investment company Battman Ltd, represented by its directors Brown, Jones and Right; chiefly engages in real estate investment. Brown approached Green Ltd, on behalf of Battman, in 2006. The Green Ltd agreed to deal only with Brown. The latter obtained his board’s consent and set up a new company Sun Shine Pty Ltd, which acquired land, in the vicinity of Brisbane. In a board meeting, Brown expressed his inability to actively participate in the management of Battman. He delegated his financial monitoring role to Jones and Right. Recession resulted in the deterioration of Battman’s business. In order to improve the company’s financial position, Jones and Right invested in the foreign exchange market and suffered a loss of $ 100, 000. In addition, $5,000 was demanded by a creditor from Jones, on account of a contract; unauthorisedly entered into by Popper, the company secretary. ISSUES The issues to be considered in this problem are; whether Brown is liable for breach of duty of care, under the provisions of the Corporations Act 2001; on account of the losses caused to the company, by the directors to whom he had delegated his powers. It is also to be determined whether Battman Ltd has to redress the damages claimed by Sharp, consequent to the agreement entered into by the company secretary Poper. Whether Poper had the authority to enter into commercial contracts on behalf of the company. RULE OF LAW Powers of delegation of a director, under the Corporations Act 2001 The Corporations Act 2001 states that a director who delegates power to another person, in accordance with the provision of the Statute; will be liable for the exercise of such delegated power by that person1. Moreover, it will be interpreted as if that very director had exercised that power, and not the delegate2. All the same, directors are absolved from liability, if they had assumed on reasonable grounds that the delegate would employ the delegated authority, in accordance with the duties of directors, as provided for in the Corporations Act 2001 or the constitution of the company. Moreover, the director’s presumption should have been in good faith, subsequent to a thorough inquiry into the suitability of the delegate, and it had been reasonably ascertained that the delegate had the necessary reliability and competence, in respect of the delegated authority3. The court held in Daniels v Anderson that a director would be liable, if he had relied on others and thereby failed to notice mismanagement, in the affairs of the company. A director was expected to take reasonable preventive measures, if there were any moves afoot to indulge in highly risky investments4. Extent of care and diligence in director’s duty The Corporations Act 2001, further states that the directors and officers of a company have to discharge their duties with due care and diligence. This should be in accordance with what a reasonable person, placed under similar circumstances would have done. The courts take into account the degree of care and diligence that is to be expected from the company’s directors and officers. In addition, the courts evaluate the position of the directors and their responsibilities, in order to set the level of care and diligence that should have been adopted by the directors5. In the Credit Lyonnais case6; Chancellor Allen ruled that it was incumbent upon the directors of a company, which was anticipating insolvency, to protect the interests of the creditors. He further, stated that the duty of such directors was not restricted to only safeguarding the interests of the shareholders7. With the decision in the Panorama Developments case, recognition was granted to the company secretary’s changing responsibilities. It has been made explicit that the company secretary’s power is restricted to administrative aspects. Specifically, the company secretary has no power to take decisions regarding the commercial management of the company. This was substantiated by the decisions in the Club Flotilla8 and Holpitt9 cases10. The executive directors are expected to possess certain skills. Their position and the scope of their operations determine these skills. Whether a breach of a statutory duty, has been committed by a director is decided on the basis of two elements; namely, the standard care of duty and the standard skill expected from that person11. Duty to protect the best interests of the company The directors or officers of a company are required to act in the best interests of the company. They are required to exercise their powers, in a manner that is beneficial to the company and in good faith. These factors should always prevail, while officers and directors discharge their duties12. In Cadwallader v Bajco13 the court ruled that a company’s director has certain fiduciary powers. The improper exercise of such power by directors causes them to be in breach of duty to the company, and not to any interested entity or individual shareholders. This decision was appealed against, but the court held that it was justified to objectively evaluate the situation, in order to establish the motivation behind the exercise of fiduciary power14. Company secretary’s empowerment to enter into contracts The authority inherent in a company secretary, in accordance with the statute, is provided by the Corporations Act 2001. This Act states that an individual is justified in assuming that a person is a company secretary or director; provided that person had been appointed, as per the extant laws and procedures, and has the authority to discharge the functions that are usually performed by a company secretary or director of similar companies15. APPLICATION Whether Brown is liable for a breach of duty of care Company directors in Australia have to discharge a number of duties that are overlapping in nature. Moreover, they are required to eschew situations entailing a conflict of interest; exercise impartial discretion and due care, and employ the powers bestowed upon them by the company for the latter’s benefit. The directors’ action should be in good faith and for realising some appropriate objective.16 The duties enjoined upon directors are similar to those specified by the statute. The abuse of position and information, by a director is disallowed by the Corporations Law. Furthermore, directors of public companies are prohibited from voting on or attending discussion on matters that affect their individual material prospects. The directors of proprietary companies are required to intimate their counterparts on the board, regarding any conflict of interest. An intricate statutory system is in vogue in Australia, which precludes related party transactions.17 The duty of care enjoined by the case law is reinforced by need to exercise diligence and care, by the statute. In addition, there is a statutory duty to act honestly, which has been construed as the legislative enactment of the requirement to act in good faith. Furthermore, there are several duties that directors have to uphold, and some instances are the duties relating to insolvent trading and corporate accounts. Thus, there are a significant number of duties that apply to directors; however, amongst these, the duty of care has proved to be extremely controversial. It has embroiled academics, courts, the legislature, and lawyers and directors18. Whether Brown is empowered to delegate powers of financial management Brown had delegated his powers relating to the financial management of the company to his two fellow directors. The company, under their management, had floundered badly, on account of the economic recession. At this critical juncture, these directors had forayed into the extremely volatile foreign exchange market. This constituted a very dangerous investment, and Brown with his vast financial acumen should have prevented this unwise move. Therefore, he is liable for the loss arising from this unwise investment. As per the ruling in Daniels v Anderson, even after the delegation of power, a director has to exercise due care towards the company Managerial functions in corporations are generally vested with the board of directors. The board is at liberty to delegate the powers relating to management, in the manner that it deems to be most appropriate. With increasing size of corporations, members of the board of directors reduce their managerial functions and assume a controlling role19. The emphasis of case law is that a minimum of management duties have to be discharged by the directors of a company. Consequently, no corporation can distribute management functions in such a way that the directors are rendered bereft of all these duties. Thus, directors can no longer remain passive and unaccountable Therefore, directors have to bear some specific responsibility for the conduct of the company’s business20. This requirement is independent of the nature and size of the corporation and the experience, skill and knowledge possessed by the director. The directors of an insolvent firm are under a fiduciary duty to accord greater importance to the rights of creditors, in comparison to that of the shareholders. This holds good in several common law jurisdictions, such as Australia and the United Kingdom21. Gradually, it has come to be accepted that a fiduciary duty rests upon the directors of a company that is in danger of becoming insolvent; whereby, they have to envisage the interests of the creditors, in addition to that of the shareholders22. The manner in which power is exercised by an individual director and the nature of such power are examined by the courts; which take into cognisance the facts of the situation, as well as the circumstances under which it had been exercised. However, the intentions and motives of the directors are in not to be ignored in this endeavour. Most importantly, if one of the objectives of the exercise of power had been improper, then the entire exercise of power is deemed to be unacceptable. The significance of an improper purpose is to be ascertained from whether an impugned resolution would have been passed by the company’s board, in the absence of that improper purpose23. Whether the company secretary can enter into contracts The company secretary had entered into a commercial contract. However, she had not been expressly authorised to do so by the board of directors of the company. As a company secretary, her duties are restricted to the administrative areas of the company’s management. The company’s commercial areas are beyond her purview. Therefore, she had transgressed the powers bestowed upon her by the company. Consequently, the company is not bound to honour any contract obligation arising from the contract entered into by the company secretary. A company secretary is empowered to enter into contracts, on behalf of the company, relating to the administrative area of the company’s affairs. Thus, a company secretary can form contracts that relate to issues, such as purchasing vehicles and hiring people for the company. This was the court’s ruling in Donato v Legion Cabs.24 This decision was reaffirmed in Panorama Developments v Fidelis Furnishing.25 Irrespective of the size of a company, the company secretary is deemed to possess the necessary authority to act on behalf of the company. In one particular case, the High Court of Australia ruled that an impression had been created by a bank that its employee, who had been provided with its official seal, possessed greater authority in contact than what was actually bestowed upon that employee. This employee had gone beyond the ambit of the authority vested in her, by affixing her official seal to a contract of indemnity. The bank was held to be liable to the third party in that contract26. A company becomes liable to a third party on a contract, if its company secretary had been provided with apparent or tangible authority. Such authorisation can be either by word or deed. Consequently, a contract is rendered enforceable against a company whose secretary had not been expressly empowered to enter into such contracts, if the latter had acted in a manner that was in conformity with the ostensibly vested authority27. It can be deduced from the decision in the Panorama Developments case that a company secretary’s authority can be lesser than that which every company secretary enjoys. The authority of a company secretary is confined to administrative functions. However, it would be erroneous to assume that a company secretary has sufficient implied authority to make commercial contracts binding upon the company28. Extension of the company secretary’s powers to include commercial management requires specific authorisation. CONCLUSION Brown had failed to exercise due care and had failed to be conscientious in his duty towards the company, after delegating his duties to the other directors of the company; therefore, he cannot circumvent liablity for the loss caused by these directors to the company. He should have advised his fellow directors, even after delegating his powers; because of the recession. Furthermore, as an experienced financial adviser, he should have acted in a manner that would have protected the best interests of the company. If Brown had acted conscientiously, especially at this crucial juncture; the company would not have been placed in such dire straits. The directors Jones and Right indulged in highly speculative activity, when the markets were reeling under the impact of a recession. Directors have to ensure the best interests of the company at all times and especially during recession. The speculative acts of the directors had caused a $ 100,000 loss to Battman Ltd, which could have been avoided, if Jones and Right had been more circumspect in their behaviour. They should have exercised due care and diligence in the discharge of their functions. Thus, Jones and Right are also liable for the loss caused, as they had breached the statutory duty of care towards the company. The company secretary Popper, entered into a commercial contract with Sharp. As such, she was empowered, only to enter into administrative contracts, on behalf of Battman Ltd. She is in breach of the powers vested upon her by the company; because, she was not authorised to enter into commercial agreements, on behalf of Battman Ltd. Therefore, Battman Ltd is not liable for the unauthorised acts of Popper. BIBLIOGRAPHY 1. Articles/Books Bird, Joanna, and Hill, Jennifer, ‘Regulatory Rooms in Australian Corporate Law’ (1999) 25(3) Brooklyn Journal of International Law 555 Eow, Intan, ‘The Door to Reorganisation: Strategic Behaviour or Abuse of Voluntary Administration?’ (2006) 30(2) Melbourne University Law Review 325 Keay, Andrew and Zhang, Mao, ‘Incomplete Contracts, Contingent Fiduciaries and a Director's Duty to Creditors’ (2008) 32(1) Melbourne University Law Review 141 2. Case Law Cadwallader v Bajco (No 2) (2002) 127 NSWSC 41 ACSR 58 Club Flotilla v Isherwood (1987) 12 ACLR 387 Credit Lyonnais Bank Nederland, N V v Pathe Communications Corp (1991) WL 277613 Donato v Legion Cabs (1966) 2 NSWR 583 Holpitt v Swaab (1992) 6 ACSR 488 Panorama Developments v Fidelis Furnishing (1971) 2 QB 711 3. Legislation Corporations Act 2001 (Cth) Corporations Law (Austl) 4. Other Sources Austin, R P, The Company Secretary: Then and Now (2002) Chartered Secretaries Australia Ltd < http://www.lawlink.nsw.gov.au/lawlink/supreme_court/ll_sc.nsf/pages /sco_speech_austin_191102> at 20 September 2009 Hocken, Michael and Latimer, Paul, The ostensible authority of a company secretary – does size matter? (2006) School of Accountancy Working Paper 2006-003 at 20 September 2009 Read More