Directors Duty According to the Corporations Act - Research Paper Example

CORPORATE LAW AND PRACTICE NAME: Grade Course: Tutor’s Name: 23, September, 2009 Introduction Directors and officers of a company govern the corporation on behalf of the share holders. The directors’ duties however, are owed to the company and not to the share holders. Directors sometimes go against the rules by their actions hence breach of duty. In some cases the directors act within the law even though their actions may seem to be outside the law requirements. This paper aims to describe the directors duties hence determine if the directors of the company (Battman) breached their duties. There is also a case where the company’s secretary, signed a business contract without the company’s directors’ knowledge and authority. The position of the company against a creditor who signed a contract through the secretary will also be discussed. The company being referred to in this case is Battman Company Limited and is given in a separate paper as a case study. The directors’ and officers of a company’s duties and responsibilities are given in the Australian Corporations Act 2001 under section 180-185. Under part 2D, the general powers of a director are described. Any director or officer who goes against these rules is liable to civil and criminal penalties depending on the breach of duty. According to the presented case of Battman Company Ltd, the three directors (Jones, Brown and Right) have only breached one out of all the duties of company directors. This will be clarified by describing the directors’ duty according to the Corporations Act and analyzing situations where the directors may be suspected of breach of duty. Directors’ Duties Owed to Battman According the Corporations Act section 180, directors should carry out their duties with care and diligence. The directors and officers should use their powers and perform their duties with diligence and care the same way a director in their position under the same circumstances would do and the same way a director or an officer occupying that office with the same responsibilities would do. From Battman Company Ltd’s case, it is clear that the directors performed their duties with diligence and care. This however requires proof if in any case a complainant would not be convinced. The directors exercised their powers correctly, for example, Brown chose to delegate his duties to the other two directors, which is allowed according to section 198D, the board was informed of the conditions of entering into a joint venture with Green Limited which is also according to the law and the other two directors made decisions about company operations properly. One officer however may have acted against this rule. Acting with diligence and care means considering what may cause detriment to the company and considering specified roles to an officer. The secretary of the company acted against this rule by signing the contract with Sharp without the director’s knowledge and permission1. Still under section 180, the business judgment rule requires directors to make judgments if they believe such judgments are for the benefit of the company, if the judgments are in good faith and for a right purpose; if the directors consult and reasonably believe it is appropriate and if the directors or any director has no personal interest in the subject matter of the judgment2. The directors have a duty to ensure that judgments are made according to the stated conditions. In Battman Company, there are no breaches of this duty. Brown negotiated a contract on behalf of the company and was forced to form another company due to the circumstances under which Green Ltd wanted the joint venture to be formed. Directors should look for advice from wherever possible in order to make decisions for the company’s operations. There is no area under the Corporations Act where it is indicated that directors should not make decisions for the company’s operations. There are only breaches of duties when such actions lead to detriment of the corporation. Brown acted in good faith and for the right purpose, there are no indications that the director wanted this contract for personal gain and according to the information provided, the directors made the decision to form a joint venture with Green Ltd through Brown for the company’s best interest. The judgment made to form another company was also done after the board’s approval which is also according to the law3. Under section 182, a corporation’s director or officer should not use his or her position in the company for personal gains, to gain advantage for someone else or cause the corporation any damage. There is no evidence of Battman’s directors’ improper use of position to cause damage to the company. The only improper use of position in the company’s case is with the secretary. The secretary did sign a contract with a creditor without permission exercising powers that are not his or hers. The secretary can be considered guilty if the signing of the contract is found to be a cause of the company’s damages. Section 183 of the Corporations Act requires proper use of information. Improper use of information in this case means the use of acquired information about the company, its financial status, opportunities and other important information due to ones position as a director, employee or officer of a corporation, to cause harm to the company or for personal and other parties’ gains. From Battman Company’s case, there are no indications of improper use of information indicating no breach of the above specified duty4. Directors or officers of a corporation commit an offense if they use their positions dishonestly to cause the corporation any damage, to indirectly and directly gain from the position or to directly or indirectly make someone else gain either intentionally or unintentionally. They are also criminally liable if they recklessly use their positions without much consideration to the consequences of their reckless action to the company. If the reckless use of position leads to personal or someone else’s gains or company’s damage, the director, officer or employee is criminally liable. From Battman Company’s case, it is evident that there is improper use of position by the directors. Both recklessness and dishonesty have not been identified. Battman Company’s secretary is however criminally liable for reckless use of position without considering the consequences of the actions to the company. Based on the above descriptions of the general duties of directors and officers of a corporation according to the corporation Act, Battman Company’s directors have not breached any general duty5 & 6. Directors should exercise their powers and perform their duties with diligence and care. It is their duty to exercise their powers. The directors of a corporation have the power to delegate their duties to other directors, a committee of directors, the company’s employee or any other person. This is according to section 198D of the Corporations Act. There is no problem with Brown’s delegation of duties to the other two directors. Brown however is responsible for the delegation of duties unless it is determined that he is not according to section 190 of the Corporations Act7&8. Under section 588G, a person is personally liable to the debts of the company if the debts are incurred when the person is the company’s director, when the company becomes insolvent due to the debts incurred or when the company is insolvent when it incurs the debts. The person is also personally liable if he or she is aware of the reasonable suspecting grounds that the company is solvent at the time when the debt is incurred9. Battman Company Ltd has not become insolvent yet and according to the information provided, it incurred losses of $ 100 000 under the directorship of Jones, Browns and Right. The company has had bad operations leading to poor performance in the mid 2008 after Brown’s delegation of duties to Right and Jones. According to section 588G, the directors are all personally liable to the debts incurred by Battman. Under the same section, the directors have a duty to prevent a company from becoming insolvent, incurring losses and should have the interest of the company in their operations. It is only this duty that the directors have breached10. Under section 198D, directors are allowed to delegate duties. A director is still responsible for the actions of the delegate unless otherwise stated by the law. In Battman’s case, Brown is still responsible for the actions of Jones and Right that have led to the company incurring debts. He is therefore still personally liable to the debts incurred by the company considering section 588 G as indicated above11. According to section 190 of the Corporations Act, Brown may not be responsible only if he believed that Jones and Right would exercise the powers according to duties imposed on directors by the company’s constitution and the Corporations Act and only if he believed that Jones and Bright were competent and reliable in relation to monitoring and managing the financial status of the company. Browns belief on reliability and competency has to be on good faith, should have reasonable grounds and should be based on proper inquiry (if necessary)12&13. The Secretary’s Actions Even though the secretary may be liable to certain criminal and civil penalties, the law provides for actions such as the one Battman Company’s secretary took. According to the principle law, the secretary of a company has professed authority to sign contracts connected with company administrative affairs. If the contract is connected with the company’s commercial affairs, then the secretary may be liable for the debts14. Signing the contract with sharp may be directorial but there are no indications showing that signing of the contract is related to administrative affairs of the secretary in the company. According to this law, the secretary was acting under his/her professed authority. A very good case example to such a case is the Guidford Ltd (Panorama Developments) vs Fidelis Furnishing Fabrics Ltd (1971) 15&16. According to this case, the company’s secretary (Fidelis Furnishing fabrics Ltd) illegally ordered hire cars on behalf of the company’s business. Illegal ordering of hire cars in this case meant without the consent of the directors. The secretary stated that the cars were for business purposes. The cars were delivered but when Panorama demanded to be paid for the cars, the company refused to pay arguing that no authority was given to the secretary to order the cars therefore it had no subsequent liability17. The court ruled that the secretary was not liable for his own debt and that according to the principle law, the secretary professed authority to sign contracts connected to the directorial or administrative affairs18. The court also ruled that it was also according to the law that companies are liable for its agents’ acting either with direct or ostensible authority actions. The court ruled that Fidelis Furnishing fabrics Ltd’s secretary had acted within ostensible authority and therefore the company was liable for the debt incurred19. This case applies to Battman Company Ltd’s secretary. This secretary signed a contract which may be within the administrative affairs of the company or not. The secretary may therefore be personally liable for the debts that may be incurred due to his/ her actions or not depending on evidence. Another major problem with the secretary is the breach of duty which as noted earlier, is the use of position and powers recklessly and not acting with diligence and care20. Battman Ltd’s Legal Position against Sharp Sharp is a creditor who became Battman Company’s creditor by signing a contract through the company’s secretary. For the creditor to be paid, he/she has to determine if the secretary was authorized to sign the contract between him/her and the company21. If Battman Company Ltd needed a creditor and the person who negotiated the contract was authorized to act on the company’s behalf then Sharp has the right to demand his $500022. According to the information provided on Battman Company Ltd’s case and its supposed creditor, the secretary who signed the contract was not authorized to do so. Based on the above argument, Battman Company is not liable to pay Sharp’s debts. For the company to be liable, the creditor must show that the secretary has or had usual or ostensible authority. If Panorama Developments vs Fidelis Furnishing Fabrics Ltd (1971) case is to be referred to in Sharp’s case against Battman, then the secretary’s action must be determined if it was commercial or administrative. Administrative actions made by the secretary makes the company liable while commercial actions gives the company a remedy to the cause of action by Sharp. If according to Battman’s Company, the administrative sphere surrounding the secretary’s ostensible authority does not include signing of contracts with creditors, the secretary cannot act on commercial management without authorization. Identification of suitable creditors for the company and signing of such contracts are commercial management matters. Battman therefore may not be liable to Sharp’s debts. Examples of cases that relate to batman Company Ltd’s current case about signing of contracts without authority are the Holpitt v Swaab (1992) 6 ACSR 488 case and Club Flotilla v Isherwood (1987) 12 ACLR 387 case23. Conclusion Directors owe their duties to the company; any breach of duty makes the directors liable both under legal and civil obligations. This paper has presented a discussion about directors’ duties to Battman Company indicating possible areas where the directors could have breached duties. One of the aims of the above discussion was to find out whether there are any breaches of duties that the three directors of the company committed. This aim has been accomplished by describing the duties of the directors according to the Corporations Act 2001. Each duty has been described and a description of whether the directors breached their duties given. Only one duty has been breached which is under section 588 G. It is not indicated in Battman’s case that the company was or became insolvent but based on its inability to pay its supposed (until proved by the law) creditor, there may be reasonable grounds that the company may become insolvent. Insolvency occurs even if the company has the capability of making profits, so long as it is incapable of paying its debts on time according to terms of the contract. Conclusion can not be made however on its insolvency state due to the fact that the contract was not signed by one of the directors, but the company’s secretary. The directors’ duty to protect the company from incurring losses however has been breached. Another aim of the paper was to find out Battman Company’s legal position against Sharp. The discussion presented has revealed that Battman’s legal position is based on the fact that the secretary was not given any authority to sign a contract with the creditor. This however faces challenges from previous court cases for example the Panorama Developments vs Fidelis Furnishing Fabrics Ltd (1971) case. For Battman to win the case against Sharp, the company has to prove that signing of contracts with creditors on behalf of the company is not under the ostensible authority of the secretary. References Adams M and Barker D, 2005, Australian Essential Corporate Law 2/e, 2nd Ed, London, UK: Routledge. Austin R P, 2002, The Company Secretary: Then and Now, Retrieved on 22, September, 2009 from: http://www.lawlink.nsw.gov.au/lawlink/supreme_court/ll_sc.nsf/pages/sco_speech_austin_191102. Corporations Act 2001, Retrieved on 22nd, September, 2009 from: http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/CA1F0F9868473141CA256FB9002CA4B2/$file/Corps2001Vol1WD02.pdf James J, 2003, Company law, 4th Ed, Abingdon, Oxon: Routledge Cavendish. Tomasic R, Bottomley, S, and McQueen R, 2002, Corporations law in Australia, 2nd Ed, New South Wales, Federation Press. Read More