Corporations Act, Business and Corporations Law - Essay Example

Business and Corporations Law Student name: Student number: Tutor: Date: PART 1 The key central argument is whether Tanya and Boris should assume responsibility for Olga’s debt obligation if Olga defaults on the Eastpac Bank loan of $22,000. Normally, the law demands a guarantor to perform her obligations to the obligee when the capacity of the primary obligor to perform a duty is in doubt. Therefore, the guarantor is needed to pay the creditor because of the failure of the debtor to do so. In such circumstance, the law normally requires the “surety a right of subrogation,” which allows the guarantor to assume the responsibilities of the debtor and to assume the debtor’s contractual rights in recovery of the cost of making payments on behalf of the debtor. A contract law is basically a creation of the common law. A fundamental common law principle is the supposition that a contract should be a free and fair bargain between equal parties. While at common law the principle of sanctity of contract often prevails, and contracts are usually upheld even when there is evidence of unfairness, several defences are available to Tanya and Boris due to the nature of the contract and nature of their mental capacity1. Fortunately for Tanya and Boris, even though they signed the negotiable instrument as guarantors, they are allowed to affirm defences to the put the instrument in force. At common law, the contract would legally bind when the law can enforce it. There also has to be a concluded agreement between the parties to a contract, which is acceptance and offer. There has to be an intention that the contract be legally binding, and lastly, there has to be consideration or benefit of value for each party’s promise to perform the contract. Next, the terms of contract have to be certain, or clearly understood by each party. The parties also need to have legal capacity to enter into the contract2. Also, each party’s consent has to be genuine. Ultimately, to the degree that the purposes or objects of the contract are inconsistent with the law, the courts will be reluctant to enforce it. While any person is viewed as competent and therefore capable of binding himself to a contract they opt for, on condition that it the contract is legal, at common law, some exemptions to this rule exists in the event of mentally incompetent, minors, corporations, minors, and intoxicated persons. Indeed, the common law observes that a mentally incompetent person cannot establish own insanity in order to avoid an obligation that they had agreed to. Such a decision was demonstrated in the landmark ruling of Judge Pollock C.B. in the case of the Molton v. Camroux 3, where it was established that when the plaintiff (guarantor) lacks a capacity to contract and the defendant (debtor) was aware of it, then the plaintiff would not be liable for the defendant’s debts. A mentally ill person is, therefore, viewed to lack the capacity to make a legitimate “inter vivos disposition” of property. Apparently, the mental capacity of the guarantor so found to be mentally ill will not bound unless he had in fact been proved that he was not in capacity to contract and that the plaintiff was aware of it. This is demonstrated in the case of Horvath v Commonwealth Bank of Australia4. At common law, a genuine agreement and consent is needed for a contract to hold. Hence, an individual with a mental disorder cannot provide consent for making a contract. However, the mentally ill will be bound by the contract when they can demonstrate that at the time of contracting they did not understand what they were doing, and that the other individual was aware of their impaired mental conditions. In reality, this is what happened in the case scenario, Olga was aware that Tanya and Boris’s mental condition had deteriorated due to age. It is also argued that since Tanya and Boris’s mental condition had deteriorated, they did not understand the contents of the contract to make a genuine agreement and consent required for a contract to be valid. On the other hand, Olga was aware of their mental deterioration. On the other hand, individuals can enter into contracts in spite of the fact they have a mental impairment. However, they may in some cases be susceptible to being bound by contracts they cannot sufficiently comprehend. In such instances, the issue of capacity to make the contract emerges once the contract is in effect. Tanya and Boris’s may find some defences in the rule that a contract is invalid and not enforceable on condition that there is a genuine consent to making it. In the present case, Olga went Tanya and Boris and invited them to help her borrow money from Eastpac Bank to buy the car. Apparently, Tanya and Boris are close to Olga. However, Tanya and Boris are old and weak and depend on Olga emotional support. This shows that Olga was aware of Tanya and Boris’s mental retardation. It also means that Tanya and Boris were vulnerable to Olga. In fact, they became readily eager to assist Olga to guarantee her loan the Bank. They sign the guarantee document at the Eastpac Bank. The capacity to give consent should entail adequate understanding of the fine details or nature of the contract. The issues of uncertain terms of contract and misrepresentation also provide Tanya and Boris with defences. Tanya and Boris may as well rely on the Non est factum defence that is available to individuals who have been misled into signing a contract who details are basically different from what they planned to sign5. Under this defence, Boris and Tanya may argue that they signed a document that is significantly different in character from what they had thought to have signed initially and that the contract was void for mistake. In the case of Avon Finance Co Ltd v Bridger6, it was demonstrated that the guarantor must know that the guarantee has secured the repayment of the creditor’s loan. Tanya and Boris can also argue that they entered into the guarantee was due to misrepresentation, and that it was significantly different from what they had initially thought they were signing and that there was negligence involved in part of the creditor (Eastpac Bank). In fact, the cases of Avon Finance Co Ltd v Bridger7and PT Ltd v Maradona Pty Ltd8 showed that the court was unwilling to enforce a contract where terms of the contract were unfair as there existed inequality of bargaining power , in the same way as Boris and Tanya. In the present case scenario, Boris and Tanya signed the guarantee document at the Eastpac Bank. On the other hand, Eastpac Bank failed to explain to them that Olga’s income as a flower courier was uncertain and therefore they may have to pay the amounts outstanding on the loan in the event that Olga defaulted. Conclusion Tanya and Boris are not liable to pay Olga’s bank loan because their mental capacity has degraded and Olga was aware of it. The issues of uncertain terms of contract and misrepresentation also provide Tanya and Boris with defences. Hence, there was no genuine agreement and consent needed for a contract to hold. PART 2 Directors’ obligations to exercise duty of care and diligence in performing their duties are fundamental to regulating the corporate governance. In this way, the balance between the desire to motivate them advance the company’s business and prosperity within Australia’s modern corporate governance and the desire make sure that the shareholders’ interests are sufficiently safeguarded by exercising of duty care is of weighty importance. During the last decade, a number of decisions have been made Australia where the courts have evaluated the sufficiency of directors in their decision-making processes9. Essentially, such cases have showed the readiness by the courts to find directors’ actions to be less liable. This essay agrees with the assumptions that legal obligations imposed on directors are not sufficiently arduous since the recent cases that involved violations of duty of care show demonstrate the Corporations Act is not sufficiently equipped to punish directors. The present day statutory provision of the director’s duty of care is in section 180 of the Corporations Act 2001 (Cth). In particular, section 182 of the Corporations Act 2001 prohibits a director from improper use of their position of leadership to gain personal advantage or to cause loss to the company. The duties, as outlined by Corporations Act 2001, are intended to see to it that directors are always acting in the interests of the corporation. However, the ‘corporation’ used in the context of Corporations Act 2001 appears to have been meant to imply ‘the shareholders in their entirety’10. As a matter of fact therefore, section 182 of the Corporations Act 2001 may not punish directors for their failures to owe duty of care to individual shareholders. While this seems odd, it is vital to remember that a ‘corporation’ is essentially a separate legal entity from its shareholders. In fact, as stated in the case of Brunninghausen v Glavanics11 by Handley JA, there are sufficient reasons for such a rule. If each of the shareholders is allowed to a personal right, the directors are likely to be vulnerable to a many actions. This also implies that directors are allowed to make decisions to company’s the best interests rather than in the best interests of particular shareholders. Such a provision however allows the directors a leeway to escape litigations for their wrong doing. This may include spending large amounts of the corporate funds with the view of attaining long-term profits, which however leads to bad financial implications when the profits are not achieved12. On the other hand, while tort, contract, and equity compel directors to perform their duties with care and diligence, there is an incongruity in the level in which the Corporate Act defines what should be viewed as ‘best interest’. To some extent, while such a duty of care is codified by Section 180 of the Corporations Act, the courts have appeared to be reluctant to impede it, even in situations where the directors make business decisions that end up grounding the company financially. In reality, Section 180 of the Corporations Act appears as designed specifically to protect the director’s decisions perceived to be in the company’s best interest. For instance, in the case of Re Smith & Fawcett Ltd13, the court held that in respect to the manner the directors have to perform their duties, they have to use their judgment ‘bona fide; in what they see rather than what the court perceives - is in the corporation’s interest, rather than for any collateral purpose’. If truth be told, the Australian courts seem to be more concerned with what should entail a director’s power and whether the directors themselves believed they are acting in the corporation’s interests. In that order, it is a defence to a violation of section 180(2) Corporations Act 2001, if directors are capable of showing that they reasonably believed the decision they made was in the best interest of the company. The duties under Corporations Act tend to be focused on the ‘interests of the company’. This requires the need to elucidate the degree to which the directors need to carry out activities in respect to ‘company’s best interest’ as well as take into consideration the stakeholders’ interest. This is specifically so since the director may fail in his duties in situations where consideration is provided to other factors rather than maximising profit. The Australia law therefore provides a leeway for the directors to evade punishment for carrying out activities that injure the shareholder. In fact, while section 181 of the Corporations Act 2001 is centred on the directors acting in the ‘company’s best interest’, some case laws elsewhere have showed that this may not imply that the directors should also take the stakeholders’ interests into account. In particular, the issue as to when a director should take into the stakeholders’ interests into consideration usually comes up when it comes to gratuitous payments. Indeed, contradicts case laws that holds the directors liable, such as the case of Hutton v West Cork Railway Co14. It is therefore conceivable that rather than hold the directors liable for their actions or inactions, Corporations Act 2001 asserts that a director must make entrepreneurial decisions. In fact, it appears that the basis of the Australian law is that the decisions the directors make are sometimes made under limited information, and it would therefore be unjust to hold the directors liable for breach of duty in spite of the situation. For instance, section 1318 of the Corporations Act 2001 (Cth) protects directors against the implications of a breach of duty. Section 1318 confers a discretionary power on courts to the effect that a civil proceeding against an individual whom the section is applicable to for negligence of duty breach of duty and breach of trust as it appears to the court, then the individual may be held liable. However, the individual may be excused when he acted honestly. Recently, Australian courts have tended to confirm the basis of s. 1318. In the case of Daniels v Anderson15, the court held that the section is intended to excuse directors from being held liable in circumstances it will be “oppressive and unjust” to fail to do so, in respect the director working in environments that involve risks when making decisions. In another case law of Edwards v Attorney General (NSW)16, the court was of the idea that the intention of the Corporations Act is to permit the economy to gain from advantages of entrepreneurial ventures that have limited liability as well as control the members’ rights. Still, it is argued that Corporations Act 2001 have to achieve a balance between permitting the directors to enjoy freedom in entrepreneurial decision-making and to hold aberrant directors liable for their actions or inactions. This means that the excesses provided for by section 1318 have to be appropriate under the circumstances to prevent the directors from escaping liability, as has been the case in the recent past. In fact, section 1318 has a number of disadvantages with section 1318 that deviate from being considered as a suitable alternative to a business judgment rule. First, is the case of uncertainty of outcome, where it is essentially discretionary. The second disadvantage is the “stigma factor,” which is the significant difference between avoidance of liability from associating business decisions made by director, and the discretionary power granted to the courts, which materialise when there is an evidence of breach of duty17. In some cases however, the court has denied relief to directors under section 1318 and established that the accused has to act honestly. For instance, in the case of Hall v Poolman18, the court demanded that the issue of ‘failing to act’ honestly has to be applied. In which case, in establishing whether a director has was honest in the decisions, the for the intention of the defence specified by sections 1317S (2)(B)(i) and 1318 of the Corporations Act, the issue of whether the director acted honestly should be considered. In a related case by ASIC v Adler19, the court also observed that that the defendant must demonstrate to have acted with honesty. Still, finding honestly is not sufficient, as directors may still act honestly yet in consistency with the interests of the shareholders. In fact, as learnt from the case of ASIC v Adler, the issue as to whether a director acted honestly or dishonestly is contingent on the circumstances: whether the director negligently performed duties, had some interests in the outcome of the decision and took advantage of tolerant creditors. At present, section 181 of the Corporations Act is highly flexible and provides the directors with lighter duty. This also means that the board of directors can easily adapt the duty to match their existing situations. While such as flexibility is critical due to the changing nature of companies in Australia (which currently has more than 1.4 million companies), it makes it easy for the directors to escape liabilities where they act against the interest of the shareholders20. The Australian Securities and Investments Commission (‘ASIC’) also enforce a breach of directors’ duties. In fact, the ASX Principles of Good Corporate Governance and Best Practice Recommendations (‘ASX Guidelines’) have adopted a better approach to put the directors into some liability. For instance, the ASX Guidelines principle 3 identifies the need for directors to give considerations to the legitimate stakeholders’ expectations. It further specifies that companies needed to have a code of conduct that guides their compliance with their duties to stakeholders21. To this extent, the Australian courts have interpreted the power of directors to manage the business broadly, by recognising them as the mind and soul of the enterprise. Such was demonstrated in a case of Imperial Hydropathic Hotel Company Blackpool v Hampson22, the court also held that the shareholders’ resolutions should not surpass the directors’ decisions so long as they have the power to manage and make a company’s decisions It was also demonstrated in the case of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd 23that directors can decide against the wishes of the majority shareholders’ wishes. This may imply that Corporate Act 2001 attempts to make the directors’ decisions uninfringeable. It is because of such immense power granted to directors in corporate management that calls for a law that imposes heavier duties of care on directors. Conclusions This legal obligations imposed on directors are not sufficiently arduous since the recent cases that involved violations of duty of care show demonstrate the Corporations Act is not sufficiently equipped to punish directors. The Australian courts seem to be more concerned with what should entail a director’s power and whether the directors themselves believed they are acting in the corporation’s interests. They have also failed to achieve a balance between permitting the directors to enjoy freedom in entrepreneurial decision-making and to hold aberrant directors liable for their actions or inactions. This may imply that Corporate Act 2001 attempts to make the directors’ decisions uninfringeable. It is because of such immense power granted to directors in corporate management that calls for a law that imposes heavier duties of care on directors. References Books, Articles and Journals Brocherie, B 2014, The Law Handbook: Your Practical Guide To The Law In New South Wales, Thomson Reuters, Sydney Byrne, M 2008, “Do directors need better statutory protection when acting on the advice of others?" Australian Journal of Corporate Law vol 21, 238-257 Dermansky, P 2008, Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)? viewed 3 April 2015, Farrar, J 2011, "Directors's Duty of Care: Issues of Classification, Solvency and Business Judgment and the Dangers of Legal Transplant," SAcL Journal, pp745-761 Golding, G 2012, "Tightening The Screws On Directors: Care, Delegation And Reliance," UNSW Law Journal , vol 35 n 1, pp.266-290 Latimer, P 2012, "Australian Business Law 2012," CCH Australia Limited, Sydney Tomasic, R, Bottomley, S & McQueen, R 2002, "Corporations Law in Australia," Federation Press, Sydney Wong, S 2009, "Forgiving a Director’s Breach of Duty: A review of recent decisions," viewed 3 April 2015, Case Laws ASIC V ADLER [2002] NSWSC 171 Avon Finance Co. Ltd v. Bridger [1985] 2 All ER 281 Brunninghausen v Glavanics (1999) 46 NSWLR 538 Edwards v Attorney General (NSW) [2004] NSWA 272 Hall v Poolman [2009] NSWCA 64 Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1 Horvath v Commonwealth Bank of Australia [1998] VSCA 51 Molton v. Camroux (1849) 4 Exch 17 Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1126 PT Ltd v Maradona Pty Ltd [1991] 25 NSWLR 643 Re Smith and Fawcett Ltd [1942] Ch 304 Read More