The Duties of Company Directors Detailed in Corporations Act 2001 - Essay Example

The Duties of Company Directors Detailed in Corporations Act 2001 Submitted by [Client’s Name] Submitted to [Professor’s Name] [Subject] Directors or top managers hold special positions in their companies. Typically, directors were given significant degrees of autonomy and independence in order to carry on their duties, particularly the ability to dispose people and resources to areas they believe would help the organization achieve its goals and potentials (Ramsay 1997; O’Hart 1995). Because of this immense power that they hold within their organizations, they are in vulnerable positions for corruption and fraudulent activities (Ramsay 1997). In the light of the recent financial scandals around the world involving top management and company directors, the general public as well as the policy-makers became more than interested to set legal boundaries on the functions and responsibilities of company directors and top managers. Consequently, they seek to impose heavy sanctions on company directors misusing their powers and autonomies to achieve personal gains. With the legislation of the Corporations Act 2001, the definition of the responsibilities of company directors, the scope of these responsibilities and the legal sanctions they would face in case they fail to conform to the statute has become clearer. The Corporation Act 2001 outlines, defines, and elaborates the common laws with respect to the duties of company directors to their respective organizations. Company directors and top officers are required by this law to exercise their power and perform their duties with care and diligence (s180). Negligence of the said responsibility can be measured by (a) an objective standard of care and by (b) the standard of skills held by the director. The court shall decide as to which standard care of diligence the company directors must follow, taking into consideration the state the company is in and the associated responsibility and capability of company directors. The skills of the directors as required by the company he is in can be measured objectively using objective criteria. If the court finds out that company directors fail short in performing their required functions, resulting in a detrimental result for the firm he is working, then company directors can be subjected to the necessary legal steps as per s588G (RCS 2009). Generally speaking, this legislation demands that company directors must: (a) make the good judgment relevant to their organizations in good faith and for the proper purpose (s181); (b) avoid making decisions with the thought of gaining any personal material advantage (s182); (c) equip and inform themselves about the relevant issues involved in the decisions that are to be made to the extent they deem appropriate (s183); and (d) to be rational and reasonable in their belief that their judgment is for the best interest of the company (s183) (LSC 2002). Section 180 introduces the standards required of a ‘reasonable’ person. A reasonable person in this context is defined as the person who, under normal circumstances, performs his duties and obligations with the best of his abilities acting in good faith on behalf of the company. Putting company directors under an obligation that requires them to act and perform their duty in good faith safeguards the interests of the stakeholders involved. Even though the company is a separate entity from its shareholders provided that the director is running the company, the director must be able to fulfill his or her duty in fulfillment of the best interest of the firm’s shareholders. As was held in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, the interest of the company and the interest of its shareholders intersect as long as the company is solvent. Company directors are bound to fulfill their duties required by the company which implies that they are bound to their company – not to the company’s shareholders, not to the company’s creditors, but to the company itself (s182). This means that directors must not use their positions to gain personal material advantage by jeopardizing the status of the company in the process. Acting in good faith generally includes equal treatment of shareholders, avoidance of any conflicts of interest, disclosures of any conflicts of interest, and non-acceptance of any forms of benefits from third parties (OUP n.d.). Previous corporate scandals involving indecent practices of company directors show that personal gain and greed are among the top reasons why corporate directors engage in fraudulent activities (Ramsay & Hoad 1997). Other reasons cited involve pleasing external and internal parties apart from the company itself. By instituting a rule that would restrict the performance of duty of company directors within the confines of the company, and penalizing any breach of this duty, ensures that company directors focus their skills, talents, and attention to the growth and welfare of the company. Majority of fraudulent activities company directors involve with include misuse of information to gain personal advantages, deliberately spreading internal information to external stakeholders for them to gain financial advantage, and the use of the sensitive information to sway the behavior or perception of the general public about the firm (Ramsay & Hoad 1997). Company directors have access to a lot of information about the company. Typically, the data and information are used by them to move the company towards a certain direction. For example, information about the spending behaviors of the consumers, the personal and financial information of the consumers and clients, the financial positions of the firm, and the management plans involving sensitive information are very accessible to company directors. If for some reason other than the welfare of the firm, the director uses these data and information, the company as well as its shareholders are placed in risky positions. Placing a restriction on the misuse and unauthorized distribution of sensitive information about the company safeguards the interest of the company and its shareholders. With the inclusion of s183 in the Corporations Act 2001, important and sensitive information of the company are protected from leaking out. It is important to note that s183 does not only prohibit company directors from disclosing sensitive information about the firm but everyone who has access to these data and information. Secretaries, managers, and other employees who have access to these data and information are also restricted by this provision to divulge this information without proper authorizations. Section 191 demands that company directors must frankly disclose any information within their knowledge to the shareholders to allow shareholders to make proper judgment based on the information they provide. Corporations Act 2001 gives rise to civil obligations and criminal offense to breach of any provisions included in the Act. If the court determines that a certain case occurred that requires provisions for a civil penalty, the court may make a declaration on the existence of a civil obligation and may order the person to pay the Commonwealth a penalty, called pecuniary penalty, of up to $200,000 detailed in s1317E. In cases where the offense results to a detriment in the company’s financial performance or economic growth, the offender may be required by the court to compensate the company for any losses incurred as a result for his actions as directed in s9.4B. The court may also disqualify the offender from managing the company for a certain period of time the court may deem appropriate as directed by s206C (LSC 2002). If the court deems that the director (or other officers) made deliberate mistakes or any recklessness or dishonesty because they fail to exercise their functions to the best of their abilities in the best interest of the company, the court may pursue a criminal offense to the offender. Section 184 outlines the requirements for a criminal offense to occur involving dishonesty and misuse of the position or information in and about the company, respectively. However, there are circumstances where the company directors, even acting in the best of their abilities, incur faults that result to major losses of the company. Often times, decisions are made, or need to be made, in the absence of strong and valid proofs like increasing the volume of production to meet the expected demands, incurring debts to increase the company’s capitalization, and the likes which do not produce the best or expected results. Section 180(2), 588H, and s189 of the act are but some of the defenses that company directors can site in order to defend themselves. Section 180(2) protects directors from civil and criminal liabilities if the decision they made turned out bad provided that the decision was made in good faith and were done in an informed and rational manner with the best of their abilities. For insolvent trading, s588H allows four defenses which are: (a) the director had reasonable grounds to believe that the company is not insolvent at the time of trading, (b) the director can provide reasonable ground for believing any information provided by competent persons that the company was solvent, (c) the director did not take part of the management for personal reasons; and (d) the director took all necessary measures for the company not to incur any debts. Section 189 protects directors from civil and criminal liabilities incurred after acting on the information provided by external and internal experts as long as they reasonably believed that this information in important for the business. References Commonwealth Consolidated Acts. (n.d). Corporations Act 2001. Retrieved Online. http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ August 26, 2009 Ramsay, I. (1997). Corporate Governance and the Duties of Company Directors. The Center for Corporate Law and Securities Regulation. Ramsay, I & Hoad, R, (1997). “Disclosure of Corporate Governance Practices by Australian Companies”. Company and Securities Law Journal 15; 454. Rostron Carlyle Solicitors. (2009). Directors Duties under Corporations Act 2001. Retrieved Online http://www.rostroncarlyle.com/legalarticles/directors-duties-in-the-corporations-act-2001.html on August 26, 2009 Legal Service Commission of South Australia. (2002). General Duties of Directors – Corporate Act 2001. Retrieved online http://www.lawhandbook.sa.gov.au/ch04s01s03s02.php on August 26, 2009 O Hart, (1995). “Corporate Governance: Some Theory and Implications”. Economic Journal. 105; 678 Oxford University Press. (n.d.). Duties of Company Directors. Chapter 11. Retrieved online http://www.oup.com.au/orc/extra_pages/higher_education/chew_9780195561050/test_your_knowledge_sample_answers/chapter_11_duties_of_company_directors on August 26, 2009 Read More