Law of Business Association - Math Problem Example

BUSINESS LAW ASSOCIATION By: Course: Instructor: University, City, State: Date: LAW OF BUSINESS ASSOCIATION Company Directors or officers are, most of time, in crucial position of trust within their companies. And because of this, there are always vast arrays of legal duties that will flow for holding that position. Directors acquire a lot of knowledge and power through their offices as long as they remain longer in that mentioned company. Due to this powerful position, it is easier than not, for their powers to be abused in one way or the other. Directors have been known, for example, to abuse their powers in office for their personal gain. This company abuse may include and not limited to: misappropriate use of company’s funds, bribes, and personal secret profits. What is less well known by the public, however, is the burden of duties and obligations put on directors by contracts and the Corporations Act laws. Directors who recklessly breach specific duties and obligations can be prosecuted in the court of law, be disqualified, pay compensation or even face severe criminal charges including being locked-up for up to five years depending on the offence committed. So for the purpose of accountability, strict corporate laws have been laid down in order to minimize the risk of wrongful (illegal) behavior by company’s Chief Executive Officers and Directors. These legal duties and obligations imposed on directors and officers by Corporation Act laws are usually created for the benefit of the company and not for their own (Directors) benefit. Directors Duties Companies are usually controlled and managed by directors and a number of officers, like the chief executive officer (CEO), the chief operating officer (COO), and others. These people are in charge of the company’s operations and they do not, in most cases, own the company. Directors and officers are known in some cases to be board members of different companies and this has been a mechanism for creating conflicts of interest. As far as fiduciary duties are concerned, officers and directors are supposed to act for the good of the company while serving on company’s board as per Part 2D.1 of the Corporations Act. It is very important for the Director to know and fully understand his/her duties, because ignorance will not minimize the penalty for breach. The directors’ duties include and not limited to: Duty to act honestly in the best interest of the company – s 181; Duty to act in good faith in the best interest of the company – s 181; Duty to act with care and diligence – s 180; Duty not to improperly use the position of a director to gain any personal benefits – s 182; Duty to avoid a conflict of interest or any other interest that you may have as a director – s 182; Duty to avoid the misuse of information and duty to keep informed – s 183. Therefore if any of the duties are contravened, as we have seen above, it can lead to civil and criminal charges, including imprisonment. Many directors have been known to fulfill or meet their duties to exercise due care and diligence if they: a. Act in good faith and honest for a proper purposes; b. Have no material personal interest as far as the company is concerned; c. They are well informed to the extent they reasonably believe to be appropriate; and d. Reasonably think that the decision is in the best interest of the company and not to themselves. In any company, directors should be especially vigilant in some areas to avoid contravening Corporations Act Laws: A. Duty to act honestly and in good faith to the best interest of the company Director’s fiduciary duties are usually regarded as different from other duties because some of these duties exist at common law by the Corporation Act. Section 181 of the Corporations Act has been drafted in a way to require company’s directors, like Smith and Jones in our case, to act “in good faith and in the best interest of the company (Retailer)” (see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285) and also for a proper purpose. But in our case, Smith seems he may not have done so. But in his (Smith) own mind, offering the tender to Myco Pty Ltd will benefit him and Retailer. So he assumes Retailer interests correspond with his own interests, and does not know that these interests are two different and separate entities all together (see Walker v Wimborne (1976) 137 CLR 1). Under Corporations Act s.184, he may have breached the statutory duties that are largely found in ss. 181-183; hence he will be liable for civil or criminal penalties under the law for the courts do not entertain excuses of ignorance (Sievers, 1997 and Campbell, 1997). B. Duty not to improperly use the position of a director to gain any personal benefits Even though directors have extensive powers, these powers are limited. And as part of their duties, they must exercise their limited powers for a proper purpose as contained in s. 182 of the Corporations Act. Any use of power that is not for the benefit of the company (Retailer) is considered as improper use of that unique power and hence a breach of director’s fiduciary duty under Corporations Act. Any director breaching s. 182 is more likely to be hit with a maximum civil penalty of up to A$1Million or disqualification (see Mills v. Mills (1938) 60 CLR 150). In our case, an exercise of power by Smith to secure some personal advantage as a director in Retailer and a shareholder in Myco, is deemed to be an improper purpose because it is not within the purpose of benefiting Retailer Ltd but to himself and his family if the Myco tender deal is successful (see Mills v. Mills (1938) 60 CLR 150, Blackwell v. Moray & Anor (1991) and ASIC v. Adler (2002)). But in the end, he will be liable for any financial benefit he received as a director of Retailer (see Regal (Hastings) Ltd v Gulliver (1967)). C. Avoiding conflicts of duty and interest. The matter of conflict of interest is not only a matter for directors (Smith) but also for other officers like Mr. Jones. Section 182 and 183 generally forbids the misuse of Director’s position just for the benefit of the director and for the disadvantage of the company (see Aberdeen Railway Co. v. Blaikie Bros (1854). Some sections like s. 191 to s. 195 of the Corporation Act details some important rules, that Directors (Mr. Smith included) are supposed to disclose or declare at a meeting of directors immediately after they become aware of the personal interest and is related to the affairs of the company. The disclosure may not be enough but is required to ensure that the honesty and integrity are thoroughly observed (Baxt, 1997). Smith may have violated s.181 because he did not tell the board he has some interest in the Myco tender as required under s.191(3) and may be prosecuted in the court of law for not declaring his interest. D. Duty to avoid the misuse of information Under s.182, directors and other officers are not allowed to improperly use confidential information acquired due to the position they hold in the company and that may cause detriment to the company (Retailer). Smith in our case, is not allowed to pass any secret information to his relatives (wife and in law) who are the directors of Myco, even if there is no effect on the side of the director, he/she will still be liable under the Corporate Act Laws (see Sitmar Transit Mixes pty Ltd v. Baryczka (1998), Gree v. Bestobel Industries (1982) and Thomas Marshall (Exports) Ltd v Guinle (1979) Ch 227 per Megarry VC. E. Duty not to abuse a corporate opportunity Directors by all means are not allowed to take an advantage of any business opportunity that might have been won by a company (see Chan v Zacharia (1984) 154 CLR 178). If there is some relation or any connection between the director’s (Smith’s) obligations and the opportunity, then it is more likely that the company’s opportunity has been misused unless if the company could not have use the opportunity itself (Regal (Hastings) Ltd v Gulliver (1967) 2 AC 134) in one or the other. As in the case of Smith, if Myco is finally chosen to supply fashionable clothing for Retailer despite of its financial problems, then Smith might have influence the decision in one way or the other for that tender opportunity for his personal benefits. F. Duties of care and diligence Directors or chief executive officers have a duty to be informed on the company’s actual financial affairs in which its solvency is also involved. The management and the financial report departments should make sure the directors are sufficiently informed about the affairs of the company as a whole. At Board meetings, directors should ask questions without any fear and in that way, they will seek clarification about any matter concerning the company. Directors have that right to question any information that is put before them so as to make sure that it is a representative of the company and not just a puppet of the company. For example, if a director received complaints that employees want their salaries be raised, it would be a violation of his duty of care and diligence if he does not fix that complaint (Cassidy, 1997). Other Directors in the Company The board of directors is usually responsible for giving out any financial benefits to any other related company as in the case of Retailer and Myco. If a director decides which company (Myco) qualifies for the contract, then the winner of the contract will be approved by the company through board meetings (see s. 208). If incase s. 209 is violated, the company can not be liable for an offense but directors may be accountable to a civil penalty (see s. 209). Jones seems to have violated ss. 180 and 181 of the Corporate Act because he did not alert or tell the rest of the directors that Myco Ltd was undergoing some financial difficulties and may have not qualify to fulfill the tender obligations. As we have seen above, it is clear that Jones never had any material interest of any sort as Smith did, except that he might be considered to have contravened s.180 of the Corporations Act because he did not disclosed any information about Smith involvement with Myco pty Ltd. Remedies As we have seen above, courts do not entertain excuses of ignorance when it comes to directors and responsibilities; it also sets standards and the kind of remedies to be given to the offended party. Section 50 is one of the ASIC powers that have recently received more attention in ASIC Act. This is where ASIC may seek a way, after investigation, to recover damages under the legislation as long as it is in the interest of the public. The reasons for intervention by ASIC are usually fraud, breach of duty committed on the company and negligence. ASIC may also step in to recover properties for individual cases. With company’s or person’s written consent, ASIC may sue or bring a proceeding in that person’s name against a director. Any directors’ duties relating to acting in good faith, acting for a proper purpose, avoiding conflict etc may lead to the following remedies: Fair compensation — very much the common law damages. An account of profits — this is where the company itself can bring a claim against a director. If the director has made some personal profit at some point, then he/she is supposed to pay back to the company regardless of any loss suffered. An injunction — this is where the director is stopped from continuing to breach fiduciary duties. A constructive trust — it states that any gain (profits) made from the breach can be kept for the benefit of the company. Rescission of contract — this is where the company is allowed to reverse a contract previously entered into. The court will issue a declaration of contravention under s.1317E if a director or any officer contravenes ss. 180-183 as required by 588G.The issuing of this declaration is very important for it allows ASIC to apply for a financial penalty order (s. 1317G) and apply for an order that the director be dismissed from managing any position of a company under s 206C. The court can also order: The director or an officer to pay damages to the company (s. 1317H). Property of the company to be given to a new appointed director (s. 1323). The Australian Parliament has tried to flex some of its laws not to be severe as imposing criminal law punishment on directors who do not qualify for company standards of conduct. Criminal Actions against Directors If it is found that directors of the mentioned (Retailer) company have acted criminally and believed to be dishonest, in which may harm the company because of their self personal advantage, ASIC may step in and launched prosecution. With the help of Australian Federal Police, ASIC can conduct criminal investigation in which tough procedures has to be followed when collecting evidence that will be use to determined as to whether a prosecution should go a head. But if it is a minor offense, the lower criminal courts will prosecute the case. On the other hand, if the case is more serious, then the matter will be handled with the Commonwealth Director of Public Prosecution. In conclusion, directors and chief executive officers should carefully study, understand and appreciate their duties and responsibilities that they are subject to as company bosses. Being a director of a company is not an easy task because there are several fiduciary duties that need to be adhered to. All the fiduciary duties of the directors and any officers as discussed above must be obliged to and if not, it renders these directors breached of their duties. Also, directors should always be vigilant in following the frequent changes of the Australian Laws as this may affect their directorship roles (Press Release, 1998). Being a director of a company is like someone who is enjoying riding on the back of a giant Tiger, but not certain on how he/she will get off that Tiger without tearing you off. References Arsalidou, D. 2003. “To Be Active or Inactive’’: Is this a “new” question for company directors?’ 8 Deakin Law Review 335. Baxt, R.1997. Escaping the Dilemma of Conflict — Is Resignation the Only Course?’ 15 Company and Securities Law Journal 326 (15). Campbell, R. 1997. "No Hiding Place for CEO's in a Crisis" 13(9) Company Director 10 Cassidy, J. 1997. ‘Has the Sleeping Director Finally Been Laid to Rest?’ 25 Australian Business Law Review 102. DeMott, D. 1992. ‘Directors’ Duty of Care and the Business Judgment Rule: American precedents and Australian choices, 4 Bond Law Review 133. Keay, A. 2001. ‘Director’s Duty to Take into Account the Interests of Company Creditors: When is it triggered?’ 25 Melbourne University Law Review 315. Langton, R. and Trotman, L. 1999. ‘Defining “the Best Interests of the Corporation”: Some Australian reform proposals’ 3 Flinders Journal of Law Reform 163. Law, L.1997. ‘Business Judgment Rule in Australia: A reappraisal since the AWA case’ 15 Company and Securities Law Journal 174. Mannolini, J. 1996. ‘Creditors’ Interests in the Corporate Contract: 6 A case for the reform’ Australian Journal of Corporate Law 14. Press Release, The Hon Peter Costello MP (Treasurer), 17 March 1998. "Business Law Reforms to Boost Jobs and Economic Development" (No. 028). Sealy, L. 1987. ‘Directors’Wider Responsibilities’ Modern Law Review 164. Sievers, A. S. 1997. "Directors' Duty of Care: What is the New Standard?" 15 Companies and Securities Law Journal 392 a. J. 2006. ‘Directors’ Fiduciary Duties’ 27 Australian Bar Review 192. Welsh, M. and Anderson, H. 2006. ‘Directors’ Personal Liability for Corporate Fault: An alternative model’ 26 Adelaide Law Review 299. Whincop, M. 1996. ‘An Economic Analysis of the Criminalisation and Content of Directors’ Duties’ 24 Australian Business Law Review 273. Read More