What Remedy May PC Seek against Arthur - Essay Example

Name: Word Count: Unit Title: LS351 Corporation Law Student Number: Unit Coordinator: Same Varayudej IINTRODUCTION For directors to carry out their duties well it is crucial for them to be fully aware of the various duties and responsibilities expected of all directors. A director owes a company a duty to act in the manner that he or she honestly believe to be acting in the best interest and with the purpose of benefiting the company1. Basically, the duties expected of the directors to a company are clearly stated in the general law and Corporations Act. The duty of the Board is to ensure protective and managerial defense between the company and its shareholders. This implies that the Board is given the powers by the company’s articles of association and statutory powers provided under the Corporations Act 2001 (Cth) as well as the general common law which have been introduced in the judicial guide2. In order to respond to the questions raised in the case of Arthur the former marketing director at Pink Cellular Ltd (PC), two major actions that Arthur involved in have been critically and legally analysed to determine the directors’ duties that Arthur breached. These include; (i) His taking up of a job as the managing director at Octopus Telecom Ltd (OT) in the following month even after signing the terms of employment contract yet he had agreed not to accept a job in a period of 2 years after his resignation from PC. (ii) Arthur’s immediate and successful setting up of a business joint venture between OT, the greatest competitor of PC and East China Telecom Ltd (ECT) - the location where he had been assigned by the PC board to investigate the market possibility of expanding the company’s products and services into and India. II HAS ARTHUR BREACHED HIS DUTIES, AS A FORMER DIRECTOR AT PC, UNDER THE GENERAL LAW AND THE CORPORATIONS ACT 2001 (CTH)? Arthur, who has been working as the marketing director of Pink Cellular Ltd (PC) since 2005, had under the terms of employment contract signed with the company, expressly agreed not to accept any employment. He also declared that he would not engage in activities that could be considered to be directly competitive with the products, services or projects of PC for a period of not less than 2 years from the date that he would have resigned from the company. However, on 23 January 2013, it can be noted that Arthur resigned from Pink Cellular Ltd and immediately took up a job offer as the managing director at Octopus Telecom Ltd (OT) in the succeeding month. Under the Corporations Ac 2001, s 191(1) disclosure of information to other directors, a director who has the material personal interest in transactional matters related to the affairs of the company should make the full disclosure of his or her interest to the board of directors. Therefore, it is relevant to argue that Arthur breached a duty to act honestly, in good faith and in the interest of Pink Cellular-his former company. This fiduciary duty requires a director to act honestly and in the good faith or best interest of the company. Thus, all decisions should be made to benefit the company and not any personal or third party’s interest3. Although Arthur resigned from Pink cellular Ltd, while he was still considered the marketing director of the company he had agreed not to take any employment for a period of 2 years since the date of his resignation from the company. However, due to his personal interests he breached the duty to act honestly because he quickly accepted a job as the managing director at Octopus Telecom Ltd (OT) in the following month, a company that is considered a direct competitor of PC. Section 157 of the Corporations Act 2001states that a director who fails to act honestly and with reasonable diligence, he breaches the common law and the statute4. Section s191(1) states that if the material personal interest arises due to the fact the director is a member of the company, then he or she need not to give notice. On the other hand, s 191(2) (a) (i) provides that if the material personal interest occurs but the interest is commonly shared by other members, then the director is not required to disclose it. As a director, it was important for Arthur to act honestly when executing his duties at PC and after resigning from the company. In January 2010, Arthur was tasked by the PC board to carry out a market research on the possibility of expanding the company’s products and services into India and China. It is surprising that over the past two years, Arthur had made little progress as far as developing the project was concerned. Since the project targeted overseas expansion venture, it is relevant to argue that Arthur was expected to provide a progressive report rather than being very slow to implement the project. Section 183 of the Corporations Act 2001 prohibits directors from using the information acquired as a result of their role with the company to take advantage for themselves or third party or to cause loss to the company5. From the knowledge and information he acquired and learned at PC, Arthur set up a business joint venture between the company’s competitor and East China Telecom Ltd (ECT) immediately after his resignation from PC. Pursuant to Statutory Duty: s 180(1) duty to act with due care and diligence provides that; a director or other officer of any corporation exercises his power as well as discharge the assigned duties with a high level of care and diligence that such a reasonable person would be expected to exercise. This applies if the person was a director or officer of that particular corporation within the corporation’s circumstances. In addition, the person must have occupied the office held by accomplishing same responsibilities in the corporation as the director or officer6. Arthur breached the duty to avoid conflicts of interest by setting up a business venture between OT, the direct competitor of PC and East China Telecom. Sections 182 and 183 of the Corporations Act 2001 states that, a director is not required to place himself within the situation where the interests of the company conflict with his personal interest7. In R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529, the court held that ss 182 and 183 of the Act require the proof that a director or officer was aware that intended result would benefit him or her or other person or damage to the corporation8. In Phipps v Boardman [1967] 2 AC 46, some trustees that were under a will owned a substantial holding within a private company. The solicitor of the trust decided to purchase the rest of the shares from the company, closed the company and distributed the assets to benefit trustees and him. Based on the inflexible rule of equity, it was held that a person holding a fiduciary position was not required to make profits out of his position. Thus, he cannot place himself in the circumstance where his interest and duty come into conflict. It is necessary, therefore, for a director to be well-informed about the common circumstances that may result in conflicting interests. For example, directors are prohibited from taking advantage of the corporate information and opportunity9. Based on the fiduciary duty that directors cannot act under the conflict of interest, for instance, diversion of business opportunities, it should be noted that Arthur was not required to divert the East China Telecom business opportunity and the information he had acquired from PC to establishing a business joint venture with OT. In SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, Cooper J held that a director would be considered to have breached his or her fiduciary duty if that particular person takes up an opportunity for own profit in circumstances where there is enough temporal and causal relationship between the obligations and opportunity10. Despite the fact that Arthur is a former director, he breached his fiduciary duty to set up another firm to rival as well as compete for contracts with PC. It can be learned that Directors of a company are subject to general law duties based on their fiduciary relationships with their companies as well as general duties of care. This clearly shows that directors have statutory duties under the Corporations Act 2001 (Cth) which to some extent overlie their general law duties. It is important to note that a number of statutory duties imposed upon directors are stated in the Act. III WHAT REMEDY MAY PC SEEK AGAINST ARTHUR? The breach of fiduciary duty by directors subjects them to various general law remedies such as injunctions and declarations, rescission, accounts of profits, tracing and constructive trusts. Other specific remedies that can be made against directors who involve in unwanted activities by their companies include the civil and criminal penalties stated under the Corporations Act 2001. Therefore, directors or officers are required to avoid breaches of such equitable fiduciary duties because a breach may subject the officer to being considered a constructive trustee. This provides the view that all benefits that particular director or officer will have obtained as a result of the breach of duty would be definitely held on trust and taken back to the company. Similarly, the company may decide to repeal any contract that is considered to be improperly made by the director or officer11. The general law remedies that PC may seek against Arthur is injunction so as to stop him from continuing to breach his fiduciary duties and rescission of contract to enable PC reverse the business joint venture between OT and (ECT) that he entered into. Since Arthur did not disclose the potential conflict of setting up a business joint venture between OT and East China Telecom Ltd (ECT) while he was still holding the office at PC, he breached the duty to disclose the potential conflict. Thus, Arthur should be subjected to a statutory remedy or fine of not more than $5,000 or be imprisoned for not more than 1 year as required under s156(10) of the Corporation Act 2001 12. This shows that directors should be held liable if they have acted without first taking into consideration the interests of the company. IV WHAT ACTION, IF ANY, CAN PC TAKE AGAINST ITS RIVAL COMPANY, OT, IN RELATION TO THE LATTER’S JOINT VENTURE WITH ECT? Most likely, the General Law remedy that PC can take against its rival company, Octopus Telecom Ltd is Rescission of contract to allow the company to reverse the East China Telecom Ltd contract, the location that the board had previously appointed Arthur the then marketing director to investigate the marketing opportunity before resigning from the company. Since he entered into contract with a company in China, Arthur a director he may have sold property to the company without providing proper disclosure. V CONCLUSION A director owes a company a duty to act in the manner that he or she honestly believes to be acting in the best interest the company. The main duty of the Board is to ensure protective and managerial defense between the company and its shareholders. Basically, Arthur the former marketing director at Pink Cellular Ltd breached duty to act honestly, in good faith and in the interest of PC as well as the duty to avoid conflicts of interest by setting up a business venture between OT, the direct competitor of PC and ECT. A director of a company is subject to the general law duties based on their fiduciary relationship with his or her company and the common duties of care. VI BIBLIOGRAPHY (A) Articles/Books/Reports Fiona Shand, 2004, Understanding Exposures and Liabilities of Directors within a turnaround situations, page 1. Arnold Bloch Leibler: Lawyers and Advisors. Available online at: LexisNexis, Directors' and Officers' Duties: General Law and statutory remedies for breach of common law and fiduciary duties. http://www.lexisnexis.com.au/aus/academic/text_updater/documents/harrisch16.pdf> Keay Andrew. ‘Director’s Duty to consider the interests of Company Creditors’ (2001) 25 Melbourne University Law Review 315. Sivehla Julian, ‘Directors’ Fiduciary Duties’ (2006) 27 Australian Bar Review 192. Section 6: Fiduciary Duties of a Director. Available online at: (B) Legislation Section 157 of the Corporations Act 2001 Sections 182 and 183 of the Corporations Act 2001 Section 156(10) of the Corporation Act 2001 Section 191(1) and 191(2) of the Corporations Act 2001 Section 180 of the Corporations Act 2001 (C) Case Phipps v Boardman [1967] 2 AC 46 R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529 SEA Food International Pty Ltd v Lam (1998) 16 ACLC Read More