The Breaches of Directors Duties - Case Study Example

Business Association Law Assignment Student name Course name Institution Date of submission Student Number [WORDS 1495] Introduction Directors are supposed to ensure good governance as well as serve the company’s best interest rather than their personal interests. This paper presents a case analysis exploring the breaches of directors’ duties or any other potential breaches of the Corporations Act 2001 that arise in the case. Duty of care and diligence According to Section 180 of the Corporations Act 2001, directors of incorporated companies must show duty of care and diligence, as well as exhibit “business judgment rule.” In particular, section 180(1) specifies that a company’s director must put into his powers in effect and carry out his duties with a level of concern and conscientiousness that any reasonable person would be expected to exercise1. The mention of a “reasonable person” denotes an “objective standard of care,” which is in agreement with the corresponding fiduciary duty2, as demonstrated in the case law of Statewide Tobacco Services Ltd v Morley3. At the same time, the foreseeable risks of harm are compared against the likely benefits anticipated to reasonably affect the company from the actions of the directors. In fact, section 180(2) of the Corporations Act 2001 specifies the Business Judgment Rule, where the director has to make his decisions in “good faith and for proper purpose,” and to inform others on issues in question in order to enable them to know that what they are doing is appropriate. For instance, NewSet directors were recklessly and deliberately dishonest. They spent the company’s money recklessly. In spite of the financial problems NewSat encountered, Ballintine was issued with a salary of AUS $1.1 million, a bonus of $1.2 million as well as AUS$1 million worth of shares. Additionally, the company offered Ballintine a loan of nearly AUS$900,000. Both of these actions were capable of wrecking the company. Additionally, an analysis of NewSat’s previous independent directors also indicates cases of reckless spending on overseas travel, where they spend some AU$1 million on travel over the two previous fiscal years. At the same time, the case provides evidence of luxurious and unwarranted spending on dinners (estimated at AUS$10,000 ) by Mr Ballintine and KahinaKoucha. Therefore, NewSat directors’ action violated section 180(2) of the Corporations Act 2001, which requires that a director’s actions must be consistent with these provisions to satisfy the statutory duty of care and diligence or show that they made reasonable business decisions. However, in the present case, the directors cannot satisfy the requirements of section 180(2) of the Corporations Act 2001. Duty to act in good faith The directors breached duty to act faithfully in the company’s interest. The test to determine if the directors have breached this duty is a subjective test of “good faith or honesty.” The directors will be considered to have breached the duty when they fail to subjectively and rationally consider the interest of the company. Still, some conditions exist for the subjective test. For instance, in the case study of Charterbridge Corporation Ltd v Lloyds Bank Ltd4, it was determined that the subjective test also brings in an objective standard, of what should be viewed to be objective or rational from the perspective of a bystander, or whether any honest and intelligent individual who is also a director of the company in question, in the entire related situation, rationally perceived that the transactions were indeed for the company’s benefit. Section 181 of the Corporations Act 2001 (Cth) is concerned with director’s duty of good faith and requires any company director to exercise his powers and perform their duties in good faith as well as company’s best interest and for a cause that is proper. Indeed, this legislation is in agreement with the directors’ fiduciary duty to act bona fide. The statutory requirement and provides the directors with an obligation to act honestly5. Hence, the directors are in breach of this duty since they exercised their powers for improper purposes, although they believed they were acting with integrity. In the case, this happened when the directors assumed the NewSat’s interests corresponded to their personal interests, as well as failed to consider the company’s interest were supposed to be a separate entity. As indicated, the external auditors who examined NewSat's financial statements brought proof of unwarranted spending to ASIC attesting that NewSat’s directors had engaged in uncontrolled spending and dubious transactions. These huge spending was in spite of the knowledge that the company was at risk of making financial losses. Hence, if the NewSat’s directors failed to put the interests of the company into their own mind, although the transactions are indeed for the company’s benefit, they will still be held to be in breach of duty6. As further held in the case of Kinsela v Russell Kinsela Pty Ltd (in liq) (1986)7, when directors give the requisite consideration to the company’s interests, they should as well consider the interests of the entire shareholders collectively. Considering that the actions of the directors led to massive financial losses, it could be reasoned that any rational, and honest company director would not have engaged in such acts. Besides, the losses indicate that the interests of shareholders were not taken into interest. Acting for improper purpose They also breached section 182 of the Corporations Act (2001), which prohibits directors from acting for improper purpose or making improper use of their positions. Hence, directors are barred from using their positions inappropriately to achieve a personal advantage or for other people, or even cause harm to the detriment to the company. A director will be considered to have violated this section when he engages in practices while intending to consolidate personal advantages or cause a harm, in spite of the fact that such benefits are realised or not. Section 182 of the Corporations Act (2001) will be breached when directors act, in spite of being aware of the weak financial standing of the company. Under the common law, directors must also not act for an improper purpose, as was held in the case law of Kinsela v Russell Kinsela Pty Ltd (in liq) (1986)8. In the case law, it was determined that a director would have acted for improper purpose when he obtains an advantage for himself. In the test for a proper purpose, it was determined in the case law of Comptroller of Stamps v Howard-Smith (1936)9, that a proper purpose entails taking capitalising on a genuine commercial opportunity that is potentially profitable. While the directors had sought to take advantage of a genuine commercially viable, they also acted for improper purpose by obtaining advantages for themselves. At any rate, the test to determine whether a director’s power has been carried out to fulfil appropriate purposes is done in an objective manner. For instance, in the case law of Whitehouse v Carlton Hotel Pty Ltd (1987)10, objective test included considering how substantial the company would benefit from an alleged need for the director’s decision. In the case, it was held that despite the improper purpose being the main cause or just in contributing to a director’s decision, the courts would consider the decision to be invalid11. Additionally, in spite of the financial troubles NewSat encountered, Ballintine was issued with a salary of AUS $1.1 million, a bonus of $1.2 million as well as AUS$1 million worth of shares. Additionally, the company offered Ballintine a loan of nearly AUS$900,000. To further illustrate, Fairfax Media showed a report of mid-2014 showing NewSat’s directors Andrew Plympton, Brendan Fleiter and Mark Fishwick making huge payments to a motor yacht in Gold Coast, whose co-owner is Ballintine, who also heads NewSat. In addition to showing evidence the directors of the directors acting in unison for personal gains, it also shows failure to avoid conflict of interest. In the case of ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd12, it was showed that conflict of interest happens when directors place direct or indirect personal or their associates’ benefits ahead of the company’s. To conclude, the directors in the company acted for improper purpose, and breached section 182 of the Corporations Act (2001). Conclusion NewSet’s directors breached the duty of care and diligence, to act for improper purpose, and to act in faith. Therefore, the directors have committed an offence under Section 184 of the Corporations Act 2001, which consider an offence to have been carried out when a director is recklessly or deliberately dishonest, and has failed to exercise his powers and perform his duties in good faith, for a proper purpose and in the company’s best interest. Second, it also considers a director to have committed an offence when he uses his position recklessly and dishonestly to gain direct or indirect personal advantages. References Journal and Books Binchy, W 2003, “Recent Developments in The Law Of Torts," Judicial Studies Institute Journal vol 4 no 1, pp.8-78 Hershey, N & Jarzab, C 2005, "Fiduciary Duties of Interlocking Directors within a Nonprofit Health System," Journal of Health Law vol 38 no 3, pp.449-478 Holland, R 2009, "Delaware Directors’ Fiduciary Duties: The Focus On Loyalty," University Of Pennsylvania Journal Of Business Law vol 11 no 3, pp.675-701 Owen, D 2007, "The Five Elements Of Negligence," Hofstea Law Review, vol 34 no 4, pp.1671-1686 Case Laws ANZ Executors & Trustee Co v Qintex Australia Ltd (1990) 8 ACLC 980 Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Read More