Corporations Law - Chance Limited - Case Study Example

Corporations Law Name Date Course Corporations Law Introduction Directors of a company play an essential role in ensuring that the company is able to achieve its goals and objectives. According to section 201A of the Corporations Act 2001 (Cth), each registered company must have directors1. However, the number of directors may vary depending with the size of the company. Arthur, Christine, Bill and David are directors of Chance Limited which is involved in the wine bottling industry. However, Arthur is convinced by Walter who is a friend to enter in the tidal energy business. The company is convinced that the venture is profitable and invests $ 20 million while working closely with Waves Pty Limited for the supply of steam generators. The investment turned out to be loss making and the directors also discovered that Walter is a major shareholder of Waves Pty Limited and has little knowledge of the tidal waves energy. The company has already made a huge investment which has a negative impact on the company. This raises the question of whether the directors are in breach of the corporations Act 2001 (Cth) and the general laws. The paper discusses the concepts of corporation Act 2001 (Cth) in relation to the situation facing the company and whether the directors breached their duties. Discussion The directors of the company did not breach their duties under the corporations Act 2001 (Cth) and the general laws. This is because they were convinced that the business idea was good and it was meant to increase the profitability of the company. According to section 181, the directors are supposed to act in good faith and in the best interest of the company. The directors of Chance Limited were acting in good faith and best interest o the country. This is because they were convinced that the new business venture would be profitable as the company was already experiencing some difficulties. In the case of Paul A Davies (Australia) Pty Ltd v Davies, the court ruled that the directors have a responsibility of using the funds of the company in the best way possible2. By making the decision to venture in the tidal energy business, they were acting in good faith and trying to save the company from losses. According to the fiduciary principles which are applicable in the general laws, the directors must act in good faith and in the best interest of the company. The concepts of the general law were thus not breached by the directors of the company as their actions were out of the best interest of the company. It is also important to note that the directors have a duty of ensuring that the company experiences growth and expansion. According to section 182, the directors are supposed to use their position for the purposes of ensuring that the company is successful. This is considered as part of civil obligations and it should be conducted for the benefit of the company (Bevans, 2006). The fiduciary duty is important for the directors of an organization. In the case of Regal (Hastings) Ltd v Gulliver, the court ruled that the directors must observe the fiduciary obligations at all times3. This is because it ensures that they only act in the best interest o the company. The directors felt that it was prudent to diversify its operations due to the reducing profits and increasing competition in the wine bottling business. Walter was thus did the right thing by inquiring from his friend about the prospects of the tidal energy. This was in a bid to ensure that the company is able to diversify on its products. It is also important to note that the diversification policies of the company were in the best interest of the company. Acting in the best interest of the company involves putting in place measures that would ensure that the company is able to experience growth and development. The other directors also accepted the decision to venture in the tidal energy business as it was meant to ensure that the company is able to increase on it profitability. According to section 180(1), the directors have a duty of ensuring that care, skills and diligence is uphold during their operations. This is for the purpose of ensuring that the interest of the company is promoted. The directors were thus exercising their skills and diligence when they decided to diversify the operations of the company. Although the business venture was not successful, it was meant to ensure that company is able to make more profits through the diversification of its business operations (Bevans, 2006). According to section 181(1), the directors must exercise their powers for a proper use. The directors of Chance Limited were exercising their powers for a proper use which was to ensure that it makes profit out of the new business venture. However, it is also important to note that Walter who advised them to join the venture was not acting in good faith. This is because he was likely to benefit from the venture as his company was contracted to supply steam generators. According to section 191 of the corporations Act 2001, a director of a company is supposed to disclose their personal and material interest with regards to a contract or a business deal. Walter failed to disclose that he was a major shareholder of Waves Pty Limited which is an indication that he intended to benefit from the deal. His actions amount to the breach of the duties of the directors. On the other hand, it is also important to note that Walter was not an expert in the field of tidal energy. It is through this that he misinformed the company which is a breach of the corporation Act 2001 (Cth). According to section 183, the misuse of information is forbidden and it amounts to an offense. The directors of the company were thus misled to carry out an investment which amounted to the losses. This does not amount to the breach of the corporations act as they were not aware that Walter was not an expert in the field of tidal energy and they fully relied on his information (Greenfield, 2010). According to section 180(2), the directors of the company are allowed to make decisions that are aimed at enhancing the operations of the company. This mainly involves making business judgments on behalf of the company. All the directors of Chance limited decided to make the business decision based on the prevailing conditions of the company at the time. All the directors were excited about the idea and they believed that it will lead to profitability for the company. This is considering that no other company had ventured in the same business in Australia. Their business judgment was thus influenced by Walter who presented the idea in a manner to suggest that it will be a lucrative business. However, this was not to be as Walter was not an expert in tidal energy and did not foresee the future problems. According to section 189, the directors are allowed to rely on the information that is provided by the professionals or experts. Walter presented the information regarding the tidal energy by purporting to be an expert. However he was not required to prove that he was an expert as he was a friend of Arthur. On the other hand, his presentation was professional and he was able to convince the other members of the organization. This means that the directors acted within their powers and in accordance to the provision of corporations Act 2001 (Cth). The actions of the directors were in the best interest for the company as it was meant to increase the profitability of the company (Tomasic, Bottomley, McQueen, 2002). According to section 183, it is important for the directors to ensure that they avoid any conflict of interest while carrying out their duties. Arthur and Walter were friends which meant that Arthur could have influenced the decision of establishing the tidal energy business. However, this was not the case. Arthur ensured that Walter presented the idea to all the board members. This is an indication that there was no breach of duty on the part of Arthur and the other directors. On the other hand, it is also important to note that the directors have statutory duties which are for the purposes of ensuring that they only act in the best interest of the company. The directors did not breach the statutory duties as they ensured that all the proper channels were followed before the decision of investing in the tidal energy was arrived at. According to section 181(1) (a), the directors are supposed to act in good faith when discharging their duties. All the directors of Chance limited were acting in good faith when they wanted to diversify their business operations and ensure that it increases its profitability. Venturing in the tidal energy business was an act of good faith by the directors in a bid to enhance the profitability of the company. However, the actions of Walter were not in good faith. This is because he failed to disclose his interests at Waves Pty Limited which he was a major shareholder. He also gave misleading information with the knowledge that he was not an expert in the field of tidal energy (Greenfield, 2010). According to section 588G, the directors have a duty of preventing insolvent trading. Insolvent trading usually leads to liabilities for the company. This may also result to losses for the company as funds may be lost. The investment of the company was not good which exposed the company to losses amounting to $20 million that they had invested. It was the duty of the directors to ensure that the company does not make such losses. In the case of ASIC v Plymin, Elliott & Harrison, the court ruled that the directors must detect insolvency and prevent it from taking place4. However, they relied on the information provided to them, which was responsible for the losses. The ideas were also practical to the company as no other investors had invested in the field of tidal energy. They therefore did not breach their duty of preventing the insolvent trading as they were fully convinced that the venture would be profitable. None of the directors can also be imposed any penalties related to the insolvent trading. This is because they were acting in the best interest of the company. On the other hand, it is also important to note that the decision to invest in the tidal energy was supported by all the directors. However, it is also important to note that the directors did not consult widely as most of the information was discovered after the company had already engaged in the deal. It is important to note that the directors did not involve experts regarding project as they fully relied on the information that was provided by Walter. This however does not amount to the breach of duty under the corporations Act 2001 and the general law (Tomasic, Bottomley, McQueen, 2002). Conclusion In conclusion, it is evident that the directors of the company acted in accordance to the provisions of the Corporation Act 2001 (Cth). The directors did not breach their duties when they decided to invest in the tidal wave energy. The investment was in the best interest of the company as it was facing a stiff competition and it required other sources of finances. It is also evident that the directors of the company observed the fiduciary principles and the general laws when they undertook the decision to invest in the tidal energy. As directors of the company, they believed that the information provided to them as accurate and hence the investments. The corporation Act 2001 (Cth) allows the directors to accept advice from experts or professionals. However, it is also evident that the information that they were provided with was not accurate and it was misleading and hence leading to the problem they faced. Walter who advised the directors breached the provisions in the corporations act. This is because he failed to disclose his interests at Waves Pty Limited. Walter also failed to tell the directors that he was not an expert in the field of tidal energy and hence an indication that he was not acting in good faith. List of References Tomasic, R. Bottomley, S. McQueen R., 2002, Corporations Law in Australia, Federation Press Bevans, N., 2006, Business Organizations and Corporate Law, Cengage Learning. Greenfield, K., 2010, The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities. ReadHowYouWant.com Cases Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440. Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. ASIC v Plymin, Elliott & Harrison [2003] VSC 123. Corporations Act 2001 (Cth). Read More