Problem-Solving Related to Company Law Issue - Case Study Example

Problem-solving Case Study related to Company Law Issue. Name: Grade Course: Tutor’s Name: 31st, August, 2009 Introduction Australian corporations are both guided by Australian Corporation’s Act and general laws. The general law and the Corporations Act rules and regulations on directors’ duties are similar except for the organizations that enact the duties. The legislations on Australian corporations Act section 180 to 184 hold legislations about duties of directors and other company officers. Any employee, director or officer of a corporate company should act in good faith, for the right purpose and should not use any information for his/ her, any other company or any other person’s gain either directly or indirectly1. This paper presents a solution to a case where directors of a listed public corporate company decided to accept a proposed concert venue by the company’s own CEO, who also happened to be a shareholder and a director of the proposed company offering the venue without much consideration leading to the company (Spider Limited) being insolvent. The case study is attached separately. Cause of Action Against Spider Limited’s Directors Directors’ Duties Australian corporate law section 184 subsections 2 and 3 under the use of information states that, directors should not use the information obtained from a corporation if a person has been the director of a corporation or is the current director of a corporation dishonestly. Dishonesty in this case is the use of information with the intention of making some other person or self, to directly or indirectly gain from the corporation or cause harm to the corporation2. From the presented corporation’s case (Spider Limited) it is clear that the CEO of Spider limited has committed an offense. Guy as the CEO of the corporation was well aware that Spider Limited had not found a venue in Canberra for staging a pop concert. He shared this kind of information with his wife, one whom he owns another company with. The company ended up being on debt and being unable to repay its debt as and when they were due. Analysis of how this information could impact the corporation was never done. Spider Limited can therefore sue CEO for dishonest use of corporate information and also if the company can prove that the CEO’s actions have breached his loyal duties to the company. Conflict of interest is not an offense, but when the actions of the interest lead to breach of duty, it becomes an offense. From the given information about Spider Limited, the company was charged by over 10% on rent by Great PTY Limited. The CEO’s exploitation of the company’s current situation has led to a breach of his duties. He has the duty to ensure that company does not go into insolvency state, to act in good faith, to make decisions based on sufficient information and for the best interest of the company. The fact that Spider Limited Company has been staging concerts and performances all along and it is only in 2009 after the Spider Limited CEO’s new company is approved to construct a theatre in Canberra that the company misses a venue, raises questions on the CEO’s interests. Spider Ltd’s CEO is legally liable for its insolvency due to the 10% increase in charges which is an action that has resulted from his conflicting interests3. According to the conflict rule, a fiduciary is not allowed to let his or her personal interests to conflict with the interests of the other party to the fiduciary relationship. This rule has led to other rules which require directors to account for any profits made as a result of being in position as a director of the company. Such rules are expressed in cases such as Cook v Deeks and Regal (Hastings) v Gulliver. The director is accountable unless the company was informed and approved the profits. Another case Chan v Zacaharia also explains the basis of the rule which has the objective of preventing the fiduciary from misusing a position for personal gains4. ASIC enforces Australian corporations Act and indicates that directors should personally determine how the proposed business action will affect the company’s performance. Another important thing is, directors should have knowledge and should monitor the company’s financial status and this should guide them in making decisions. Just like in Tourprint International Pty Ltd v Bott (1999) 17 ACLC 1543 case where the court decided that a director (Bott) was liable under section 588G due to the director’s inability to investigate the true financial position of the company, when he was a director and when he was appointed director, so are all the directors of Spider Ltd liable5. According to the Insolvency law under the corporations Act, a director is liable if the company goes to insolvency state due to his or her actions. If the director allows the company to get into more debts when a company is an insolvent state or when the director allows the company to incur debts and the debts result into a company’s insolvent state, then that director is personally liable6. The director is criminally liable to such decisions if the director was aware of the company’s insolvency state or the state to become insolvent and had dishonest decisions to prevent the company from becoming insolvent or had dishonest actions in helping the company out of insolvency7. From the given case study, the directors of Spider Limited are all personally liable if the company goes into insolvency state due to the debts incurred. A director may disobey the law by letting a company incur debts. This rule does not distinguish the role of non executive from executive directors in preventing the company from becoming insolvent. Both the executive directors and the non executive directors are expected to have enough information to be able to perform their duties efficiently and effectively. A case example of such a requirement is the ASIC v Plymin [2003] VSC 123 (5 May 2003) which did not differentiate the knowledge between non executive and executive directors hence denying John Elliott’s appeal. The Victorian Supreme Court ruled that all directors are liable for insolvent trading and there is need for all directors to have enough information to perform their duties8. The CFO is both criminally and personally liable. The director should have information about the company’s current financial status, what decisions can lead to its insolvency and its future status based on management decisions. The CFO can also be charged with incompetency which will be a breach of duty according to section 183 of the corporations act. If evidence can show that the CFO is incompetent like in the case of ASIC v Vines [2003] NSWSC 1095; 48 ACSR 291 where an expert was allowed to provide evidence on what a competent CFO should be, then the CFO will be liable for the damages caused to the company. This case and the corporations act section 183 also applies to the Chief Operations officer who is a lawyer and a comedian yet acts as a chief operations officer. He is personally and criminally liable for letting the company incur debts. He should be aware of the operations that can make the company go into solvency and work towards preventing it9. He should also have the qualifications of a chief operations officer as required by the laws in section 183 describing the requirements of corporate directors. Remedies to Breach of Duties If a director does not meet the requirements of being a director according to the Corporations Act under the general rules, the director receives the following penalties: Declaration of contravention by the courts An order to compensate the company considering the damage caused by the directors A pecuniary penalty of $ 110,000 and a Disqualification order These could be imposed on Spider Limited Company directors since there is no reasonable belief that the business judgment made was for the best interest of the company. No consideration was made to determine if the company would benefit or not which indicates violation of a corporate law. Additionally, one director (Guy Great) may have acted not for the best interest of the company, but for his own and his company’s best interest. Directors that are criminally liable are fined $110,000 or get five years imprisonment. The CFO and the Chief Operations officer are liable to civic obligations which as shown above is due to lack of meeting the requirements of a director as required by Australian Corporate laws in the Corporations Act10. Spider Limited Share Holders’ Rights and Remedies Share holders have rights against mismanagement of the company under the Australian common law, the statute and the constitution of a company. The case presented requires the shareholder to identify rights in relation to insolvency of the company and breach of duties by the company’s directors among others that may be related. Rights Shareholders have the right under the statutory laws to take proceedings against breach of duties by directors. In the above case, the directors have not acted according to the corporations act and therefore the shareholders have the right to take proceedings against them on breach of duties11. Remedies There are remedies provided by the common law and the statute that aim at justifying the rights of individual shareholders of a corporate company. Related remedies are as follows: a) Statutory Remedy for Oppression This remedy is included in Pt 2F1 of the Corporations Law. According to this remedy, a shareholder is lawfully right to report or file a complaint over unfair discrimination, oppression, or unfair prejudicial by the company just like the Re Spargos Mining NL entity case. One of the minority shareholders of Re Spargos Mining Ltd brought oppression charges against the directors after finding out that the directors changed policies that in turn changed the purpose of the company12. Statutory laws are concerned with the actions leading to the unjust damage to the interest of the members of the company13. A company can be wound up on the ‘just and equitable grounds’ if a minority shareholder can prove that the directors lacked fair conduct in managing the affairs of the company with Loch vs John Blackwood Ltd serving as a ground judicial review case. In Loch v John Blackwood Ltd, a small company was wounded up by a privy council due to unfair conduct in managing the affairs of the company by the directors. Spider limited could also be wound up if a shareholder could prove the lack of fair conduct in the management of the company’s affairs. Shareholders are entitled to winding up a company if they can prove that they have lost confidence in the current management group to conduct the affairs of the company on the ‘just and equitable’ grounds14. b) Compulsory Liquidation Remedy Under this remedy, winding of the company is ordered by the court under two circumstances; when the company affairs indicate unfair prejudicial actions, unfair discrimination or oppression against some members and are not according to the interests of the company, and when it has been determined that and the court has the opinion that the company should be wound up15. The company is wound up on the ‘just and equitable’ grounds by the court when it ceases to carry out business for which it was formed as illustrated by Re German Date Coffee Co and Re Tivoli Freeholds Ltd16. Shareholders can seek an injunction through the ASIC where there is contravention of Corporations Act under section 1324 just as was attempted by broken Hill propriety limited against Bell resources limited17. Conclusion The above discussion has given the duties that directors of the company have breached, the shareholders rights that can help solve the problem and legal solutions. Spider limited has gone into insolvency state due to the actions of all the directors. From the presented case of Spider Limited and according to general laws and Corporate Acts, it is appropriate for the shareholders to take proceedings against the directors for breach of duties. References Adams M and Barker D, 2005, Australian Essential Corporate Law 2/e, 2nd Ed, Sydney, Australia: Routledge. Corporations Act 2001, 2001, Retrieved on 29th August, 2009 from; http://www.comlaw.gov.au/comlaw/Legislation/ActCompilation1.nsf/0/06B599E3181C33FCCA2570C20001B061/$file/Corps2001Vol4WD02.pdf Hanrahan P, Ramsay, I and Stapledon G, 2008, Commercial Applications of Company Law. Commercial Applications of Company Law, CCH Australia Ltd, 9th edition, 2008. Comasters Law Firm and Notary Public, 2001, Shareholder Remedies, Retrieved on 29th August 2009 from; http://www.comasters.com.au/Comasters_Articles/Shareholder_Remedies_08.11.21.pdf Surgeon P, Barker D, 2003, Corporate Governance and Directors’ Duties in Australia, Retrieved on 30th August 2009, from; http://www.afic.am/CG/CorporateGovernanceAndDirectors%27DutiesInAustralia.pdf Read More