Issues at NewSat Company in Relation to the Corporations Act 2001 - Case Study Example

Business Association Law Name Date Course Business Association Law Introduction The corporations Act 2001 (Cth), is one of the business laws in Australia that is used in controlling business operations. It clearly outlines the roles and responsibilities of different stakeholders including the directors of the company. The directors play a significant role in the management of the company and the decision making process. It is the responsibility of the directors to ensure that they act in the best interest of the company. According to section 180, the directors have a duty of civil obligation1. They are also supposed to ensure that they do not spend their funds of the company in a manner that cause wastages or for their own personal benefits. The duties of the directors have, therefore, been clearly defined so as to ensure that the operations of the company are effective. The paper critically discusses issues at NewSat Company in relation to the Corporations Act 2001 (Cth). Background Fairfax media revealed that the senior directors of the company were spending the funds extravagantly. The senior executive of the company had spent up to $ 1million for luxurious trips in the world first class. On the other hand, the senior executives of the company had spent about $ 10,000 for dinner. This is quite extravagant as the company was being funded by the external sources, lenders and shareholders. A questionable deal had also been carried out by the directors of the company with Gold Coast Motor Yachts which amounted to hundreds of thousands of dollars. The company is also required to disclose the marketing expenses in its financial statements. However, this was not done by the company. This is an indication that the marketing expenses were questionable and could have been mismanaged. The company in its financial statement disclosed $ 342,000 that had been paid to Cresta Motor Yachts. However, another $ 357,000 had been billed to Jabiru project as opposed to being billed in the account of the Chief Executive officer2. The spending by the retired directors of the company was also questionable. The company is also facing a lawsuit from TrustComm for allegedly perpetrating fraud against the company. Although the company was facing challenges, the CEO of the company was paid millions in salaries and remunerations and the same was also applied to the retired directors of the company. One of the retired directors was also paid $ 900,000 for consultancy which was also questionable. Issues The issue is whether the directors of the company should take responsibility or be charged for the loss of funds within the company. Rules According to section 180(1), the directors must carry out their duties with care and diligence. This means that the decisions that the directors make should be for the best interest of the company. According to section 180(2) (b), the directors should not have personal interest or material interest when making the business decisions3. According to section 181(1), the directors are supposed to act in with good faith and in the best interest of the corporation. The directors of a corporation are not supposed to use their position improperly for the purposes of gaining an advantage for themselves or someone else in accordance to section182 (1) (a). According to section 182(1) (b), the directors of the corporation are not supposed to use the position to cause detriment to the corporation. On the other hand, the company is being accused of carrying out questionable deals that amounted to hundreds of dollars which is an act of detriment. The company was also being accused of perpetrating fraud against TrustComm. According to section 184(1) (b), the directors commit an offence if they are intentionally dishonest4. A director commits an offence by using their position dishonestly for the purposes of gaining an advantage for themselves or for someone else in accordance to section 184(2) (a). According to section 295 the company should disclose its financial statements in accordance to the accounting standards. The disclosure of the financial statements did not meet the standards that were set by ASIC. This is especially in the case of the marketing expenses that were incurred by the company. Application By spending money wasteful, the directors of NewSat Company were in breach of this section 180(1). The salaries and enumerations of the CEO and the retired directors were too high despite the company undergoing problems. This means that the business judgment in terms of the salaries and remuneration of the senior executives was influenced by personal interest which is in breach of 180(2) (b). The directors were to gain from the decision as they were awarded millions of dollars. Underrating luxurious trips and dinner is an indication that the directors were not acting in good faith. The directors were instead acting in their own best interest as compared to that of the company which is in breach of section 181(1). This is considering that the company was depending on the shareholders, lenders and other external sources for the purposes of funding. Spending the money extravagantly for luxurious purposes is therefore an indication that the actions of the directors was not in good faith. The directors at the company were in breach of section 182(1) (a) as they were using their position for their own benefits. The directors were using their position to finance the luxurious trips in the first class as well as awarding themselves hefty pay packages. The extravagantly spending of money has the potential of causing detriment to the organization which is breach of section 182(b). The directors of the company were intentionally dishonest by providing financial statements that were not correct which is in breach of section 184(1) (b). On the other hand, manipulation of the financial information is intentional dishonest. The directors did not record the expenses that they used for marketing process and this amounts to intentional dishonesty on their part. The fraudulent deal that was being carried out by the directors of the company also amounts to intentional dishonesty which is an offence. The financial statement of the company was not in accordance with the financial standards which is breach of section 295. It lacked some of the information which was aimed at hiding the fraudulent deals that had been carried out by the directors of the company. The conduct of the directors of the company is also against the regulations that have been set by ASIC5. This is also considering that the company in being accused of fraud which is a serious offence. It is also important to note that none of the directors raised an objection with regards to the activities that were taking place at the company with regards to the use of funds. This is an indication that they were acting together for their own benefits which is a breach of section 184. The directors of the company were responsible for the breach of the duties of the directors as outlined in the Corporations Act 2001 (Cth). In the case of ASIC v Mcdonalds, the Federal Court of Australia found that the directors of the company were guilty of failing to exercise their duty of case and diligence as outlined in the Corporations Act 2001 (Cth)6. The directors were also found to have provided false, deceptive and misleading information. This situation is the same of the directors of NewSat Company. The directors of the company were engaged in fraudulent deals and they also failed to manage the funds of the corporations effectively. As a result of the action of the directors of the company, they are guilty of breach of section 180. According to section 1317E, a civil penalty applies for the breach of section 180. The directors of the company may end up paying fines for their actions. The directors may also be found guilty and charge under section 1317E for mismanaging the funds of the company and using it for luxurious activities despite the problems that the company was facing. The CEO and the other directors are all guilty of this offence as they all benefited from the fraudulent activities and financial misappropriation. Civil penalties apply to the breach of the duties of the directors. The directors of the company also committed an offense by manipulating the financial information of the company for their own benefits. This is considering that the directors should not use the positions for the purposes of benefiting themselves or others. In the case of ASIC v Healey, the directors of the company were charged with contravening section 180(1) and section 344(1) which requires the directors to carefully examine the financial statement of the company before it is approved7. The directors approved financial statement of the company which had errors. This is similar to the case of NewSat Company where the financial statement of the company was passed despite missing some of the crucial information such as the marketing costs. This was aimed at covering up the fraudulent deals that had been carried out by the directors and they are therefore liable to an offence. The directors of the company may also face a ban from holding the executive positions if they are prosecuted. This is due to the violation of the Act As well as the regulations of ASIC. Conclusion In conclusion, it is evident that the directors of the company violated several section of the Corporations Act 2001 (Cth). The actions of the directors indicated that they violated the duties of the directors as outlined in the Act. The directors can be prosecuted for their actions and may face civil penalties under section 1317E. The actions of the directors of the company amounted to intentional dishonesty, fraud and misappropriation of funds. This is considering that a huge amount was used for luxurious activities by the directors. It is also evident that the directors used their positions for their personal benefits by awarding themselves hefty pay packages. List of References Corporations Act 2001 (Cth) ASIC v Healey [2011] FCA 717 ASIC v Macdonald (No 11) [2009] NSWSC 287 Loh, C, M, Deegan, C, & Inglis, R, 2014, The changing trends of corporate social and environmental disclosure within the Australian gambling industry, Accounting & Finance. Cantatore, F, & Marshall, B, 2014, Businesses are people too? Anomalies in widening the ambits of" consumer" under consumer credit law, Australian Business Law Review. Schultz, E, et al, 2013, Corporate governance and the CEO pay–performance link: Australian evidence, International Review of Finance, 13(4), 447-472. Duffy, M, 2014, Towards better disclosure of corporate risk: A look at risk disclosure in periodic reporting, Adelaide Law Review [P], 35(2), 385-407. Baker, R, et al, 2015, Satellite company NewSat executives' spending flies high, Sydney Morning Herald, Retrieved on 15th April 2015 from, . Read More