Legal Duties of Directors and Their Implications - Coursework Example

University> LEGAL DUTIES OF DIRECTORS AND THEIR IMPLICATIONS By Directors owe to the companies an obligation to take reasonable care in the performance of their duties (Davies et al 2008). Directors also have a performance obligation to ensure they stay up to date with the financial situation of the company through efficiently reviewing of financial statements on a regular basis. Section 180(1) declares that an officer or director of an operating company must ensure that they use their power and discharge their responsibilities with the right amount of attention and thoroughness required. The duties should be carried out in a way that a rational person would exercise if they were in the position1. The Director also has a responsibility of ensuring that the adequate records of accounting are kept and that the records are satisfactory enough to prove and explain all the transactions conducted by the Company’s. At any given time, a director should be able to reveal with realistic precision, the exact financial situation of the corporation (Tricker 2015). Cth Bank v Friedrich (1995) 9 ACLC 946: All directors must possess basic skills that enable them to understand their company’s operations and financial affairs. Directors must have a minimum degree of financial literacy (ASIC v Healey per Middleton J at [124]). They must also actually read and consider the company’s financial statements (CBA v Friedrich per Tadgell J at 126). Although the preparation can be delegated, the obligation to read them cannot (ASIC v Healey at [124]). The director should ensure that he is suitably current on the prevailing accounting principles and necessities of financial reporting within the Corporations Act. S 181(1) (a): At general law the director has an obligation to perform in good faith and with the company at the fore front of his or her interests. Re W & M Roith Ltd [1967] 1 WLR 432: Directors must not act in a manner that is incapable of being seen as upholding the interests of the company, he is heading. All directors should always ensure that any information provided is for the best interest of the organization at heart. Thus, fraudulent information constitutes a breach of this consideration. Directors, under Company law, should not accept any accounts until they are content and get to clarify that the said accounts provide an assessment that is fair and true about the state of affairs of the Company. A director can take on a role with exceptional accountabilities. This role involves; the executive director or the role of CFO chair of an audit committee. The director must discharge the increased expectations of the stated positions with utmost attention and diligence.2 As director, you must take steps that are practical so as to act in accordance with the financial reporting and keeping up the auditory necessities of the Corporations Act. This activity includes the director’s basic obligation to keep accounting books and records that are proper. (ASIC 2014). As the executive director, Andrew has the duty to inform fully the board of all relevant facts within his knowledge. Andrew did perform some of his duties but in the course of his operations he still neglected some of his duties. Cth Bank v Friedrich (1995) 9 ACLC 946: All directors must possess basic skills that enable them to understand their company’s operations & financial affairs. Each director has an obligation of maintaining diligence and expertise in how they understand the financial report that is to be divulged to the stakeholders of the company. The director has to make sure he reads and comprehend on the subjects of the financial analyses. You must be smart and have an eye for detail, anytime you carry out an assessment of the financial report being handed to you. As a director you should determine that the information contained within the reports is in line with his most comprehensive information on the business position of the organisation. A director should make it his duty to guarantee that all matters significant matters within the knowledge of the stakeholders, or the stakeholders have no knowledge of, are not in any way whatsoever absent. In reading the financial report, you should: 1. Warrant, rationally, that whatever data is within the report is as current with no ambiguities. 2. Question in detail all the accounting methods that were used. 3. Take a careful look at the degree of competence in the revelations and if at any point information was omitted. The Director can delegate his duties of book preparation and financial reporting to other individuals. However, as director you have an obligation to take an intelligent and assiduous concern in the statistics provided to them. The director should make it his duty to comprehend the information gathered and run it through an inquisitive mind. Under s 189, how far the director can rely on such information or recommendations from an outside party is prima facie reasonable, provided; 1. Director on sensible grounds believes the person chosen to help out thoroughly competent on the duties outsourced to them; 2. The person has professional expertise, relative to issues that the director considers on grounds that are reasonable to be within the professional capabilities of the outsourced individual. In regard to the financial report, the views of the external auditor are autonomous. The director is accountable for every facet of the information contained inside the financial report. The director should make it an obligation that the external auditor is no involved in any way whatsoever in developing his conclusions about the financial report. Allowing this would make the objectives of the autonomous audit fragile. As the executive director, Andrew has the duty to inform completely the board of all relevant facts within his knowledge. Andrew did not inform the board of his omissions in the final financial report he had prepared and approved (Chuah 2007). Andrew overlooked his duty to inform the board members of the irregularities and as for this in my judgment I would say he did not carry out this duty. Directors owe to their company an obligation take into consideration reasonable care whilst performing their duties. The duty to take reasonable care constitutes ensuring that the financial documents provided did not have any major irregularities that may lead to losses by the company. Directors are accountable for keeping safe the company's possessions and thus for taking equitable advances to avoid any discovery of fraudulent information (Tomasic et al. 2002). Andrew had a duty to be familiar with the company’s financial status, regularly review financial statements, and inquire into suspicious matters revealed by those statements. He should have thought about the form and material of the financial reports. He should have questioned whether the reports presented a correct and reasonable view applying common sense as well as the technical requirements. Andrew should have considered how consistent the financial statements were taking into account the information he had of the company’s financial position (Bruce 2005). A director should declare whether the affirmations from the CFO obligatory to section 295A have been provided. Directors should take steps that are within reason to secure compliance with, the requests of the Corporations Act concerning the accounts (section 344). Directors should stand back and ask what key transactions transpired throughout the reporting period? Have any substantial matters or circumstances ascended since the balance date? Directors are under a persistent commitment to keeping up-to-date about the activities of the corporation (Daniels at 503). CFO must be proactive and take steps to ensure that the financial information is up to date and accurate, and any assumptions or deficiencies are communicated to the board (Tricker 2015). Taking this information into account, in my opinion this duty is neglected by Andrew. He acknowledges a financial report with a lot of financial irregularities. Andrew has the duty to inform the board of all relevant facts within his knowledge. PBS v Wheeler (1994) 11 WAR 187 at 218– in this case, the MD withdrew from making a decision on a transaction because of a conflict of interest. TheMD was in breach because he did not alert the board to all information he knew about the transaction) (ASIC 2014). In my opinion, Andrew did not perform this duty. Director must carry out honest activities so that the company can benefit and not for some ulterior purpose. Acting justly for the benefit of the company is subjective; however, the Court will look for objective evidence of the director’s assertion. The court is not questioning the commercial justification for the decision. The court is assessing whether the director held that assertion3. A director must use the authorities provided for them and exonerate their responsibilities: (a) To ensure the company’s wellbeing; and (b) For a purpose, that is not sketchy or incomprehensible. Section 181(1) is a civil penalty provision under s 1317E (and is an offence under s 184 if the director is reckless or intentionally dishonest – higher BOP). Breach of directors duties (can amount to oppressive conduct; Jenkins). Under s 233(1), the Court can make the following orders: 1. Purchase the shares of any member (if the oppressive conduct has decreased the value of the shares. The order may specify that the shares are purchased at the price that the shares would have been had the conduct not taken place. Scottish Co-operative Wholesale) 2. For example, in Jenkins, the directors their duties breached whilst acting with paramount interests of the company. Either way the Court appointed a receiver (s 233(1) (h)) to investigate the impugned transactions. The court also had to institute proceedings against the directors, If necessary (s 233(1) (f)). References Books Tricker, R. (2015). Corporate Governance: Principles, Policies and Practices, Oxford University Press, Oxford. Bruce, M. (2005). Rights and Duties of directors. 7th Edition, Tottel Publishing, West Sussex. Tomasic, R, Bottomley, S, McQueen, R. (2002). Corporations law in Australia 2nd ed, The federation Press, Annandale. Paul, L, (2008). Gower and Davies: Principles of Modern Company Law, 8th ed, Sweet and Maxwell Publishers, London. Cases Re W & M Roith Ltd [1967] 1 WLR 432 PBS v Wheeler (1994) 11 WAR 187 at 218 Daniels v Anderson (1995) NSWLR 438 Cth Bank v Friedrich (1995) 9 ACLC 946 ASIC v Healey per Middleton (2011) FCA717 Journals Chuah, J. (2007) The new Companies Act 2006 and Directors' Duties. Finance and Credit Law vol.6 Australian Securities & Investments Commission, December 2014 www.asic.gov.au Corporations Act 2001 Administration www.treasury.gov.au Read More