Directors of a Company and Australia Corporation Law on Directors Duties - Case Study Example

Company Law Assignment Name Institution Name Date Introduction The success of any organization depends on the effectiveness of different stakeholders and the strategic obligations and contributions of these stakeholders. Shareholders create a company, and the duties are assigned to the directors. A single company can have a few shareholders to thousands of shareholders, which creates challenges in running the establishment and the decision to manage the company is given to directors. Directors have numerous responsibilities and roles depending on the size, location, and type of the organization. The paper discusses directors of a company through highlighting the legal framework, roles and responsibilities, and means of addressing complexities that may occur while the directors manage a company. Directors of a Company and Australia Corporation Law on Director’s Duties A director is an individual who is tasked with managing a company’s business activities. A director manages a company on behalf of the shareholders of a given company (De Silva Lokuwaduge & Armstrong, 2015). The mandate, responsibilities and legal framework are contained in the Corporations Act 2001. ‘The business of a company is to be managed by or under the direction of the directors’ (Corporations Act 2001, s198A). The laws and legislations categorically state that directors have to manage a business. Depending on the size of the business, an individual director can manage the business, but while the company continues to grow, more directors are required. According to the Australia Corporation Act 2001, the Act defines four duties that the directors have to perform. The duties are care and diligence, good faith, proper use of position, and proper use of information. Under s180, the directors are advised to act with a degree of diligence and care within stipulated limits and standards. For example, Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 relied on s180 whereby the courts found out the directors of a financial company did not act reasonably. S181 discusses the aspect of good faith and interests of the company should be championed including revealing and managing conflicts and avoiding conflicts of interest. The s181 raises the fiduciary duty that is associated with the duty of trust and fidelity, which are imposed on the directors by required legislation and standards. Corporation Act 2001 (s182) states that a proper use of the position is integral in that an individual should not use the position to gain an advantage for themselves while negating the requirements of the company. The proper use of information as contained in s183 infers that the directors are not required to gain an individual advantage on any information they access during their roles as directors. Any information gained should be used in furthering the objectives and requirements of the organization. Overview of Roles and Responsibilities of Directors The history of the roles and responsibilities of directors can be viewed as having grown indefinitely and incrementally. In the 19th century, the meetings of shareholders were seen as a directive approach of running the business but the problems that emerged illustrated the need of creating the specifics of directors. The shareholders cannot manage the business because of emotional and lack of experiences meaning directors can fill the void. The article of association continued to influence the position and growth of the directors as indicated in the Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 whereby the role of directors depends on the construction of the articles of association. Quin & Axtens v Salmon [1909] AC 442 cemented the position of directors in advancing the requirements of management while the modern roles and responsibilities are highlighted in the John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 indicating the position of the board of directors. The position of directors meant that frequent adjustments and reviewing to reflect the changing business and operational dynamics inferred the roles and responsibilities had to be clarified. The following are the duties and responsibilities of directors today: i. The directors have to act and operate within defined powers such as compliance with the company’s decisions and constitution (Clarke & Branson, 2012). ii. Acting in a way the director considers it promote the success of the company such as considering the interests of the company’s employees, long-term consequences of decisions, fostering positive relationships with different stakeholders and maintaining positive reputation (Nicholson, Newton & McGregor‐Lowndes, 2012). iii. The directors have to exercise independent judgment such as working without the influence of others but can relate in advice in exercising their judgment iv. Directors have to exercise reasonable diligence, skill, and care (De Silva Lokuwaduge & Armstrong, 2015). It is based on the experience, skill, and knowledge of the director towards fulfilling the requirements and objectives of their respective position (Dignam et al. 2012). v. To avoid conflicts or potential conflicts between the company and the director’s interests vi. Not to benefit from the position by influences from a third party or reasons associated with been a director of a given company (Dignam et al. 2012) vii. A director has to declare conflicting situations and conditions to ensure the actions and approaches taken does not raise or create conflict of interest (Nicholson, Newton & McGregor‐Lowndes, 2012) The Corporations Act 2001 plays an important but does not govern all organizations meaning there are some organizations that employ similar Acts and approaches. For example, Corporation Act 2001 is not applicable to cooperatives, which are governed by Associations Incorporation Act. Others include charities, organizations operating based on a royal charter, organizations incorporated by specific Act such as the University of New England Act 1993 (NW) and the Anglican Church of Australian Constitution Act 1961 (NSW), which are either passed by the Federal or State Parliament. Others are government bodies that have their legislation such as the State Owned Corporations Act 199 (NSW) and the Commonwealth Authorities and Companies Act 1997. Even though these legislations and Acts are different, the creation and development of these Acts are borrowed heavily from the Corporation Act 2001. Consequences of Directors Contravening the Law and Remedies Sometimes, the directors may fail in the implementation of their respective duties and responsibilities. When the directors contravene the law, numerous remedies are available (Valentine & Stewart, 2013). Compensation and damages are alternative courses of action in regards to the losses that the company or principle has suffered. Gemstone Corporation of Australia v Grasso (1994) 13 ACSR 695 states that compensation can be made based on circumstances and conditions. The director may be forced to meet the costs of their respective actions, depending on the nature and extent of failure. In Warnam International Ltd v Dwyer (1995) 182 CLR 544 the court pointed out that a company can elect between equitable compensation and account of profits. Therefore, a company can consideration both targets since it compensates the shortcomings of directors in fulfilling their roles and responsibilities. Rescission of a contract and summary dismissal is sometimes employed depending on the extent of misunderstanding and contravention. Trust and honesty are important factors in determining the position of the directors and conflict of interest may contribute to termination of contracts and employment. Keech v Sandford [1726] EWHC J76 points to the fiduciary duties of company directors meaning a conflict of interest translate to a breach of trust, and the potential outcome is dismissal or rescission of a contract. Maguire v Makaronis (1997) 188 CLR 449 states that a company may repeal, cancel or revoke any contract the director has entered. In general, it means that the contracts cannot be implemented and an individual is in a position of losing his/her employment’s contractual benefits and obligations. In addition, another strategy that can be employed is the restoration of the organization’s property if the property is traceable. In certain situations such as after auditing, the assets can be traced to a director, and it is potential to pinpoint the location of the property or asset, the director may be forced to surrender the property (Clarke & Branson, 2012). For instance, a company can trace funds to a director’s account; the company proceeds to courts and seeks directions to restore the property. Similar approaches can be employed when a director transports goods to another location or use the property for personal benefits. When the direct restoration is not possible, the next step is employing other approaches such as the account of profits, rescission, and compensation. In addition, an account of profits can be implemented whereby a director has made profits out of the company’s information: an equitable allowance can be made to the company. Warman International Ltd v Dwyer [1995] 128 ALR 201, the court held that when individual benefits from a fiduciary engagement, the profits or benefits have to be distributed to the interested parties. A proportion approach is employed depending on the particular circumstances. The Future Direction of Director’s Duties in Australia The future of directors is demanding and raises additional responsibilities and roles. Social and environmental responsibilities continue to influence the role and responsibilities of management (De Silva Lokuwaduge & Armstrong, 2015). The directors have to consider the wider impact of their decisions and approaches to the business conditions. For example, the aim of companies is to generate more profits, but it is also important to consider the social objectives. Balancing the numerous requirements is paramount to a future director responsibilities and roles. Change of reporting from environmental reporting to sustainability reporting where variables such as economic, environmental and social are incorporated (Dignam et al. 2012). Directors have to create an environment and situation that is possible to report the happenings and outcomes of the company. Originally, the directors employed the use of financial statements such as profit and loss accounts, and balance sheets (Nicholson, Newton & McGregor‐Lowndes, 2012). These documents relied on profitability and shareholder’s value without considering the impact to the wider operating environment. The change of report would reflect on sustainability situations in which the directors are able to report the accomplishments and the impact of the accomplishments to the social and environmental fabric (Clarke & Branson, 2012). It means the content of the financial reports would be increased and clarified to enable identification of accomplishments of a company. Dynamic and enlightened shareholder aimed at shareholder value, which means shareholders would continue scrutinizing and influencing the business activities of the company (Nicholson, Newton & McGregor‐Lowndes, 2012). The shareholders would complain and determine the effectiveness of the directors and whether the directors can achieve the plans and objectives (De Silva Lokuwaduge & Armstrong, 2015). For example, the shareholders would argue that directors have to increase profits while also considering the requirements of employees (Dignam et al. 2012). The aim is to create a positive reputation, which is integral in furthering the objectives of the company (Sotiriadou & De Bosscher, 2013). In addition, an informed shareholder can easily identify areas requiring improvement and strategies that can be employed in furthering the objectives of the company. Significance and management of internationalization and globalization would impact heavily on the director’s roles and responsibilities (Young & Thyil, 2014). The advancement of technology introduces challenges and new approaches of completing activities (Sotiriadou & De Bosscher, 2013). For example, globalization and advancement of technology mean that companies can operate across boundaries and the introduction of online payment systems requires enhancement of security measures (De Silva Lokuwaduge & Armstrong, 2015). Directors have to incorporate the technological and changes systems into the management and running of the organization and also implement measures that can counter the risks and challenges of new processes (Dignam et al. 2012). For example, internationalization of businesses requires directors who appreciate numerous legislations and frameworks that have to be integrated into the business activities. Hence, the role and responsibilities of directors continue to emerge and expand meaning directorship has to be responsive in nature. Conclusion In conclusion, the roles and responsibilities of directors include ensuring the needs, views and aspirations of the shareholders are fulfilled. It includes gaining trust, championing honesty, adhering to the fiduciary objectives, working within the standards and legislations in place, and assisting in formulating and implementing measures beneficial to the shareholders. Effective engagement and collaboration with shareholders and stakeholders are crucial to the achievement of different objectives and requirements. References Customary Laws, Court Cases and Legislations Anglican Church of Australian Constitution Act 1961 (NSW) Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 Commonwealth Authorities and Companies Act 1997 Corporations Act 2001 Gemstone Corporation of Australia v Grasso (1994) 13 ACSR 695 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 Keech v Sandford [1726] EWHC J76 Maguire v Makaronis (1997) 188 CLR 449 Quin & Axtens v Salmon [1909] AC 442 State Owned Corporations Act 199 (NSW) University of New England Act 1993 (NW) Warnam International Ltd v Dwyer (1995) 182 CLR 544 Books Clarke, T., & Branson, D. M. (2012). The SAGE handbook of corporate governance. London: Sage Publications. De Silva Lokuwaduge, C., & Armstrong, A. (2015). The impact of governance on the performance of the higher education sector in Australia. Educational Management Administration & Leadership, 43(5), 811-827. Dignam, D., Duffield, C., Stasa, H., Gray, J., Jackson, D., & Daly, J. (2012). Management and leadership in nursing: an Australian educational perspective. Journal of Nursing Management, 20(1), 65-71. Nicholson, G., Newton, C., & McGregor‐Lowndes, M. (2012). The nonprofit board as a team: Pilot results and initial insights. Nonprofit Management and Leadership, 22(4), 461-481. Sotiriadou, P., & De Bosscher, V. (2013). Managing high performance sport. New York: Routledge. Valentine, E. L., & Stewart, G. (2013). The emerging role of the board of directors in enterprise business technology governance. International Journal of Disclosure and Governance, 10(4), 346-362. Young, S., & Thyil, V. (2014). Corporate social responsibility and corporate governance: Role of context in international settings. Journal of Business Ethics, 122(1), 1-24. Read More