The Duties and Responsibilities of Directors of a Company under Australian Corporation Law - Assignment Example

Corporation Law Name Institution Corporation Law Introduction Directors govern and manage a company on behalf of the shareholders (Rezaee, 2009). The Australian Corporation Act 2001 states that the business of a company is expected to be managed under the guidelines of the directors. In Australia, all directors have general legal duties and responsibilities that they are expected to abide to (Plessis, McConvill and Bagaric, 2005). Such duties and responsibilities imposed under the Australian corporation law apply to different organisational structures including the public companies, proprietary companies to name a few. Therefore, the duties and responsibilities of the directors are identical in the public companies and proprietary companies. However, not all organisations are governed by the corporation law. Example of such organisations include incorporated associations like cooperatives, organisations working under a royal charter, charity organisations, government bodies etc. (Plessis, McConvill and Bagaric, 2005). This paper will highlight the duties and responsibilities of directors of a company under Australian Corporation Law and it will give a brief history of the evolution of the directors’ duties. The essay will also explain the consequences that directors face if they contravene the law and the available remedies and will also provide the future direction of Australian director’s duties and responsibilities. Directors of a company are people from a group of managers responsible for leading or supervising a particular section of a company (Ghuman and Aswathappa, 2010). Companies that use the term ’director’ often contain many directors placed in different business functions such as director of finance, director of human resource etc. Directors often report directly to the company’s vice president or CEO. Directors can be termed as individuals who manage the company’s business operations (Ghuman and Aswathappa, 2010). Even small companies contain at least a single director. Larger companies have more than one director who collectively has the responsibility of managing the business of a company. They can be referred to as board of directors. According to the Corporation Act 2001, first a director is considered a person appointed authentically as a director or substitute director. Second, director is an individual even though not authentically appointed as a director, takes the position of the director (Higgs, 2003). Third a director can be an individual even though not authentically appointed as a director act as “showdown director”. Non-executive directors manage a company in cooperation with other directors in the company on behalf of the shareholders by whom they are appointed. Such directors are not employed by the company in an executive capacity (Higgs, 2003). However, whether executive or non-executive, every director is expected to comply with the legal requirements and laws presented by the Corporation Act 2001. There are four major duties and responsibilities of directors under Australian corporation law. To start with, the corporation law requires that directors of a company to exercise powers and carry out their duties and responsibilities with care and diligence. Second, these duties and responsibilities are subject to a business judgment rule that requires directors to make judgment in good faith with proper purpose, and not have a material personal interest when making such judgements, inform the company about the subject matter regarding the judgement and rationally believe that the judgement made is in the interest of the company (Higgs, 2003). Third directors of companies are expected to exercise their powers and carry out their duties and responsibilities avoiding improper use of information acquired through position with an aim of gaining advantage that cause detriment to the company. Fourth, the directors are expected to avoid using their position for their advantage or of others to detriment the company (Higgs, 2003). A number of attributes of corporations can be drawn back from mediaeval times (Tomasic, Bottomley and McQueen, 2002). However, modern Australian corporation law began its operation with establishments in England in 1825. Many of the substantive duties and responsibilities of the directors were worked out by courts. The features and characteristics of corporation law are a product of statutory reform and the reactions of the reform (Tomasic, Bottomley and McQueen, 2002). With regards to director’s duties and responsibilities, it was conventional by the beginning of twentieth century that directors had justifiable duties and obligations to put their powers bona fide in action in relation to the interest of the company and for the right and proper purpose. The earlier cases can be referred to the judgement of “Isaacs J in Australia Metropolitan Life Insurance Co Ltd v Ure (1923) 33 CLR 199 at 217”. During the 1920s, in Re City Equitable Fire Insurance Co Ltd (1925) Ch 407 stated that directors have duties and responsibilities to exercise skill and diligence in the company. The court also clarified that with consideration to set standards of care required, duties of the directors had to depend on the nature of the company and the experience and knowledge of the director (Tomasic, Bottomley and McQueen, 2002). This is to mean that directors may delegate particular functions and duties to other officials trusting that those functions are performed honestly. This was commonly termed as a source of director’s responsibility to act with due care. Such principles have continued to endure over the years under the common law and are also reflected in director’s statutory responsibilities and duties contained under the Corporation Act 2001. Often, the actions of the director are treated as being the actions of the organisation in question. Thus, anyone acting as a director is required to be vigilant of the civil and criminal consequences when he or she contravenes the law. According to Section 178 CA 2006, the consequences of breach of responsibilities and duties are the same (Marson and Ferris, 2015). This is to mean that, with regard to the duties treated as fiduciary duties, the organisation would consider recovering the company’s property misused by the director or can make the director be accountable for the profits made in breach of the duties. In addition, the company may issue an injunction that prevent the breach from happening in the first place or alternatively rescind the contract. In an event where the complaint is that a duty of care and diligence has been breached, the company has the right to claim damages from the director where loss has been suffered due to the breach. In addition, the ‘proper plaintiff’ rule act as a restriction in bringing actions by the other members against the director (Gaines and Miller, 2007). Such rule is referred to as the rule in Foss v Harbottle. The rule states that if a company desires to enforce its rules by taking legal actions, such proceedings should be introduced by the body responsible from taking such legal action under the company’s set constitution. Customarily, the body responsible for bringing the legal proceedings will then be the company’s director (Gaines and Miller, 2007). In an event where the director found to have breached his duties control the board, there are often problems for the company to start with the legal proceedings due to compensation for the members. Therefore, the court has allowed members of the company to bring the proceedings via the ‘deviation action’ procedures (Gaines and Miller, 2007). Moreover, under Companies Act 2006, any member of a company has the right to present a derivative claim with regard to actual or proposed act involving default, breach of duty, trust and negligence by the director. Also, members are eligible to pursue an action if they perceive that the company has not fully dealt with the breach claim (Tolmie, 2003). Thus, in theory, members of a company can force the company to take actions against own director for breach of duties and violation of law. In addition, due to the insolvency of a company asa result of breach of law, the director is liable for the creditors. The principle is that all assets and liabilities of a particular company are separate entities from those of an individual who owns or controls the company. In this situation, the shareholders and creditors are the ones who will bear the losses and the directors responsible for the company’s insolvency will have the responsibility of sharing the losses. Breach of duty may lead to disqualification of the directors. A director may be disqualified from managing the company or taking the office of the director according to the Company Directors Disqualification Act 1986 (Tolmie, 2003). When an individual is disqualifies under CDDA, he cannot act as a director or concerned with management of a company. A director maybe disqualified in an event where he has been convicted of unlawful offence, has been determinedly in default, has been found guilty of a breach of law offence and where he has caused insolvency of a company (Tolmie, 2003). Contravention of law by the directors can be rectified by the company (Calder, 2008). Directors owe their duties and responsibilities to the company. Therefore, the members can ratify the violation by declaring that the company will not take any legal actions against the director with regard to the matter. The ratification intent must first be passed by members at a meeting or written resolution. Remedy from liability can be from the court. Even if the director has violated the law, he may still be excused (Calder, 2008). In a situation where proceedings are presented against a director for breach of duty of violation of law, the court can grant relief from liability. If the court decides that the director acted reasonably in spite of the violations, then the court may grant liability relief to the director wholly or in parts as deem fits. Another remedy from the consequences of violation of laws or breach of duty is insuring the director against liability (Gruner, 2004). Companies may not include provisions or indemnity in their articles for the purpose of excluding the directors from liability brought about by violation of laws or breach of duties. They may however decide to insure the directors against liability to a third party or to the company. In the last few years, Australia has witnessed the collapse of high profile companies as a result of breach of duties or violation of law by the directors (Blumberg, 2005). Nevertheless, legislation will never be enough to cater for a large number of organisations found in Australia, their mission, activities and operations of differing size and complexity in the business sector. A ‘one-size-fits-all’ approach with its mandated principles will simply not work and could lead to unintended consequences. There are more than 700 state and federal laws in Australia governing the director’s duties and responsibilities (Baxt, 2012). In future, there will be developments across corporation law as to whom directors should owe their responsibilities and duties when making decisions. These developments will be intended to promote long-termism and make sure that directors take into consideration stakeholder’s interests. Conclusion Directors are individuals who manage a company’s operations and activities on behalf of the shareholders. According to the Australia corporation law, directors have the duties and responsibilities of care and diligence, good faith, proper utilization of position and proper use of information to avoid detriment to the company. Before, the issues related to the duties and responsibilities of the directors were taken care of by the courts. Today, the duties and responsibilities of the directors are covered under the corporation Act 2001. When the directors contravene the law, they face consequences such as disqualification, liabilities to creditors, legal actions by the members etc. However, the directors can be relieved from their liabilities failure to follow the law. Relief can come from the court and the company. Also, some companies insure their directors against liabilities with regard to breach, violation of law, negligence etc. References Baxt, R. (2012). Duties and responsibilities of directors and officers. Sydney: Australian Institute of Company Directors. Blumberg, P. (2005). Blumberg on corporate groups. New York, NY: Aspen Publishers. Calder, A. (2008). Corporate governance a practical guide to the legal frameworks and international codes of practice. London Philadelphia: Kogan Page. Gaines, L. & Miller, R. (2007). Criminal justice in action. Belmont, CA: Thomson Wadsworth. Ghuman, K. & Aswathappa, K. (2010). Management : concept, practice and cases. New Delhi: Tata McGraw Hill. Gruner, R. (2004). Corporate criminal liability and prevention. New York, N.Y: Law Journal Press. Higgs, D. (2003), Review of the Role and Effectiveness of Non-Executive Directors, Department of Trade and Industry, London Marson, J. & Ferris, K. (2015). Business law. Oxford, United Kingdom: Oxford University Press. Plessis, J., McConvill, J. & Bagaric, M. (2005). Principles of contemporary corporate governance. Cambridge England New York: Cambridge University Press. Rezaee, Z. (2009). Corporate governance and ethics. Hoboken, NJ: John Wiley & Sons. Tolmie, F. (2003). Corporate and personal insolvency law. London, U.K. Portland, Or: Cavendish Pub. Tomasic, R., Bottomley, S. & McQueen, R. (2002). Corporations law in Australia. Leichhardt, NSW: Federation Press. Read More