Breach of the Directors Duty - Example

Breach of the director’s duty Organization Law Name Institution Date Introduction The corporate governance issues are increasingly becoming useful in Australia as well as other parts of the world1. This can be attributed to the number of companies that have been collapsing in the recent past. In Australia, companies that used to perform well as HIH, One Tel and Harris Scarfe are among the recent companies to collapse. The collapse of the companies is mainly attributed to the aspects of corporate governance. The role of the directors is one of the corporate mechanisms that influence the success of the companies. In Australia, the role of the directors has clearly been highlighted in the Corporations Act 2001 (Cth)2. The control of the company is mainly dependant on the how effective the directors play their roles. The directors have to encourage the efficient use of resources and ensure there is accountability in the use of the resources. The paper thus discusses how the director’s duties should work in order to ensure competent and ethical operations. Discussion In order to ensure that companies operate competently and ethically, the director’s duties should be enhanced. The power to control and direct the company is currently under the directors. According to section 198A (1), of the business of the company has to be managed under the directions of the director3. This is an aspect that requires further changes as it has partly contributed to corporate governance challenges. Some of the directors usually end up abusing their powers or using their influence for personal benefits. This has impacted negatively on ethics as well as competence. The shareholders require more powers in order to ensure that the directors are accountable. The shareholders should be involved in every decision that affects the company4. It is also important for them to have the powers to reject some of the decisions made by the directors if it is not in their best interest. The shareholders must be consulted before any direction is implemented by the directors. The directors should play a more active role in encouraging the shareholder to participate in the operations of the company. In the current situation as highlighted in the case of Howard Smith Ltd v Ampol Petroleum Ltd, the shareholders cannot direct the board to exercise its powers5. Loyalty and good faith forms the core aspect of the duty of the directors. According to section 181, the directors have a duty to act in good faith and in the best interest of the company6. Since the shareholders cannot direct the board to exercise its powers, it is important for the directors to act in good faith and best interest of the company in accordance to section 181. This will ensure that the needs of the stakeholders are met and hence reducing any conflict with the directors. All the directors have to be provided with a clear definition of their roles and aspects of good faith and interest of the company. A clear distinction has to be made in order to determine when a director is not acting in good faith and best interest of the company. Any director who is not acting in good faith and best interest of the company should be declared incompetent and unethical7. As such, they should not be allowed to work as directors in any other company. This is likely to promote competence and ethics among the directors. Conflict of interest is an aspect that affects corporate governance. According section 191, the directors have a duty to disclose certain interests. This was highlighted in the case of ASIC v Healey where the directors could have benefited from failing to disclose certain interests8. It is important for the directors to fully disclose information that may cause conflict of interest. In case of any conflict of interest, the individuals should not be appointed as directors. However, they can choose to forfeit their interests so as to be appointed as directors. In case they were shareholders, they can sell or transfer their shares before being appointed as directors. The directors should fill a disclosure form on an annual basis. The directors should not be allowed to work on the same companies with competing interest. This is due to the conflict of interest that it is likely to generate9. It may affect their decision making process and loyalty which may contravene section 181. Tougher penalties including disqualification as well as jail terms should be enforced in case of failing to disclose any conflict of interest. A director who is found not to have disclosed certain interest contravenes section 191 which attracts jail terms, fines or other penalties. According to section 180, the directors are required to act with reasonable care and diligence10. The directors should thus use the consultative approach during the decision making process. A director or directors that act without considering reasonable care and due diligence should be held personally liable for any losses. The directors can be charged for criminal liability under section 588G (3). This may be the case when the directors flout the company rules or national laws while carrying out their duties. Criminal liabilities may also arise when the directors make decisions that are aimed at benefiting them personally as opposed to company and shareholders. Currently, this is a complicated process due to the existing loopholes in the law11. The directors and the company are treated as separate entity which has seen the company bearing losses for decisions made by the directors. The directors usually escape prosecution as the company ends up shouldering the responsibilities. Heavy penalties need to be imposed on the directors who are in breach of their duties. In the case of Lord Macnaghten, Salomon v Salomon & Co Ltd, it was held that the company is a different entity from the owner12. This has been misused by some of the directors who are owners of the company. To enhance competence, ethics and corporate governance, the directors should be held liable for failures or irregularities by the company. This will play an important role in ensuring that the incident of directors hiding under the corporate veil is eliminated. Ethics as well as competence will be enhanced when the directors can no longer hide under the corporate veil. This should further be reinforced by section 588M which deals with the recovery of amount lost due to aspect such as insolvency trading. The directors should strike a balance between the interest of the employees and that of the shareholders13. As highlighted in the case of Parke v Daily News, the interest of the shareholders comes first14. This means that the directors have a duty to ensure all the employees are competent and ethical when discharging their duties. The directors have to ensure that they are able to discharge their duties effectively and with competence in order to strike a balance. Continuous development is an aspect that should form part of corporate governance15. The directors should ensure that they continue to attain and maintain adequate levels of knowledge and skills. This may include the management as well as the leadership skills which can be enhanced through training. All the directors of a company should make a commitment to learning and professional improvement. This will ensure that the directors are able to carry out their duties more efficiently and effectively. Further enhancements are required in order to improve on the director’s duties. In order to improve on the aspects of ethics regarding the director’s duty, integrity and honesty has to be upheld by the directors at all times. The directors should be subjected to an integrity test based on the code of conduct developed by ASIC as well as the company’s. This will play an essential role in ensuring that individuals who are not ethical and are likely to breach section 180 and 191 are not appointed as directors of a company16. Any director that has previously been involved in deceit and intentional dishonesty should be disqualified from holding such a position. The culture of intellectual honesty and impartiality has to be incorporated into corporate governance. This will play an essential role in eliminating the unethical activities in corporate governance that was highlighted in the case of Briggs v James Hardie & Co Pty Ltd17. The directors as part of their duty should always maintain subjectivity and avoid subordination of their judgment. Confidentiality is an aspect that is required directors under section 184. The directors should not provide the competitors with information about the company. In case the company is selling its shares, the directors should not provide their friends, family members or any other person with detailed information about the sale. This is the responsibility of the company as such information may give them due advantage over the others who intend to engage in the sale18. Failing to maintain confidentiality has negative ethical implication. The failure to maintain confidentiality can lead to the detriment of a company and hence its relevance19. ASIC should also come up with a database that has information regarding the directors who have failed to uphold their duties in relation to competence and ethics. The presence of deterrence measures can be useful in enhancing corporate governance in relation to duty of the directors. Conclusion In conclusion, it is evident that the director’s duty requires further improvements in order to improve on corporate governance. The standards of ethics as well as competence among the directors have to be improved. Honesty and integrity among the directors can be useful in improving on corporate governance. The existing laws have some loopholes which impacts negatively on the corporate governance. Several are companies in Australia have collapsed due to the poor corporate governance. Accountability and transparency can be enhanced in an organization by improving on the corporate governance issues related to the director’s duty. Continuous training of the directors is required in order to improve on their competence. Tougher actions have to be taken against the directors who are in breach of their duties. References Legislations Corporations Act 2001 (Cth) Cases Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3 ASIC v Healey [2011] FCA 717 Lord Macnaghten, Salomon v Salomon & Co Ltd Co Ltd [1897] AC 22, 51 Parke v Daily News [1962] Ch 927. Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 Articles Hanrahan, P., Ramsay, I., & Stapledon, G., (2016). Commercial Applications of Company Law. Wolters Kluwer. Goulding, S., (2013). Principles of company law. Routledge. 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. Schultz, E, et al., (2013). Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), 447-472. Kathyayini, K., et al., (2012). Corporate governance and environment reporting: An Australian Study. The international Journal of business in society, Vol. 12 Iss: 2, PP. 143-163. Read More