Director Duties under Corporation Act 2001 - Essay Example

DIRECTOR DUTIES UNDER CORPORATION ACT 2001 –AN ANALYSIS In Australia, companies are governed by the general law of Australia and various provisions of both state and federal laws but the chief governing statute is the Corporation Act 2001. Under Corporation Act, directors of Australian companies are imposed with statutory duties. ASIC is toothed with the authority for prosecution of a director for a civil breach and can levy fine for a civil breach and may impose a banning order and an order to recoup the losses sustained by the company due to director’s action. If a director has been found with recklessness or dishonest, a criminal prosecution may be proceeded with levy of either fine or imprisonment1. 1. Have Smith, Jones and the other directors of Retailer fully discharged their legal duties to Retailer? In your answer you should consider their duties under the Corporations Act and under relevant case law. Under Section 191(1) of Australian Corporation Act of 2001, a director has the duty to inform other directors of his material special interest whenever there arise from conflict of interest. A director who has such material interest should give a notice of interest to other directors. As per section 191 (1A), if a director has a substantial personal interest in a business transaction that pertains to the business events of the company, then he will be liable for strict liability under section 6.1 of the Criminal Code2. Under section 195, a public company’s director who has a special individual interest in a business transaction that is being deliberated at a meeting of directors’ must not: Be present while the issue is being deliberated at the meeting; Vote on the issue3. Under Section 181 (1) of the Australian Corporation Act 2001, a director of a company must use their authority and carry out their responsibilities; In the best interest of the company with good faith For a proper purposes Under Section 182 (1), a director must not improperly employ their position to; Derive benefit for themselves or for someone else; or Cause disadvantage to the corporation4.\ At common law, a director has a duty to act in the best interest and good faith of the company and as fiduciaries, director’s have a duty of economic loyalty to the company. Directors must not use their authority for any private purpose or for private advantage. Directors are expected to function honestly in the utmost interest of the company. Under common law, the director’s have the following duty; Duty to function in bona fide or in good faith and in the whole interest of the company. Duty to not to abuse their authority for the improper purposes, and they should use their power in the best interest and benefit of the company and not for any improper or collateral objectives. Directors have an obligation to avoid potential and actual conflicts of interest and to have clear demarcation between their personal interests and their duty to the company and to avoid from enriching profit out of their position5. There should not be any conflict of interest between duties to company and personal interest and this is a primary rule of equity, which has been held in Phipps –Boardman6. In Magellan v Mount King Mining NL7, it was held by West Australian Supreme Court that the threshold for deciding whether an interest is material interest or not and when such interest is quite low, the character of interest “should have the ability to sway the vote of a specific director on whether to make a decision or not thereby keeping in mind that the conflict of interest must be of substantial and of real kind8 “Section 191 (1) of the Corporation Act 2001 “demand that a director has an obligation to inform other directors where he is having a material personal interest in a specific conflict. A director is not necessary to disclose his interest if If he is a shareholder of that company and not a director or director’s membership of the company. A notice of interest is given by the director to the company and how the interest impacts the affairs of the company. If he has declared his notice of interest at a board of directors meeting where such contract is being voted. The notice should contain the extent and the nature of interest and also the relation of such interest to the affairs of the company. Further, an interested director may declare his personal interest by way of enduring notice of his extent or nature of his involvement in the subject matter. If the extent or nature of the interest has materially increased above the extent that was disclosed in the notice, a standing notice may cease to have effect henceforth. As per the Section 195 (1) of the Corporation Act 2001, a director of public company who has a personal or special concern in a business transaction that is being deliberated at a meeting of directors, should not cast his vote on any resolution, which pertains to the subject matter and shall not attend the meeting while the issue is being deliberated by the board of directors at their meeting. Smith being the Chairman of the board and Managing Director of Retailer, an Australian Public company. In the problem , no mention is made about whether a notice of interest is given by the Smith to the company and how the interest impacts the affairs of the company .Whether Smith has declared his notice of interest at a board of directors meeting where such contract is being voted or not is not mentioned in the problem question Assuming that Smith has given a notice of interest and if the notice should contain the extent and the nature of interest and also the relation of such interest to the affairs of the company, then he may be exonerated from any misconduct . Further Smith had not participated in the meeting and did not vote on the resolution. However, if he has not given any standing notice about his interest, he may be later found guilty of misconduct if company sustains losses in the future due to award of contract to Myco, which is Smith’s family company.\ If any loss is being suffered by the company due to award of contract to Myco , then Smith be held liable for Under Section 181 (1) of the Australian Corporation Act 2001, a director of a corporation must exercise their authority and carry out their duties; In the best interest of the company with good faith For a proper purposes Under Section 182 (1), a director must not improperly employ their position to; Derive benefit for themselves or for someone else; or cause disadvantage to the corporation. 2. With what particular legal provisions under the Corporations Act should the board and the directors have complied? Retailer Board is already aware that Smith is only a shareholder in Myco. They also know that he is not a director of that company. The Section 191 (1) of the Corporation Act 2001 demands that a director has an obligation to inform other directors where he is having a material personal interest in a specific conflict. A director is not necessary to disclose his interest if If he is a shareholder of that company and not a director or director’s membership of the company. A notice of interest is given by the director to the company and how the interest impacts the affairs of the company. If he has declared his notice of interest at a board of directors meeting where such contract is being voted. The notice should contain the extent and the nature of interest and also the relation of such interest to the affairs of the company. Further, an interested director may declare his personal interest by way of standing notice of his nature or extent of the interest in the subject matter. If the extent or nature of the interest has materially increased above that was disclosed in the notice, a standing notice may cease to have effect. Smith should have given the notice of the interest to the Retailer Ltd. Further, the other director Jones is privately aware that Myco has had financial difficulties in recent times. This fact should have also brought to the board of directors of Retailer Ltd by Jones. In “Grand Enterprises pty ltd v Aurium Resources Limited”9, one of the chief allegations was that board resolution passed earlier by the company was invalid since there was a contravention of the provisions of section 195(1). The director has a duty to give notice under section 191 (1) to other directors of their personal interest in a subject matter of a contract discussed in such meeting. Further, it was alleged that interested director attended the meeting and casted their vote for the resolution which was against the provision of the section 195(1). In this case, Barker J held that in this specific case, no personal interest was present that is needed to be disclosed under s 191(1) since they did not qualify to material personal interest and hence, there was no breach of s 195(1). In this case, the director had in fact actually divulged their interest at the board meeting and there was no duty casted on them to adhere with s 195(1) as there was no need to divulge those interests in the first place. In this case, the court was under impression that there was no infringement of either section 191(1) or s 195(1) and would not make the specific resolution being invalid10. (Bender 2009:2). Apply the above ratio, Smith may be exonerated from the observance of the provisions section 191(1) and 195(1) of Corporation Act 2001 if the company does not incur any financial loss due to award of contract to Myco. 3. What would be the most appropriate remedy for a shareholder who later discovers that entering the contract with Myco, rather than a competing company, has in fact cost Retailer $10 million over the term of the three year contract? Class action suit means a suit or private enforcement method jointly initiated by the group of shareholders, institutions and individuals against the directors and the company against fraud and ways of recouping financial losses sustained due to the fraudulent activities of company’s directors. According to Law Reform Commission (1988) report, a group of shareholders can initiate a legal action against the erring directors and the company to recoup their losses which they could not achieve independently. Shareholders are having a variety of legal remedies for the frauds committed by directors under the following provisions. Under the Trade Practices Act 1974 (TPA), statutory remedies for deceptive and misleading conduct. Under section 12DA of the Australian Securities and Investment Commissions Act 2001 ( ASIC Act) Sections 728 of the Corporations Act 2001 In the last 5 years alone, class action suits in large numbers were filed by Australian Shareholders. GIO (1999) case is the leading case where a whooping $112 million was awarded. One King on behalf of about 68,000 shareholders of GIO filed a case on the ground that its takeover offer by AMP was containing misleading statements. GIO class suit was the largest Australian class action settlement suit as on the date and this case was considered to be an enlightening experience that shareholders can claim from the company the losses sustained by them due to misleading statements. In (January 2005), “Media World case”, a class action suit was registered against one Adam Clarke, director of the company for misleading representation linked with communications released by Media World. A class action suit was initiated against the Media World as it had offered a false promise of attaining fourteen percent market share in the Australian television household circle which later it acknowledged that its technology did not yield desired results. In Concept Sports case, (2004), a class action suit was filed against the corporation on the footing that the prospects issued by the company contained misleading information and did not facilitate the investors to make a best decision for investment. In “Sons of Gwalia”case, a class action suit was filed against the company on the ground that it engaged in deceptive and misleading conduct by not disclosing full details about its gold hedging activities. IMF has funded this class action suit and IMF was restricted by the Court to scrutinise the share registers of Gwalia to communicate with the members of the company to enhance the magnitude of the class action suit. In “Crosbie, Re Media World Communications Ltd”, it was held by Finkelstein that a shareholder of a company can recoup damages from a Company if such share purchase was tempted by misrepresentation or by fraud11. (Betts 2009) In Queensland Mines Ltd v Hudson (1978) 18 ALR 1, the managing director of the company had taken some license for mining exploration. However, more than fifty-one percent of shareholders of Queensland Mines Ltd did not approve to proceed on the project as there was no finance available for that venture. Due to this, Hudson resigned from his position and dedicated all his endeavours for the development of the project. Later, a new management of Queensland initiated action against Hudson for abusing of his official power to make a personal profit. The court viewed that since Hudson had informed the board about the project and later, the board decided to remove all its interests in the license and hence Mr. Hudson could not be held liable12.( AICD 2009). The Brookfield Multiplex case involves representative suits brought by shareholders against Brookfield Multiplex demanding for damages for the financial losses sustained due to management so-called failure to divulge the cost blowouts in the erection of Wembley’s Stadium in London. The shareholders alleged that there were a scam on the market and losses sustained due to infringement of company’s disclosure commitments and The Federal Court of Australia made a landmark judgement on 20 October 2009, which would have a rampant outcome for Australian suit funding industry, especially class actions suits. In Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd13 , the court held that the solicitor retainer for representative proceedings and the litigation funding arrangements tantamount to an unrecognised Managed Investment Scheme which was in violation of the provisions of the Corporation Act 2001. The Brookfield has filed for injunctive and declarative relief that would have effect of controlling the solicitors, litigation funders and the representative applicants from initiating any actions in relation to the offending arrangements and retainers14 Thus , shareholders of Retailer Ltd who later discovers that entering the contract with Myco, rather than a competing company, has in fact cost Retailer $10 million over the term of the three year contract can initiate a class action suit against the company to recover the losses sustained by them due to fraudulent acts Smith and other directors. Bibliography AICD Position Paper, Conflicts of Interest Policy (2009) at 1st April 2010 Anderson, Helen, Director’s Personal Liability for Corporate Fault (2008) Bendor, Philip, Case studies on corporation and Securities Law (2009) at 1st April 2010 Betts, Jason, The Rise of Shareholder Class Actions in Australia (2009) at 1st April 2010 Browns, Malcolm, Statutory Director’s Duties. An Introduction. (2009). at 1st April 2010 Bulling Jim, Litigation Funding Class Actions Have Corporations Law Problem. (2009) at 1st April 2010 CCH Australia Limited, Australian Corporation & Securities Legislation: 2009. Corporation Act 2001 (2009) Latimer, Paul, 2009 Australian Business Law (2008) Read More