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LAW5206 Corporations Law Assignment Solution
This LAW5206 Corporations Law Assignment Solution is focused on different type of undersection relevent of corporation law and its advantage and disadvantage.
The given circumstances give rise to few issues. That same are submitted herein under:
- Whether the directors of the company were in breach of any of their duties.
- Whether any of the directors, that is, Abbey, Bob, Cathy, and David can rely on the business judgement rule or any other defences.
The above raised concerns can be analysed in the light of the provisions of the Corporation Act, 2001.
Relevant Law – The Corporation Act, 2001
The role of the Directors in any company is very important. There are heavy duties and responsibilities that are allocated upon the Directors of the company. The main steps that can be undertaken by the directors in order to protect and fulfil their duties in regard to a company are, first, to seek the help of professional advisors; second, to keep them and other officers updated with the current scenario of the company; third, to allocate a necessary compliance and management programme and fourth, proper insurance coverage should be maintained. Thus, the role of a Director cannot in any circumstances be mitigated as the progress of any company depends upon the working of the Directors of the company. [Baxt, B, 2005]
The Directors are the part of a company which has its legal existence under the Corporation Act, 2001. There are several companies that prevail in Australia, such as, private company, public company, foreign companies etc, however, the role of a Director does not varies with the nature of the company. Rather the role and responsibilities are stagnant and must be furnished by Directors in every situation. The concepts of the importance of Directors are highlighted in Deputy Federal Commissioner of capital taxation v austin (1998). [Lucy, J, 2006]
The Directors of the company are allocated with several responsibilities, such as, duty to act in the best interests of the company, duty to act in good faith, duty of care and diligence, duty to mitigate any conflict of interests, duty not to misuse the company information are the duties which is in compliance of all the other duties. These are the duties which are imposed upon the Directors and are owned towards, creditors, shareholders, fellow directors, employees etc. The importance of the duties was highlighted in NRMA v Geeson (2002). [PWC]
All essentials duties of a Director are submitted below:
- Duty in the best interest of the company and to act in good faith: Section 181 of the Corporation Act, 2001 deals with this duty. It is almost on the same lines on the fiduciary duties of the common law. It was formerly known as the duty to act honestly. The duty states that it is not that the directors only act in respect of good faith and to act in the interest of the company, rather, the duty also encompasses that the same must be furnished for proper purposes. Whitehouse v. Carlton Hotels Ltd (1987) was an important case in which the duty was formulated. In this case it was submitted that giving shares to the son of a director is nothing but breach of duty of good faith and thus such transaction should be avoided. The duty was also highlighted in Advance Bank v. FAI Insurance (1987). The duty of good faith is not what is expected by the Director but what is analysed by a reasonable man in similar situation and is held in Blackwell v. Moray & Anor (1991).
If the director does not company with section 181 of the Act, then there can be civil and criminal imposition. Section 184 of the Act is applicable if the duty of section 181 is breached with dishonest and reckless intention. However, if there is no fraud then civil liability can be imposed by section 1317 of the Act. The concept was held in Australian Growth Resources Corporation Pty Ltd (Receivers & Managers Appointed) v. Van Reesema (1988). [Lexis Nexis]
- Duty to misuse of position and information: This duty is also a fiduciary duty that is imposed upon the Directors of the company and is highly prevalent under common law. Section 182 and section 183 comprises the concept of duty to not to misuse position and information and was established in Aberdeen Railway Co v. Blaikie Bros (1854). Section 182 and section 183 of the Act imposes an obligation on the Directors of the company that no misuse should be made with respect to the position and the information of the company. Further, the misuse must not bring any gain to the director and any loss to the company. The concept of the duties was highlighted in R v Byrnes (1995) & Chew v R (1991). When a Director brings gain to himself by using position or information then he is in breach of section 182 and section 183 of the Act. The concept was held in Sitmar Transit Mixes Pty Ltd v Baryczka (1998). If the Director is in breach of section 182 of the Act that it may result in disqualification of a Director or may be impose with the penalty of $ 1 million. If while the breach of section 182 involves fraud than criminal impositions can be made upon the Director. [Martin A, 2007]
- Duty to avoid conflict of interest: Section 191 to section 195 directly obligates the Director to avoid any conflict of interest and list down the thing which must be communicated to the other directors if there arose a situation which gave rise to conflict of interests. The disclosure of interest was highlighted in Centofanti v Eekimitor Oty Ltd (1995). [Overell A, 2011]
- No abuse of Corporate Opportunity: A Director has an utmost duty that he does no misuse the opportunity that is attained by him while being a Director and bring advantages to himself at the expense of the company. If a Director abuses the corporate opportunity it is nothing but breach of the common law duty to act honestly and for the benefit of the company. If by abusing the corporate opportunity the director attains any kind of benefits than the shareholders can demand the refund of the same. The abuse of corporate opportunity by the directors was validly held in the leading case of Queensland Mines Ltd v Hudson (1978). The courts have many times impose fine upon the Director for the abuse of corporate opportunities. There are several cases that submit that in no event the Director must misuse his position which will result in making loss to the company. These are Paul Davies Pty Ltd (in liquidation) v. Davies & Anor (1983) & Fexuto Pty Ltd v. Bosnjak Holdings Pty Ltd & Ors (2001). [Bevan C, 2013]
- Duty of Care and Diligence [Baxt, B, 2005]: Section 180 of the Corporation Act deal with the duty of care and diligence. Section 180 (1) was established in year 2000 after replacing section 232(4) of the Act. Section 180 mainly imposes an obligation upon the Directors that he must cater his duties with utmost care and diligence. The concept of duty of care was established in two leading cases, that is, ASIC v Rich & Ors (2003) and ASIC v Adler & Ors (2003).
Mainly the duty of care and diligence was for the first time formulated in AWA Ltd v Daniels & Ors (1992). The duty of care submits that it is the responsibility of the Directors that they must take heed to the affairs of the company. The duty of care and diligence was specifically obligated on the shoulders of the non-executive directors and was held in Daniels v Daniels (1979) & Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1977). In order to deal as to whether the care and diligence has been attributed by the Directors or not it is necessary to judge the actions of the Director in the light of what a normal reasonable man views. Along with this the position of the company and the directors are to be looked into in order to analyse whether the duty is properly furnished by the Directors or not. However, many a times the defaulting partners for the breach of section 180(1) of the Act is guarded by the application of business strategy rule. However, it is important to submit that the rule has its allocation only with respect to the duty of care and diligence. Section 180 (2) of the Act deals with business judgement rule. The director is relieved from the breach if he can prove that:
- The judgement is for proper purpose and in good faith;
- The judgement does not involve any material persona interest of the Director;
- They must inform themselves with respect to the judgement;
- That the judgement is in favour of the business.
If all the above submissions are made than it can be said that the director is not breach of duty of acre and diligence and is protected by the framework of business judgement rule. The concept of business judgment was highlighted in Talbot v NRMA Ltd (2001).
Duty to prevent Insolvent Trading [Worreells, 2011]
One of the most important duties that are imposed upon a Director is to avoid insolvent trading. Section 588G of the Act deals with this duty and is established in Woodgate v Davis (2002). The duty submits that no trading must be incurred by the company when the company is not solvent or will become insolvent if trading will occur, trading includes raising liabilities on behalf of the company. A director is held for breach of section 588G when he was aware that the company is getting involved into trading which will make the company insolvent and does nothing to stop the same. However, a Director can be safeguarded from the breach of section 588G of the Act, if he is able to prove the defences availed in section 588H of the Act. These are:
- The director has reasons to believe that the company is solvent or will remain solvent after incurring debt;
- The director was not taking part in the affairs of the company;
- All steps are undertaken to prevent insolvent trading;
- The decision of incurring debt is based on professional advice.
- Section 588 H was established under Manpac Industries Pty Ltd vCeccapini (2002).
- Thus, these are the relevant duties which are necessary to understand and analyse the raised issues.
Application of law
- Abbey is the MD of the Company and thus it becomes his paramount duty to look into the daily affairs of the company. Any action which will deteriorate the position of the company must be avoided. However, various contracts are undertaken knowing that the cash flow statement of the company is negative. Thus, Abbey is in breach of his duty of care and diligence, to prevent insolvent trading, good faith.
- Bob is the Chief financial officer of the company. He was aware regarding the self interest of Cathy in WS Ltd but he does not disclose the fact to the other Directors of the company. Thus, he is in breach of his duty of care and diligence, good faith, to act in the best interest of the company.
- Cathy is the non-executive director of the company. Cathy negotiated a contract with WS Ltd, the company which was owned by the son of Cathy and the fact was not disclosed to other Directors of the company. Thus, by not disclosing the same Cathy is in breach of duty to avoid conflict of interest, good faith, care and diligence, duty to misuse the position and information of the company.
- Further, all the directors of the company, approved the proposal of Abbey without looking into the financial report prepared by Bob and without listening to any clarifications from Abbey. They act may result in the insolvency of the company and thus they are in breach to act with proper care and diligence, good faith, to prevent insolvent trading.
Thus, all the directors are in breach of one or more of the duties.
- Abbey was in beach of taking care and diligence as being the MD of the company she must analyse each and every transaction that is taking place in the company. She can rely on the business judgment rule and its defences if it can be proved that she had taken utmost good care while furnishing her duties. Her actions are supported by an expert advice of Bob who was the chief financial officer.
- Bob being the chief financial officer must prepare the financial reports adequately. By not doing so he has breached his duty to take utmost care and diligence and thus cannot rely on the defuse of business judgement rule.
- Cathy by contracted with her sons company had shown his self interest and no care was conducted and which has resulted in causing great financial loss to company. Thus, Cathy cannot rely on business judgment rule.
- David by giving approval to the proposal does not considered the financial position of the company and that any new contract can lead the company in to insolvent trading. However he can safeguard himself by taking the defences valid under section 588H of the Act.
All the Directors are in breach of duty of care and diligence and other duties and can rely on the business judgment rule and the defences only if they can prove that they acted in good faith and all reasonable care all catered by them before involving the duties. That they played with full honesty and diligence.
To conclude, it can be submitted that the Directors are the essential part of every company and thus should follow the obligations imposed upon them so as to avoid any consequences.
Letter of Advice
Our Ref No:
Letter of Advice in regard to options best suited under the external administration procedures under the Corporation Act, 2001.
When a company is not in financial accounting position than the option that can be availed is External administration. There are three forms of external administration procedure. These are Voluntary (administration), receivership and liquidation. As soon as the external administration is opted, a person is appointed over your company and all the control is taken from you. You are be liable to make available all the books and accounts to the appointed person. Such person is an agent for the company. The appointed person may also carry in the business activity if so desired. [Australian Transaction Reports and Analysis Centre, 2011]
- The person appointed in case of voluntary administration is called administrator (section 437B of the Corporation Act, 2001).
- The person appointed in case of receivership administration is called receiver.
- The person appointed in case of liquidation administration is called liquidator.
As per the given facts submitted by you, the three shareholders and Directors of your company Stone Pty Ltd are Eric, France and George (your good self). The company operated by you deals in supply of food products to cafes around Toowoomba. It was submitted at your end that the company is facing difficulty in its financial position because several large customers of your company are not paying the invoices on time. This has resulted in having not funds to pay the bills, particularly rent. The owner of the warehouse has also warned you that if the rent is not paid on time he will evict you from the premises. Also, as submitted by you, the employees are taking industrial action in an attempt to receive a pay increase. This strike stops deliveries from the warehouse for two days, with several customers cancelling their supply contracts with the company. Further, the company’s bank, Eastbank Ltd, threatens to appoint a receiver over the company if the monthly interest is not paid within two weeks. From all the above stated facts it can be concluded that the company is not in sound financial position, thus, there are several external administration procedures that can be availed by you for Stone Pty Ltd. All the procedures are dealt one by one and a brief analysis is drawn with respect to its pros and cons,
Voluntary Administration– it is submitted that it is a process which is formulated by the Corporation Act, 2001. Part 5.3A of the Act deals with administration and its object is engraved under section 435A of the Act. The process of administration is very short @ one month. [Marshall R]
The person who is appointed as an administrator may be either, one, registered/official liquidator hired by the company board of directors (section 436A of the Act) , second, hired by the liquidator (Section 436B of the Act), third, hired by the secured parties (section 436C of the Act). It is the most common form by which external administration is done. The administrator can secure the position of the company and take out it from its financial position and can avoid insolvency.
- The impact of administration is three fold. That is:
- Cessation of the administration process and to grant the control of the company back in the hands of the Directors of the company;
- To change the process of administration to creditors voluntary liquidation;
- Application of section 439 and establishment of ‘Deed of Company Arrangement” (DOCA) for the company.
- Thus, in order to secure the position of the company and to retain the control over the company the best option that can be availed by your company is voluntarily administration
Process of voluntary administration [Herat A, 2013]
As soon as an administrator is appointed, he takes the control over the affairs of the company. He is responsible for the decisions in regard to the company. The administrator must conduct a creditors meeting within 5 days of his appointment. After 28 days, another meeting of the creditors is called under which a report is submitted by the administrator submitting that whether a deed of company arrangement or liquidation is preferred.
Advantages of administration [Herat A, 2013]
- The process of administration is very short @ one month;
- Statutory safeguard is provided through this process;
- It gives a time frame to the directors of the company so that they can focus and improve the conditions and activities of the company;
- By the appointment of the administrator the profitability of the company can be improved and enhanced;
- Discussions and negations can be established with the creditors of the company;
- The insolvent trading of the company is restricted;
- The trading of the company can be re-established;
- The personal liability of the directors can be evaded.
Disadvantages of administration [Lee C, 2008]
- That the whole and sole authority of the company is transferred in the hands of the administrator. Thus, there is no involvement of the directors in the affairs of the company;
- There is no compulsion that the administrator will come out with positive results. He may furnish his reports by stating that it is just that the company should be wound up;
- There are several after effects that can be faced by the company such as, difficulty in securing finance, lack of suppliers etc.
Impact on creditors [ASIC, 2013]
- The unsecured creditors cannot begin or start their claims in regard to the company without the approval of the court or the administrator;
- The property which is given to the company cannot be recovered (except perishable property);
- The Secured creditors cannot take charge over the property of the company except in few cases;
- the creditors cannot put an application in the court for the liquidation of the company;
- If a creditor is holding any personal guarantee, than he can only act after getting consent from the court.
- The next option that can be availed by your company is Liquidation.
Liquidation - There are two types of liquidation that is prevalent in the corporation Act 2001. These are: [Marshall R]
Official liquidation – Official liquidation is normally carried on by an order of the court (superior). The orders are normally made under three circumstances. These are:
- In case of insolvency – section 459A of the Act;
- On just and equitable grounds – Section 461 (1) of the Act;
- On the grounds of oppression – section 233 (1)(a) of the Act.
Voluntary liquidation – part 5.5 of the Corporation Act, 2001 deals with voluntary liquidation. When the members of the company wants to liquidate (wound up) the solvent company, then they can do so by passing a special resolution in this regard as per section 491 of the Act. However, an insolvent company can only be wound up voluntarily when along with the members meeting an extra creditors meeting is conducted who will appoint a liquidator by virtue of section 497-499 of the Act. The person who is appointed as a liquidator can be registered or official. The main aim of voluntary liquidation or voluntary winding up of the company is that the asset of the company is disposed off and allocated to the creditors. Any surplus that is left is given to the shareholders of the company. The company is deregistered in the end.
If you want to liquidate and cease the company and does not want its control retained then this option can be availed.
Advantages of liquidation
Official [Tully K, 2010]
- The debts of the company are dissolved and it gave new pathway for the establishment of new compony;
- The fraudulent and wrongful trading is reduced;
- The pressure of the creditors is mitigated;
Voluntary [Business debt advice, 2010]
- Any unpaid debts are written off by the creditors when the company is closed;
- The liquidator is appointed at the behest of the directors;
- The aim of the directors and officers is to establish a new company rather than wasting the time on a already lost company;
Disadvantages of liquidation
Official [Tully K, 2010]
- The established business venture was put to an end;
- The officers can be hold personally accountable for the debts of the company;
- The reputation of the business is shattered;
- Voluntary [Business debt advice, 2010]
The liquidator can submit the report on the conduct on the actions of the directors. If the directors are found to be in breach of insolvent trading then they can be disqualified;
- A creditor who has personal guarantee has an added advantage;
- If there is extra liability of the directors than the liquidator will hold the director liable to pay off his dues;
- The employee relation of the company may not receive their entitlements.
Impact on creditors [Company Liquidation, 2013]
- The unsecured creditors of the company can in no circumstances can initiate or pursue already instituted legal proceedings against the company unless consent is given by the courts;
- The unsecured creditors does not have any right to claim their dues from an insolvent company;
- There is no impact of liquidation on the position of the secured creditors. Thus, any dues of the secured creditors can be easily recovered.
- The third option that can be availed by your company is receivership.
Receivership – There are two ways under which receivership can be done. These are by court or by establishing a contract. The main task of the receiver is to take the assets of the company, to receive payment from the debtors. Further, the unsecured creditor’s claims are not dealt in comparison with the secured creditors (section 433 of the Act). The actions of a receiver are guided by Part 5.2 of the Act. Further section 418(1) of the Act submits that a receiver can be official or registered. [Marshall R]. Normally a company is taken to receivership when the secured creditors of the company appoints a receiver who takes control over the assets of the company, disposes the same and pay the debts of the secured creditors.
Advantages of Receivership [Receivership, 2008]
- The pre-receivership contracts are not terminated because of the appointment of receiver;
- Majority of the liability will be release and a new start can be given;
- Any leftover property will be given back to the company;
- Legal action can be initated by the company;
- The problem caused by the unsecured creditors will be mitigated;
- The legal action that can be initiated by the unsecured creditors through courts can be avoided;
- The wages and bank accounts will not be unnecessarily prettify
Disadvantages of Receivership[Receivership, 2008]
- It will on public record;
- Legal action can be initiated against the company;
- The debts which are fraudulent cannot be discharged;
- The fines of the courts are not dealt with;
- The ability to get credit will be negatively affected;
- The ability to get insurance will be negatively affected;
Impact on creditors[Receivership, 2008]
- Access to assets can be granted to the creditors which would not be available in normal course;
- The unsecured creditor has every right to move to the court with regard to any outstanding debts;
- The debt owned by the secured creditor is paid off;
- The report prepared by the receiver cannot be viewed by the unsecured creditor.
After understanding all the three options, it is suggested and recommended that the best option that can be availed by your company is opt for administration, rather than liquidation or receivership. This is so because by appointing an appointer the company can retain its financial position back and the company remain alive. By option receivership or liquidation there is cessation of the company. Hence, it is advised that the company must be voluntarily administered.
Aberdeen Railway Co v. Blaikie Bros (1854).
Advance Bank v. FAI Insurance (1987);
ASIC v Rich & Ors (2003);
ASIC v Adler & Ors (2003);
Australian Growth Resources Corporation Pty Ltd (Receivers & Managers Appointed) v. Van Reesema (1988);
AWA Ltd v Daniels & Ors (1992);
Baxt B, “ Duties and Responsibilities of Directors and Officers” (2005) 18th Edition <http://www.savillhickscorp.com.au/sites/default/files/D&OExtensiveExplanation.pdf>;
Bevan C, “A Guide to Director's Duties in Australia” (2011) < http://www.findlaw.com.au/articles/32/directors-duties.aspx>;
Blackwell v. Moray & Anor (1991);
Centofanti v Eekimitor Oty Ltd (1995);
Chew v R (1991);
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