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TLAW 101 Business Law Assignments Solution
(a) In this part of the question, it has to be explored if any person can be held responsible for the breach of duties that are present for the directors of corporations.
Rule: under the corporation’s law, several duties are present for the directors. These duties have been mentioned in the Corporations Act, 2001. In view of these duties, it is required that the actions of the director should be bona fide. Moreover, the director should always give preference to the interests of the company. The Corporations Act also requires that the directors should use their position in the company only for proper purpose. Therefore, s. 181 imposes a duty of good faith on the directors of corporations (Austin and Ramsay, 2013). This provision requires that the powers given to the director should be used in good faith. Similarly, the director should always keep in mind, the best interests.
According to s 182, the talent provided that the position of the directors should not be used improperly. An example of the improper use of the position of director takes place when the director continues to allow the company to act even when the director is aware that the financial accounting condition of the company is not stable.
Is there anything that has been imposed on the directors is to prevent insolvent trading. This duty has been mentioned in s 588G. therefore, this provision provides that it is the responsibility of the directors that they should not allow the company to trade if they are aware of the fact that the company may be insolvent or if they have doubts that the company may be insolvent (Ford, 1978).
Application: at the present scenario, Dion failed to disclose the opportunity that was offered to the company, by the CEO of Organica Ltd to the board of his company. As mentioned above, it is the duty of the directors and one with which the bona fide. Moreover, the directors are also under an obligation to give preference to the interests of the corporation (Farrar and Hannigan, 1998). The test that can be applied for this purpose to see if the directors have complied with the duty, is an objective test. Therefore, this does is concerned with honesty and good faith. Hence, it will be treated as the violation of the duty is the directors have subjectively failed to properly consider the interests of the company. For example, this case may be present when the directors assume that the company's interests correspond with the interests of the director and they fail to treat the interests of the company as a separate entity (Paterson and Ednie, 1976). It is also very significant that the directors to consider the interests of all the shareholders jointly. As compared to this situation, when the corporation becomes insolvent or there is a risk that it may become insolvent, the law requires that the. Directors should prefer the interests of creditors instead of the shareholders.
Under these circumstances, it can be said that the directors are under an obligation according to which they should not use their powers for an improper purpose. It can be said that an improper use of their powers has taken place by the directors when the directors use these powers in order to receive a personal benefit or for the purpose of defeating the voting power of the current shareholders and creating a new maturity for this purpose. It needs to be noted that the law requires that while using the power of issuing new shares, it is significant that the directors should consider the interests of the company as a whole. For example, in such cases, it can be said that the purpose is proper if it is done for raising capital or take advantage of an opportunity that has arisen for the company.
There has been another breach of duty by the directors. These breaches related with the duty body with the director should not allow the company to trade if the company is insolvent. On the other hand, during the whole meeting, Vance recommended Food Works should make another investment of $100,000 for its marketing and media advertising efforts. This strategy was also favored by the other two directors, Dion and Larry. However, Peter, who is also director of the company had considered the cash flow statement and he also discussed the matter with the company's accountant and came to the conclusion that already there were -- no problems for the company. Therefore, it was clear that the company was going to face insolvency.. As Elizabeth was not a good idea to me any more investment in advertising and marketing. Even in the presence of such circumstances, the three directors of Food Works, Vance, Larry and Dion decided that the company should go ahead with making additional investment of $100,000. They also passed a resolution for this purpose, according to which the company was to continue with aggressive strategy regarding marketing and advertising for the next year. However, within a few months, the company ran dry of capital. In this way, it can be said that in this scenario, these directors of the company were also responsible for the violation of the duty which requires them to prevent insolvent trading by the company. This amounts to the breach of s. 588G of the Act.
Conclusion: by applying the relevant provisions of the Corporations Act, in this case, the conclusion arises in this question that three directors of Food Works, Vance, Larry and Dion have reached their duties imposed on them as the directors of the company.
(b) Issue: the issue is related in any defense that may be available to the directors of the company regarding the allegations concerning the breach of duty.
Law: the law offers a defense to the directors when it has been alleged that the directors are liable for the breach of their duties. These defenses available as a business judgment rule. It was the role of the common law, but now, this room has been incorporated in the Corporations Act. Therefore, s. 180 (2) contains the provision that is based on the business judgment rule. It provides a defense to the directors for the business judgments that have been made by them in good faith. But the Act provides that the director should not have any personal interest in the decision that is being made by them. It is also required that the decision should be an informed decision up to the level that is reasonably expect to perform any other person acting in a similar position. At the same time, it is also required that it should be reasonably believed by the directors the judgment being made by them is for the welfare of the company.
Application: as mentioned above, there are certain requirements that should be fulfilled for availing the defense that is available in the form of business judgment rule. However in the present scenario, the defense available in the form of this rule is not available to Dion. The decision was not made by Dion in good faith and keeping in view the welfare of the company. Therefore, Dion used a lucrative business opportunity that was presented to Food Works by the CEO of Organica Ltd., who another company, Lifestyle Today Ltd. Dion is the sole director and only shareholder of this company. Therefore, in the present scenario, Dion, used his position as a director of Food Works improperly as he tried to achieve a personal benefit.
Conclusion, in view of the facts mentioned above comment, is that it can be said that the defense is not available in the present case. The directors of Food Works cannot use the defence provided by the business strategy judgments rule.
(c) Issue: here the issue is if the penalties that can be imposed on the directors under the corporations act for the breach of their duties, and also the remedies that may be available under the law for the breach of duties by the directors.
Law: civil as well as criminal penalties have been prescribed for the directors when they are held liable for the breach of their duties. According to the Corporations Act, when the director has been liable for the breach of duty mentioned in s. 588G (3), the law provides that criminal proceedings can be initiated against the director. The maximum penalty that can be imposed under the law in such cases is a fine up to $200,000 and an imprisonment of 5 years. In this regard, s. 206B provides that when the director has been convicted regarding a criminal offense, such directories automatically disqualified from managing corporations. At the same time, civil penalties may also apply in such a case. The ASIC may seek declaration from the court regarding the contravention, pecuniary penalty and damages.
Application: under the circumstances, when the directors are liable for the violation of their duties, civil and criminal penalties may be imposed on such directors. The breach of duty includes the violation of the duties according to which the directors did not allow the corporation te trade if they have doubts that the company may not be in a sound financial position. Therefore, the directors may have to face civil or criminal penalties for the breach of duty.
Conclusion: in this case, the directors of Food Works Pty Ltd may have to face civil or criminal penalties in view of the fact that they have violated their duties as directors of the company.
Q2 Issue: the facts that are present in this scenario reveal that it has to be considered if the majority shareholders controlling Carpets Galore Pty Ltd can be held to be liable for oppressive conduct. Similarly, it also needs to be seen if any remedies available to the minority shareholders that have been provided by the Corporations Act.
Law: the rule of I majority is considered as a basic concept of the corporate law. However there is also an inherent risk of abuse present in case of the rule of majority. This risk can be particularly seen regarding the corporations that are closely held. This risk increases due to the fact that generally in case of such companies the shareholders play a major role in the management of the corporation (Hillam v Ample Source International, 2012). Hence, there are chances that the conflict may arise as a result of the fact that decisions made by majority shareholders are not accepted well in view of the interests of the shareholders collectively. It is also worth mentioning that due to the disputes that may arise between the shareholders, there is a risk of an irritable breakdown of trust and confidence in the company. In the same way, the situation of such conflict may also cause a deadlock. Hence, in order to deal with such instances, certain remedies are available to the minority shareholders (Morgan v 45 Flers Avenue Pty Ltd., 1986). The purpose behind providing these remedies to the minority is to make sure that the decisions are fair and efficient.
One such provision is s. 232 of the Corporations Act. This provision provides a power to the court, according to which relief may be granted by the court if the company is involved in oppressive conduct. At the same time, s461(1)(e) provides a ground for compulsory winding up of the corporation if the court is of the opinion that the directors acted for the purpose of looking after their personal interests instead of taking care of the interests of the company (Roberts v Walter Developments Pty Ltd., 1997).
However, mere disagreement that is present between the majority and minority cannot be considered as oppressive conduct. Therefore, all the relevant facts and circumstances may be seen by the court for the purpose of arriving at the conclusion if any prejudice was the result of the conduct that cannot be reasonably justified (Chander, 2003). For this purpose and objective test has to be applied. Under this test, it needs to be seen if the majority's conduct was against the interests of the shareholders collectively (Bahls, 1990).
Application: according to the provisions of corporations regulated with oppressive conduct, in the present case, it can be mentioned that the decisions taken by David and Ben can be described as oppressive conduct. For example, the decision taken by these two directors, which provided that the pay of these two directors will be increased, but the same was not granted to other two directors, Sarah and Caitlin. Similarly, even if the company made good profit, but the majority of directors decided that it was not going declared a dividend. This information was continued for the last 4 years even if the company made regular profit. Moreover, David and Ben failed to inform Sarah and Caitlin that they were going to hold meeting of the board of the company even while they took me to get decisions during these meetings.
Conclusion: the conclusion arises in this case that the majority of directors of Carpets Galore Pty Ltd were involved in oppressive conduct and the remedies provided by the Corporations Act for oppressive conduct are available to the minority.
1. Austin R P and Ramsay, I M., 2013, Ford’s Principles of Corporations Law, LexisNexis Butterworths, 15th ed, 432
2. Bahls, S. C., 1990, ‘Resolving Shareholder Dissension: Selection of the Appropriate Equitable Remedy', 15 J. Corp. L. 285.
3. Chander, A. 2003, ‘Minorities, Shareholder and Otherwise', 113 Yale L. J. 119
4. Ford, H A J., 1978, Principles of Company Law Butterworths, 2nd ed., 345
5. John H Farrar and Brenda Hannigan,1998, Farrar’s Company Law Butterworths, 4th ed., 382
6. Paterson W E and Ednie, H H., 1976, Butterworths, Australian Company Law, vol 2 2nd ed.
1. Hillam v Ample Human Resource International (No 2)  FCAFC 73
2. Morgan v 45 Flers Avenue Pty Ltd(1986) 10 ACLR 692
3. Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882