About the corporation law Essay Example

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
  • Page:
    2
  • Words:
    1143

Assignment Corporation Law

For advising Jean regarding her claims against Annie and others, the issues to be considered are;

Whether Annie had breached any of the fiduciary duties, as director of the company?

Whether Annie and the others had breached any statutory duties under the Corporations Act 2001?

Whether Jean has any positive claims against the directors and members of the company, regarding violations of the Corporations Act 2001.

The principal duties of a director are to be careful, competent, and honest, while functioning as a director. Thus, directors have to ensure the proper maintenance of financial records and solvency of the company. A fiduciary duty is imposed upon directors requiring them to act in the best interests of the company. Failure to do so could result in prosecution by the Australian Securities and Investments Commission, the primary Australian regulator of companies and their directors.1

In addition, Section 180 of the Corporations Act 2001 stipulates that company directors or the officers of the company have to ensure due care and diligence, whilst discharging their duties. In addition, Section 181 of this Act obliges directors to make a complete and forthright revelation of information that they possess. Such disclosure should facilitate the shareholders of the company to arrive at informed judgments.2 Moreover, directors are under a duty to avert conflict of interest. Thus, in the normal course, a director cannot take advantage of an opportunity that emerges during the course of business to make a profit at the cost of the company. Furthermore, directors cannot compete with their company, utilise the latter’s property for personal purposes or form contracts for the supply of goods or services for their company, in the absence of a full disclosure to the company regarding their involvement.3

In addition, Section 191 of the Corporations Act 2001, requires directors to disclose any material or personal interests to the company.

Application

In this problem, Annie purchased land in her company’s name, Malafides Pty Ltd, with an intention to sell the land to Puissant Rose Enterprises Pty Ltd, at an inflated price. Jean objected to Annie’s action; however, Annie refused to conduct a general meeting, as required under the Corporations Act 2001.

Annie sold the property to Puissant Rose Enterprises Pty Ltd from the company owned by her, namely Malafides Pty Ltd. This clearly depicts violation of the fiduciary duties of honesty and acting in the best interests of the company, by Annie. Furthermore, Annie had breached her duty, under Section 191 of the Corporations Act 2001, to provide a fair disclosure of her actions, regarding the purchase of land. It is incumbent upon directors to avoid conflicts of interest. Thus, directors should not form a contract to supply goods or services to their company.

The ruling in Foss v Harbottle4 rendered decisions, the sole preserve of the management and directors, thereby averting shareholder interference. This situation was regard as unsatisfactory. The rule established in this case, was of limited applicability and served to render rogue directors unaccountable.5

However, this situation changed with the provision of a statutory right to bring derivative actions. The related procedure for this is stipulated under Sections 236 to 242 of the Corporations Act 2001. The term derivative is employed, as the applicant relies upon a cause of action that belongs to the company and not upon an individual cause of action. After being satisfied with the leave criteria, specified under Section 237 of the Corporations Act 2001, the court has to be grant the leave application. Subsequently, the court may make an appropriate order, with respect to the derivative action, as provided under Section 242 of the Act. A derivative action cannot be brought under the general law, as this right has been abolished by Section 236.6

The duty of directors to discharge duties with due care and diligence is subject to a business judgment rule.7 However, Directors should not exploit their position to gain an advantage or cause damage to the company. In addition, directors have to notify the company of any material personal interests and of a conflict of interests.8 The director of an Australian company is entitled to apply for the company to be wound up, if the affairs of the latter are being conducted unfairly.9

In Regal (Hastings) Ltd v Gulliver,10 it was held that liability arises from profit having been made, under the declared circumstances. This ensured that a profiteer was compelled to account for the profits made by him.11

In our problem, Annie did not disclose her interests in the purchase of land, despite the objection raised by Jean. Under these circumstances, Jean can approach a court for redressal.

With regard to remedies, Section 233 of the Corporations Act 2001 provides the following. The court can make any order, under this section, which it deems to be pertinent, Vis – a – Vis the company. Some of these are; winding up the company; modification or repeal of the extant constitution of the company; regulating the subsequent affairs of the company; ordering purchase of shares with an accompanying and appropriate reduction in the share capital of the company; and ordering the company to commence, prosecute, defend or discontinue specified proceedings.12

In addition, the court can order a shareholder to institute, prosecute, defend or discontinue specified proceeding in the name and on behalf of the company; appoint a receiver for the company’s property; restrain a person from indulging in specific conduct or carrying out a specific act; and compel an individual to perform a specified act.

Conclusion

Jean can avail of any of the above remedies, at the discretion of the court, by filing an application under the provisions of the Corporations Act 2001, to safeguard her interests in the company. She can also file a derivative claim on behalf of the company under the provisions of law, with the permission of the court.

1 Australian Securities & Investments Commission, Your company and the law (2013) < http://www.asic.gov.au/asic/asic.nsf/byheadline/Your+company+and+the+law?openDocument>.

2 Legal Services Commission of South Australia, Criminal offences (16 August 2012) <http://www.lawhandbook.sa.gov.au/ch05s01s04.php>.

4Foss v Harbottle (1843) 67 ER 189.

5 K Yang, The Evolution of The Australian Derivative Action: Floodgates to Shareholder Activism? (2013) <http://researchrepository.murdoch.edu.au/15554/1/The_Evolution_of_The_Australian_Derivative_Action_Floodgates_to_Shareholder_Activism.pdf>.

6 Nance Frawley, The cost of bringing a statutory derivative action in Australia – is it time to reconsider the terms of Section 242 of the Corporations Act 2001? (2007) <http://www.clta.edu.au/professional/papers/conference2007/2007NF_CBSDAA.pdf>.

7 Legal Services Commission of South Australia, General Duties of Directors — Corporations Act 2001 (Ctth) (3 July 2012) <http://www.lawhandbook.sa.gov.au/ch05s01s03s02.php>.

8 ACIS, Directors Duties under the Corporations Act 2001 <https://www.acis.net.au/bulletins/Directors_Duties.pdf>.

9 Peter Surgeon and Dibbs Barker, Corporate Entities (2003) <http://www.afic.am/CG/CorporateGovernanceAndDirectors%27DutiesInAustralia.pdf>.

10Regal (Hastings) Ltd v Gulliver [1942] UKHL 1.

11 Ludwig Ng, Basic Insolvency Law and Practice and Company Restructuring for Managers and Directors <http://www.onc.hk/pub/oncfile/publication/insolvency/20121016_Basic_Insolvency_Law_and_Practice_and_Company_Restructuring_for_Managers_and_Directors.pdf >.

12 Cch Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations (CCH Australia Limited, 2011) 270.