CASE STUDY ANALYIS
Case Study Analysis
Case Study Analysis
A director is required to ensure the operations of a company proceed as smoothly as possible and that all the interests of the stakeholders are sorted. As such, a director is usually expected to be knowledgeable in matters pertaining to business. He should exhibit competence and capacity to steward the financial resources of the organization. In Australia, the duties of the directors are classified as either statutory or general law. The distinction between the two is a technical issue. In the end, directors are fiduciaries and are expected to act in the best interests of the organization. Tom, Dick and Harry are directors who have breached their fiduciary duty to the company. Their actions have expressly led to the depletion of the financial resources in the organization, thus making it unable to service debts. According to Percival v. Wright (1902), the duties of a director are owed to the company (Lowry & Dignam, 2006).
Tom, Dick and Harry had taken the necessary steps to hire a financial accountant, Moe, to help facilitate the financial management aspect of the organization. To this end, it is a good move by the directors of the organizations to hire Moe since it fulfills the requirements by law to delegate roles and responsibilities as deemed fit. Directors have the statutory authority to delegate authority, and this delegation does not absolve them from their actions (Lowry & Dignam, 2006). It implies that a director can be held liable for the actions performed by the one delegated. The only time in which a director may not be held liable for the actions of the delegate is when the delegate is seen to be reliable and competent in his work and that he or she would exercise his or her powers effectively. In reviewing Moe’s situation, the same cannot be said about him since he was completely left out of the managerial decisions of the company.
Moe simply served to offer insight and to ensure that the books were well balanced. Tom, Dick and Harry hired Moe with the realization that they understood little about the financial management aspects of a business. Moe is paid a good salary, but he is unable to have a say in the policy decisions of the company. It is a state of affairs that makes puts him between a rock and hard place considering that the directors of the organization are involved in undercutting practices. It was made clear to Moe that he was not supposed to be involved in the managerial decisions of the organizations. He was simply hired so that the directors of the organization can rely on his expert opinion to formulate the policies for the organization. Reliance on expert opinion is one of the responsibilities of a director.
A director may rely on information from employees as well as professional advisers and experts. Other entities that directors can rely on to make decisions in their organizations include other directors or officers and a committee of directors (Tomasic, Bottomley & McQueen, 2002). Reliance is an issue that ensures that an organization will continuously have the best information available so as to place an organization in a competitive position in the marketplace (Hanrahan, Ramsay & Stapledon, 2013). As such, the reliance is made in good faith and after making an independent assessment of the information provided by the one tasked with a specific responsibility.
Tom, Dick and Harry did not rely on the expert advice presented to them by Moe. The undercutting activities of these directors directly affected the way they operated, and this served to limit the cash-flows of the organization. As mentioned earlier, directors have a duty to prevent a company from becoming insolvent, thus that there is a need to protect creditors. There is a clear line by which a company is not supposed to overstep (Tomasic, Bottomley & McQueen, 2002). If a company is found to be insolvent, the directors are not supposed to allow any form of trade to persist as this is supposed to protect the creditors from losing their money. In any case, quick action is needed to arrest all activities, and matters be resolved according to the law (Hanrahan, Ramsay & Stapledon, 2013). Should trading go on despite insolvency, then the directors are personally liable for the debts of the company (Tomasic, Bottomley & McQueen, 2002). In this particular case, the directors showed remarkable consistency in alienating the dictates of the law and acted unprofessionally. The financial manager had on multiple occasions warned them about their actions and behaviors, but they ignored.
The fact that this matter was brought forward to the directors means that they were aware that the company was headed towards a state of insolvency. The cash-flow position of the company had dwindled and as a result, creditors were not being paid in good time. Moe was forced to pay specific creditors as part of disaster management, but the situation quickly deteriorated and his decision to resign displays a process of neglect and inappropriate conduct on the part of the directors. Even as the company goes into voluntary liquidation, the three directors should be found personally liable for insolvent trading as they were forewarned, in a reliable manner, of their actions. They failed to adjust their strategies and as such jeopardized other entities’ businesses.
Hanrahan, P. F., Ramsay, I., & Stapledon, G. P. (2013). Commercial applications of company law. COMMERCIAL APPLICATIONS OF COMPANY LAW, CCH Australia Ltd.
Lowry, J. & Dignam, A. (2006). Company law. Oxford: Oxford University Press.
Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Federation Press.