Corporate Law

Introduction

In Australia, directors’ duties are aimed at promotion of good governance while ensuring that directors always act in the best interest of the company. Thus, the directors are supposed to put the company’s interests ahead of their own. Common law and statutory obligations include the duty to act in good faith in the interest of the company as a whole. Directors should not act for an improper purpose and they have a duty of care and diligence. Directors should also avoid any conflicts of interest while avoiding making improper use of their position as directors. In addition, directors should not make improper use of information. Where directors have breached these duties, the company (the aggrieved) together with ASIC should act to ensure that the aggrieved parties are remedied accordingly. This paper looks at how the three directors of Deju Vu limited have breached their duties as outlined above as well as the remedies under both the general law and Corporations Act and any actions that could be taken by Deju Vu Ltd and ASIC.

Advice to Young and Haris on the breaches of directors’ duties or other obligations in relation to;

  1. The purchase of the technology by Monterey Pty Ltd

Crosby, Stills and Nash oppose the idea of buying the new technology claiming that its market value is unknown and that its success or otherwise is unpredictable. They also claim that they have heard rumours from engineer company, Woodstock Pty Ltd, that the new Pono Format promised to bring new levels of fidelity to the digital sphere has not been demonstrated. Obviously, the engineering company being an expert, this aimed at convincing Young and Haris against buying the technology. This they do successfully and hence the technology is not bought. However, the truth of the matter is that Cosby and Stills have been told by Woodstock Pty Ltd that initial testing have proved extremely successful and would very significantly change the digital sound experience. Crosby and Stills buy the new technology through their Monterey Pty Ltd with the knowledge of Nash who they give a commission of $100,000. Their acts indicate breach of directors’ duties as follows;

  1. Crosby, Stills and Nash breach their duty as directors to act bona fide in the interest of Deju Vu Ltd. In other words, their actions of convincing other directors not to purchase the new technology claiming that it is not good and cannot deliver the value it promises in not honest. This is against section 181 of the companies’ law. As directors, the three should have considered the interests of the company with regard of all the company’s shareholders before theirs as was held in Walker v Wimborne (1976).

  2. The directors breached their duty not to act for an improper purpose. Crosby and Nash create a new majority in the board by influencing Nash through the “commission” he is paid in a bid to ensure that they and not the company benefit from the purchase of the new technology. Thus they act for an improper purpose (Kinsela v Russell Kinsela Pty Ltd 1986).

  3. They breached the duty of care and diligence because Crosby and Stills influenced Nash into making a board decision that favored them. Directors are required to make an informed and independent judgment on decisions put to them ((Venardos, 2015).

  4. The directors breached their duty to retain discretion since their made them unable to make decisions in the company’s best interest (ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd, 1991).

  5. The directors breached their duty to avoid conflict of interest according to section 191 of the company’s law. This is because they had interest in purchasing the technology as directors of another company, yet they did not disclose this to the board. They also did not disqualify themselves from voting for the proposal but in fact went ahead to influence other directors against the proposal so that their company can buy the technology (Whitehouse v Carlton Hotel Pty Ltd (1987).

  1. Nash’s receipt of the commission from Monterey Ltd and his arrangement with Wild Tales

After the new technology is bought by Monterey Pty Ltd, Nash receives a commission of $100,000 as a “commission”. He also agrees to join Wild Tales as a board members which eventually secures contract to purchase the technologies and he is paid a bonus of $400,000 for this. Thus, he is in breach in the following respects,

  1. He breaches the duty to act in good faith because his actions at Deju Vu Ltd as a director are not honest. He is involved in convincing Young and Haris against purchasing the technologies and also votes against it yet he does this for the commission (Whitehouse v Carlton Hotel Pty Ltd, 1987). He also becomes a director in a rival company and influences the outcome of the contract for purchase of the technology through his relationship with Monterey Pty Ltd hence acting dishonestly against Deju Vu Ltd for monetary rewards.

  2. He breaches his duty not to act for an improper purpose by using his influence to enrich himself to the detriment of Déjà vu Ltd (Clarke, 2008).

  3. He breached his duty of care and diligence by allowing Crosby and Stills to influence him in making a decision that favored them1. In addition, he joins a rival company’s board and acts to the detriment of Deju vu Ltd.

  4. He breached his duty to avoid conflict of interest by engaging with affairs of other companies to the detriment of Deju Vu Ltd for monetary awards (swarb.co.uk, 2015).

  1. The entering into the contract with Wooden Ships Ltd.

Corby suggests to Deju Vu Ltd board meeting to engage the services of Wooden Ships Pty Ltd as constant music arrangers for future production purposes. The proposal is accepted and hence Wooden Ships Ltd is engaged at a cost of $200,000. Thus, Crosby breached his duty to avoid conflict of interest (Superfraud.org, 2016). This is because he failed to disclose his interest (being major shareholder ) in Wooden Ships Pty Ltd and also went ahead to influence the decision to engage the company through voting for his proposal.

Remedies

In all the above cases, the law provides for both criminal and civil remedies in accordance to section 180-184 of the company’s act. In this case, Deju Vu Ltd and ASIC may sue the directors in breach for the above remedies. Criminal remedies would entail criminal penalty for dishonesty with a maximum penalty of $200,000 or five years of imprisonment if they are convicted of their respective offenses. Such directors would also be disqualified from managing the company. On the other hand, civil remedies would include declaration of contravention, compensation order or pecuniary penalty order. The company and ASIC could also sue for the breaching directors to be fined up to $200,000.

References:

Walker Wimborne (1976), HCA 7; 137 CLR1:50 ALJR 446; 3ACLR 529, Retrieved on 17th April 2016, from;

https://jade.io/j/?a=outline&id=66638

Kinsela v Russell Kinsela Pty Ltd (in Liq) (1986)4 NSWLR 722, Retrieved on 17th April 2016, from;

http://briefsofcases.blogspot.co.ke/2014/03/Kinsela-v-Russel-Kinsela-Pty-Ltd-in-liq- 1986.html

Venardos, A2015, What are the duties of a director of a company in Australia?, Retrieved on 17th April 2016, from;

http://www.businesslawtoday.com.au/corporate-structuring/duties-of-a-director- company-australia/

ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (recs and mgrs. Apptd)(1991)2 Qd R 360, Retrieved on 17th April 2016, from;

http://swarb.co.uk/aberdeen-railway-co-v-blaikie-brothers-hl-1854/

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, Retrieved on 17th April 2016, from;

https://jade.io/article/67343

Clarke, M2008, The role of an executive director, Retrieved on 17th April 2016, from;

http://www.mondaq.com/australia/x/65390/Directors+Officers/The+Role+Of+A+NonExecutive+ Director

swarb.co.uk, 2015, Phipps-v-Boardman; HL 1966, Retrieved on 17th April 2016, from;

http://swarb.co.uk/phipps-v-boardman-hl-1966-2/

Superfraud.org, 2016, A trustee’s “Duty of Care”, Retrieved on 17th April 2016, from;

http://superfraud.org/?page_id=3674