Corporate Law. Essay Example

  • Category:
    Law
  • Document type:
    Case Study
  • Level:
    Undergraduate
  • Page:
    3
  • Words:
    1661

Corporate Law 3

Corporate Law

Question (i)

In order to advice Dilara and Suzan, regarding their concern about Semra’s interest in Sew West Pty Ltd, the following issue has to be taken up for discussion.

Whether Semra’s interest in Sew West Pty Ltd had breached any of her fiduciary duties stipulated in the Corporations Act 2001.

The Corporations Act 2001 stipulates the following as the principal duties of the directors of a company. The first of these pertains to care and diligence. This duty, which is described under Section 180 of the Act, enjoins upon the directors to exercise the care and diligence expected of a reasonable person. The common law imposes the very same duty upon the directors. In this context, the business judgment rule provides a safe harbour for company directors at common law, and under Section 180 of the Corporations Act 2001[ CITATION Aus112 l 1033 ].

The second duty relates to good faith, this has been stipulated at Section 181 of the Act. It requires the directors to act in good faith, with the objective of promoting the best interests of the company and for a legitimate purpose. Moreover, directors have to avoid conflicts of interests, and they have to manage and disclose conflicts. This constitutes a fiduciary duty, which incorporates a duty of trust and fidelity[ CITATION Aus112 l 1033 ].

The third duty is that of not engaging in improper use of position. This duty prohibits directors from making improper use of their position in the company, so as to benefit themselves or others to the company’s detriment. This has been detailed under Section 182 of the Act. The last among these duties, which constitutes the subject matter of Section 183 of this Act, prohibits the improper use of information. According to this duty, a director is precluded from making improper use of the information gained during the course of being a director, in order to gain an advantage to the detriment of the company[ CITATION Aus112 l 1033 ].

In our present problem, Semra had not disclosed to the other members of the company that she and her daughter controlled Sew West Pty Ltd. This company was to supply the sewing machines to Vintage Dress Ltd. As such, her conduct amounts to breach of fiduciary duty relating to the issue of conflict of interests, which has been described under Section 181 of the Corporations Act 2001.

Question (ii)

In our present problem, Dilara formed a surreptitious business contract with the Second Hand Fabric Pty Ltd, and profited from it. For assessing whether Vintage Dress can claim a share in the profits made by Dilara, the following issues need to be considered.

A fiduciary duty is owed by the directors of a company towards those who are susceptible to their actions and who are vulnerable to being easily harmed. Thus, the directors and officers of a company are under a duty towards their company, as it tends to be vulnerable to their actions and relies upon them to conduct themselves in a proper manner[ CITATION Dir13 l 1033 ].

Corporate behaviour, as a fiduciary, is subject to four crucial requirements; namely to act in the best interests of the company, and in good faith; to avoid a conflict of interest; to desist from making a clandestine profit; and to act for a proper cause. Every officer of the company is required to avoid infringement of these fiduciary duties[ CITATION Dir13 l 1033 ].

A breach of these duties could render the concerned company official, a constructive trustee. As a consequence of being labelled a constructive trustee, the proceeds obtained by that official, on account of the breach of duty, would be held on trust and given back to the company. Then again, the official in such breach of duty could become liable to pay equitable damages or the company may annul any contract that had been made improperly by that official. Moreover, such officials could also be rendered liable for civil or criminal penalties under the provisions of the Corporations Act 2001[ CITATION Dir13 l 1033 ].

Dilara’s behaviour breached the fiduciary duties of corporate behaviour as stated in the Corporations Act 2001. Dilara as a responsible director of the company should take decisions in the best interests of the company. She should have spent more time and effort to develop the company Vintage Dress. However, she formed a new company for her own benefit and made substantial profits; which was detrimental to the best interests of Vintage Dress. Dilara breached the fiduciary duties of loyalty and best interests, as stipulated by the Corporations Act. According to the above discussion, Vintage Dress can claim a share in the profit made by Dilara.

Question (iii)

Semra and Dilara refused to register the transfer of shares by Suzan to her daughter. No reason was forthcoming from them, regarding their refusal to register this transfer of shares.

Whenever the relevant authority of a company refuses or fails to register the transfer of shares; or refuses or fails to provide its acquiescence or approval for the registration of a transfer or transmission of the company’s securities; the transferee or transmittee is at liberty to approach a court of law for obtaining an order. This is the gist of Section 1071F (1) of the Corporations Act 2001[ CITATION Com10 l 1033 ].

Furthermore, the Corporations Act 2001 states the following at Section 1071F (2). On satisfying itself that the failure or refusal to transfer or transmit the securities of the company was unjustified, the court can undertake the following. It can issue an order directing the company authorities to register the transfer or transmission of the securities[CITATION CCH11 p 1264 l 1033 ].

In addition, the court can make such order that it deems just and reasonable. This can include the following cases. First, with regard to the transfer or transmission of shares, the court can make an order providing for the shares to be purchased by the company or its specified member. Second, in the event of purchase of the shares by the company, the court can make an order providing for the consequent reduction in the company’s capital[CITATION CCH12 p 1311 l 1033 ].

The above discussion clearly indicates that Suzan and her daughter can approach the courts, with the express purpose of procuring an order for registration of these shares.

The Indoor Management Rule is an important and fascinating feature of the Australian company law. Under the provisions of this rule, outsiders dealing with a company are permitted to make assumptions regarding the internal consistency of the decisions made by a company[CITATION Mor96 p 28 l 1033 ].

The origins of this rule can be traced to the decision in Royal British Bank v Turquand. In its ruling, the Court permitted the outsider to presume that the officials of the company had acted in a manner that was compliant with the rules of the company. However, an important exception to this rule was established in Morris v Kanssen. It was held that an outsider was precluded from assuming regularity if the circumstances obtaining should have prompted the outsider to embark upon further investigations. Lord Simonds, in his ruling opined that the outsider could not presume in his favour that acts had been performed correctly, if the enquiry that he should have made would have disclosed otherwise[CITATION Mor96 p 29 l 1033 ].

As a consequence, an outsider cannot rely upon the Indoor Management Rule, when he has information that should have persuaded him to enquire into the internal matters of the company in question. This notion was reiterated by Kirby P, in his ruling in Registrar General v Northside Developments Pty Ltd & Ors[CITATION Mor96 p 30 l 1033 ].

In Albert Gardens (Manly) Ltd v Mercantile Credits Ltd, the Australian High Court affixed its seal of approval upon the Indoor Management Rule. The contemporary form of this rule is described under Section 164 of the Corporations Act 2001. It has been stressed by the courts that the introduction of the statutory provision, with regard to the Indoor Management Rule, was to clarify the position of the common law and not to enact a new rule[CITATION Mor96 p 31 l 1033 ].

Section 164(4)(a) of the Corporations Act 2001 incorporates an exception to the Indoor Management Rule, namely the knowledge exception. This is nothing more than a reiteration of the actual knowledge exception at common law. However, Section 164(4)(b) of this Act, serves to restrict this exception, in comparison to the due inquiry exception of the common law. The exception under the Act requires the presence of a correlation for an outsider to be put on inquiry, and thereby actuating him to enquire into the internal functioning of the company[CITATION Mor96 p 32 l 1033 ].

I am in complete agreement with the protections granted by the Indoor Management Rule, since it protects innocent outsiders from being cheated by the fraudulent officials of a company.

References

Albert Gardens (Manly) Ltd v Mercantile Credits Ltd (1973) 131 CLR 60.

Australian Institute of Company Directors, 2011. What are the duties of directors?. [Accessed 5 October 2013].
Available at: <http://www.companydirectors.com.au/Membership/The-informed-director/What-are-the-general-duties-of-directors>
[online]

CCH Australia Limited, 2011. Australian Corporations & Securities Legislation. Sydney NSW, Commonwealth of Australia: CCH Australia Limited.

CCH, 2012. Australian Corporations & Securities Legislation. Sydney, NSW, Commonwealth of Australia: CCH Australia Limited.

Commonwealth Consolidated Acts, 2010. CORPORATIONS ACT 2001 — SECT 1071F. [Accessed 5 October 2013].
Available at: <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1071f.html>
[online]

Corporations Act No. 50, 2001. Canberra, Commonwealth of Australia: Australian Government ComLaw.

[Accessed 5 October 2013].
Available at: <http://www.lexisnexis.com.au/aus/academic/text_updater/documents/harrisch16.pdf>
Directors’ and Officers’ Duties, n.d. [online]

Morris v Kanssen (1946) AC 459.

Morrison, D., 1996. The Continued Role of the Common Law Indoor Management Rule Due Inquiry Exception. Queensland University of Technology Law Journal, Volume 12, p. 28 – 40.

Registrar General v Northside Developments Pty Ltd & Ors (1989) 7 ACLC 52.

Royal British Bank v Turquand (1856) All ER 435.