Law of business aasociation Essay Example

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
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    2
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Breach of Director’s Duty

Q: Can Jones keep the car? If he does so, might he be in breach of any directors’ duties he owes to XYZ Ltd?

Introduction

The key legal issue is whether Jones will breach the director’s duty by taking the car. It is therefore established whether Jones will have acted in good faith and in the interest of the company. Another issue to be evaluated is whether he is likely to breach the duty to avoid conflicts of interest and whether he will discharge his duties for the proper purpose.

Proper Purpose s(1)(b)

stipulates that a director must use his powers and fulfill his duties for a proper purpose. 181(1)(b) of the Corporations Act 2001 (Cth)
Section

. 1where the court held that once it is established that directors were not motivated by self-interest, it can be concluded that they acted in good faith and for proper purpose Howard Smith Ltd v Ampol Petroleum Ltd, The seminal case relating to what should be regarded as proper purpose is

It can be argued that Jones will not have pursued personal interest if he accepts the new car since it is the dealer’s decision – free from any coercion by Jones – to issue the car to Jones. This is implied when Jones appears to be seeking advice or consent when he says: “Whether I like it or not, my friend will be giving me an expensive new car if XYZ buys its fleet from him2.” The car dealer’s price is also significantly less and therefore in the best interest of the company.

Director’s duty to act in good faith s(1)(a)

.3a director must exercise his powers and discharge his duties in good faith and in the interest of the companywhich species thatsection 181(1)(a), The duty to act in good faith (bona fides) for the benefit of the company is enshrined in

The director’s duty to act in good faith and for the benefit of the company is determined subjectively, as demonstrated in the case Re Smith and Fawcett Ltd4. The inquiry is therefore directed to the director’s intention, beliefs and motive and whether they considered the company as their principal consideration5.

Based on the facts of the case, Jones promotes the idea to buy from the car dealer friend since the friend’s price is significantly less compared to other dealers. This shows that Jones’ motive was to get the cheapest car dealer. His interest was therefore for in good faith and for the benefit of the company6. As a director, he has a mission to make or execute decisions that allow the company to develop its commercial as well as social purpose7.

Duty to avoid conflicts of interest

As demonstrated in the case Aberdeen Railway Co v Blaikie affirmed in Guinness plc v Saunders, directors must not put themselves in a position or seek contracts that can create a conflict of interest between their personal interests and their obligations to the company8. The exceptions of this rule is where the contract is ratified by the other shareholders after a full frank disclosure, as was demonstrated in the case Guinness plc v Saunders9.

In the present case scenario, Jones made a full disclosure to the Board of Directors that the car dealer was his friend who was willing to offer him an expensive car, if XYZ company bought the fleet of cars from the car dealer. Further, the board ratified the contract after establishing the dealer’s quote offered the cheapest price.

Conclusion

Based on these facts, it is critical to note that Jones will not have breached the director’s duty to act in good faith and to discharge duties for proper purpose. He also will not have breached the duty to avoid conflict of interest. Therefore, Jones can keep the car. If he does so, he will not be in breach of any directors’ duty he owes to XYZ Ltd.

References

Books, Articles and Journals

Andres, C & Giraldo, L 2006, Factors Governing The Application Of The Business Judgment Rule: An Empirical Study of the US, UK, Australia And The EU, viewed 18 Sept 2013, http://www.javeriana.edu.co/juridicas/pub_rev/documents/6-Laguado.pdf

Baxt, R 2005, Duties and Responsibilities of Directors and Officers, Australian Institute of Company Directors: Sydney

Byrne, M 2008, «Do directors need better statutory protection when acting on the advice of others?» 21 Australian Journal of Corporate Law, Vol. 2 No 3, pp.238-257

Lexisnexis 2005, Directors’ and Officers’ Duties, viewed 18 Sept 2013, https://www.google.co.ke/search?biw=1366&bih=667&noj=1&q=+Robinson%2CDirectors%E2%80%99+Duties+during+Insolvency+google+books&oq=+Robinson%2CDirectors%E2%80%99+Duties+during+Insolvency+google+books&gs_l=serp.3…12402.18946.0.19594.3.3.0.0.0.0.991.1887.6-2.2.0….0…1c.1.26.serp..3.0.0.GeYtAo1CVX4

Case Laws

Aberdeen Railway Co v Blaikie affirmed in Guinness plc v Saunders (1854) 1 Macq 461]

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

Guinness plc v Saunders (1990) 8 ACLC 3061

Re Smith and Fawcett Ltd [1942] Ch 304]

1 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

2 Byrne, M 2008, «Do directors need better statutory protection when acting on the advice of others?» Australian Journal of Corporate Law, Vol. 2 NO 3, pp.238-257

3 Lexisnexis 2005, Directors’ and Officers’ Duties, viewed 18 Sept 2013, https://www.google.co.ke/search?biw=1366&bih=667&noj=1&q=+Robinson%2CDirectors%E2%80%99+Duties+during+Insolvency+google+books&oq=+Robinson%2CDirectors%E2%80%99+Duties+during+Insolvency+google+books&gs_l=serp.3…12402.18946.0.19594.3.3.0.0.0.0.991.1887.6-2.2.0….0…1c.1.26.serp..3.0.0.GeYtAo1CVX4

4 Re Smith and Fawcett Ltd [1942] Ch 304]

5 Baxt, R 2005, Duties and Responsibilities of Directors and Officers, Australian Institute of Company Directors: Sydney

6 Baxt, R 2005, Duties and Responsibilities of Directors and Officers, Australian Institute of Company Directors: Sydney

7 Andres, C & Giraldo, L 2006, Factors Governing The Application Of The Business Judgment Rule: An Empirical Study of the US, UK, Australia And The EU, viewed 18 Sept 2013, http://www.javeriana.edu.co/juridicas/pub_rev/documents/6-Laguado.pdf

8
Aberdeen Railway Co v Blaikie affirmed in Guinness plc v Saunders (1854) 1 Macq 461]

9
Guinness plc v Saunders (1990) 8 ACLC 3061