Organisation law Essay Example

Question One:

In accordance with section 181 of the Corporations Act 2001 (Cth) directors of companies have the role and powers to discharge their duties and in doing so, such need to be done with due care and diligence. Relating this section with Stillwater Ltd, their duties should be subject to the business judgment that requires that the directors (Tony Jones, Jacqui Burke, Fred Meyer, Magda Macara, Fiona Nash and Jimmy McGovern) to make a business judgment in the following ways:

  • A judgment from these directors should be in good faith and for proper purpose for Stillwater Ltd

  • The decision made by these directors should not be seen to be having any personal or material interest in the subject matter of the their judgment

  • The decisions made should inform every board member regarding the subject matter of the their judgment to the extent the directors are reasonably able to believe their decisions are appropriate

  • The judgment would be considered rational and it is for the best interest of Stillwater Ltd

Before citing instances of breach of breach of s 182 of the Corporations Act 2001 (Cth) courts have held that directors as well as other officers of public company have the duty of exercising their powers as well as be in a position to discharge their duties that reflects the best interest of the company. In Asic v Adler1 the courts held that s 182 of the Corporations Act 2001 (Cth) was breached since directors of the company acted in bad faith when they engaged in transactions that finally brought down the company (duty not to improperly use position).

Relating this case, with directors in Stillwater Ltd and whether or not there is contravention of s 182 (duty not to improperly use position), the following issues are apparent:

  • Magda Macara and Fiona Nash are aware and supports a takeover of Stillwater when in the real essence, this decision will lead to selling off the bottling plant and use any remaining cash to make a ‘loan’ to another company to pay down other debt

  • Tony Jones presents a proposal for the company to purchase block of land which he has interest in the stake and further benefit from the inflated prices (in fact the land is in fact owned by a new company Tony Jones set up in December 2014)

  • Jimmy McGovern is aware of the inflated land prices but fails to act since “Tony agreeing to propose large bonuses for the directors to be paid in December 2015”

  • Jacqui has in fact been manipulating the books of the company for some time

Based on the cases cited above, these directors are using their positions improperly to gain an advantage or someone else or themselves contrary to the provisions of s 182 of the Corporations Act 2001.

As such, the directors (both the executive and non-executive director in this Company) provide the primary role by which corporate governance can protect against the faults and whims of management. Therefore, provisions of s 182 of the Corporations Act 2001 give rise to civil rights including civil penalty to the directors mentioned above. If the court determines that there was contravention of a civil penalty provision, then the directors will likely pay a pecuniary penalty of up to $200,000 and at the same time order the directors to pay or compensate the company for any loss. Furthermore, the court may further disqualify the director from managing the company for the period the court considers appropriate in accordance with s 206C. This was the case with Asic v Adler when the court director was banned for 10 years from operating the company and the court further asked directors implicated to pay as follows: Williams — $250,000, Adler — $450,000 and Fodera — $5000.

Question Two

Unless the Stillwater Ltd argues that the loan from the Amada Bank was unfair in accordance with s 588FD of Corporations Act 2001, the valid security from the bank means the bank will be having legal rights to take over the assets on the insolvency of Stillwater Ltd, taking possession of its assets further gives the bank the right to use sell and use the proceeds to repay the loan borrowed. Furthermore, Ramsay (2015) argues that depending the circumstance and court decisions regarding the breach of s 182 of the Corporations Act 2001 as discussed, the bank further has the option of taking security instead of dealing with a given asset of the company or the entire assets Stillwater Ltd owns. However, if the bank will decide to go for the latter, a debenture will be considered so as to create fixed as well as floating charges over the assets and property of the Stillwater Ltd.

Auditors in this case may be potentially liable for both civil and criminal offence in accordance with Corporations Act 2001. Due to the fact that they “provided a very low quote to win the Stillwater audit and therefore, they are not interested in spending a lot of time on the audit” means that they did not rigorously apply the required International Standards on Auditing and the Code of Ethics for Professional Accountants and further failed in ensuring that they pay close attention in revealing the deals Jacqui had made. Just like it was with Corporation v. Forsyth2 is there is fraud which is ignored by the auditors then they are blameworthy before the law.

On whether a company can take action against auditor, we first need to admit that inherent limitations especially those caused by Jacqui can limit the scope of operation of the auditors and for that matter, error of reporting might occur. However, if the question as it is in this case, that the auditor failed in adhering to their principles governing their audit then companies have the right to take legal action against the auditor(s) especially, when there is evidence supporting the inadequacy of the procedures undertaken and the suitability of the audit report.

On whether secured creditor can take any action against auditors, it is clear that the risk of the auditors not detecting material mis-statement resulting from the directors’ fraud in this company will be considered greater than the risk of these auditors not detecting a material mis-statement from error. This is because the Amada (as the creditor) in this case will know that the act of the auditors was not mis-statement resulting from error but fraud acts involving Jacqui that was designed to conceal the problem, as collusion and deliberate failure to record transactions. Principal provisions of the Corporations Act regarding duties of auditors (auditor’s duties under s. 332(3)(a)) gives the creditor legal right to sue the auditors.

Question Three

The argument regarding the interest a director must serve can be contextualized within the primary role of a board of directors. Basically, the primary role of a board of directors is related to the principles of good governance. In accordance with s 180(1) of the Corporations Act
2001 (Cth) the directors of Stillwater Ltd have the obligation to exercise what would be deemed as care and diligence while exercising their duties. In understanding whether the directors acted with the utmost care and diligence, recent case concerning ASIC v Cassimatis (commonly known as Cassimatis).3 According to the court, Mr and Mrs Cassimatis breached their duties of care and diligence when the directors failed to give considerations regarding the subject matter that would lead to proper decision. Relating this argument with the sale of land, Jimmy McGovern was aware of the inflated land prices but failed to act since “Tony agreeing to propose large bonuses for the directors to be paid in December 2015.” The duties owned by Jimmy McGovern are premised in s 180(1) which s 180(1) disregarded while agreeing to propose large bonuses for the directors to be paid in December 2015.

With reference to previous court decision on what constitute breach of 180 of the Corporations Act 2001 (Cth) Justice Ipp in Vrisakis v Australian Securities and Investments Commission.4 The court held that there are different factors that need to be considered before concluding on where there was breach of s 180. These factors were:

  • Balancing and

  • Interpretation of the section as a whole

Beginning with harm, there has to be evidence pointing that there was harm to a given interest of the corporation. To this regard, Jimmy McGovern actions harmed Stillwater Ltd in the sense that from the one hand, the land is in fact owned by a new company Tony Jones set up in December 2014 thus harming the prospect of the corporation’s profits. Secondly, Tony has interest in the transaction and Jacqui assists Tony by arranging for an inflated valuation on the land which will hurt the future prospects of the company. Though Jimmy McGovern is aware of these but does nothing.

Balancing

With regard to balancing, the courts have held that directors have the responsibility of assessing the business situation and do what a reasonable person who is in the shoes of a director can do, not what a reasonable person should have done so as to avoid the injury with the benefit of hindsight. Therefore, by Jacqui assisting Tony by arranging for an inflated valuation on the land does not balance the interest of the corporations but amount to what the courts find as ‘the benefit of hindsight.’

Interpretation of the section as a whole

In the process of making a determination regarding the foreseeable risk of harm with possible benefits that can be termed as reasonably expected, directors need to make the determination with regard to the approach or perspective of the corporation’s situation and the responsibilities of the directors that reflect the relevant circumstances. However, actions by Jacqui were punitive in the sense that he was aware of the foreseeable risk which was not only dangerous to the existence of the company but threatened to detail the existence of the company financially.

Question 4

In accordance with s 588G of Corporations Act 2001 imposes a general rule or obligations on directors so as prevent insolvency trading. That is, insolvent trading accordingly is said to occur in a situation where, at the time the corporations incurs a debt, it was unable, or becomes unable, to pay its owned debts as and when they came due. s 588G of Corporations Act 2001 gives permission to creditors who has suffered the loss as a result of the actions from directors contravening s 588G of Corporations Act 2001 to seek the process of recovery. However, to satisfy the claim, the liquidator will have to prove the following:

  • That the loss suffered was due to the insolvency of the company

  • That the debt in question was indeed unsecured at the time the loss was suffered

  • That the company is winding up

The application of these conditions when liquidators are making their claims was seen in the case involving International Greetings UK Ltd v Stansfield.5On its face, it basically means that the requirements above are intended to refer to the situation of the company at the time there is commencement of the proceeding by the aggrieved liquidator. Nevertheless, the decision made by Barrett J in the Supreme Court of New South Wales regarding the case (International Greetings UK Ltd v Stansfield) was a precedent that liquidators must provide evidence to show that indeed the corporation was winding up as required by 588M(1)(d). This approach was earlier reflected in a case involving Donmastry Pty Ltd v Albarran & Anor.6 As such, it is required that steps will have to be taken by the legislature in the rectification of section 588M(1)(d) before liquidators can be able to pursue a claim against any director concerning insolvency trading.

In pursuant to section 588H of the Act the directors have some defence regarding the insolvent trading. First, the director can defend that there was reasonable ground to suspect that the company was solvent during the time and for that matter, there was reasonable point to prove that indeed the company was going to remain solvent in case it incurred the said debt as well as other depts. At the time the debts were incurred. This defense were applied in the case involving Commonwealth Bank of Australia v Friedrich
7 where the court noted that the onus on the director was there for the director to ascertain that they had reasonable grounds needed to believe the corporation was solvent as they did and as a matter of circumstance, the corporation was solvent.

Question Five

The fact of the matter regarding Clara Schmidt and Peggy Elster is that as minor shareholders they still have interest in Stillwater Ltd. As a result, they should be accorded all their rights attached to their shares in accordance with Corporations Act 2001 (Cth). In this case, majority shareholders in Stillwater Ltd are not going to issue themselves dividends without giving the same dividend per every share to Clara Schmidt and Peggy Elster.

According to Corporations Act 2001 (Cth) Clara Schmidt and Peggy Elster are recognised to be disadvantaged as a result, there are protection provisions which have been enshrined in section 232 of Corporations Act 2001 (Cth). According to this section, the court grant relief to Clara Schmidt and Peggy Elster when it is found that the proposed resolution (as it is with this case) was contrary to the interest of the minority shareholder as a whole or in cases where there is elements of oppressive or unfair elements of discrimination. In this case, the company’s affairs include major decisions that have been made by the directors that contravened different sections of Corporations Act 2001 (Cth).

Furthermore, Clara Schmidt and Peggy Elster should be notified that if the Court finds that indeed there were different actions were prejudicial to the interest to the two then the court has been given powers under Corporations Act 2001 (Cth) to exercise wide range of powers including forced buyout of the shares of Clara Schmidt and Peggy Elster shares for value.

The law concerning the statutory remedy Clara Schmidt and Peggy Elster have regarding awarding large bonuses is contained in Part 2F.1 of the Corporations Act 2001 (Cth) which is further contained in s 232 to 235. However, there is restriction to the extent the two minority shareholders can take decisions. Accordingly, s 234 spells out the person entitled to apply for an order in accordance with s 233. Therefore, Clara Schmidt and Peggy Elster are not allowed to bring an oppression action to the directors of Stillwater Ltd where it is in liquidation instead, it will be the responsibility of the liquidator to bring an action against the directors with the aim of trying to recover the large bonuses when the company was so badly run. This was the interpretation made by the court in the case involving Zempilas v J N Taylor Holding Ltd.8

Bibliography

Ramsay, Ian. «Increased Corporate Governance Powers of Shareholders and Regulators and the Role of the Corporate Regulator in Enforcing Duties Owed by Corporate Directors and Managers.» European Business Law Review 26, no. 1 (2015): 49-73.

1Asic v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002).

2Corporation v. Forsyth (1970) 92 WN (NSW) 29 at 65).

3ASIC –v– Cassimatis (No 8) [2016] FCA 1023

4 Justice Ipp in Vrisakis –v– Australian Securities and Investments Commission (1993) 9 WAR 395)

5International Greetings UK Ltd v Stansfield[2010] NSWSC 1357(International Greetings)

6Donmastry Pty Ltd v Albarran & Anor. [2004] NSWSC 632

7Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946

8Zempilas v J N Taylor Holding Ltd (in liq) (No 6) (1991) 5 ACSR 28 per Debelle J at 30.