The corporation law Essay Example

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    Law
  • Document type:
    Assignment
  • Level:
    Undergraduate
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    4
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Corporation Law 4

Corporation Law

Introduction

Thornton, the managing director of Country Living Ltd has sought advice on the following issues. First, the duties breached by Judy under the Corporations Act 2001 (C’th) and under the general law. Second, a few of the Country Living Ltd’s shareholders have threatened to initiative a statutory derivative action against the board of directors for their failure to implement the outdoor home furniture project. In the alternative, these shareholders have decided to bring an oppression action against the board of directors. It is to be determined whether these shareholders can initiate these actions in court.

Question A

Whether Judy has breached the provisions of the Corporation Act.

Whether Judy has breached the norms of directors under general law.

Rule of Law

The Corporations Act imposes a civil obligation upon directors, secretaries and other officers of a corporation to discharge their duties and exercise their powers for a proper purpose and for promoting the best interests of their company. Consequently, the use of their powers to secure their self-interests, the interests of a third party or sectional interests, instead of the interests of the corporation would be deemed an infringement of this duty by the concerned directors.1

In Mills v Mills, the court ruled that the powers vested with directors were not to be employed for an improper purpose, such as deriving a personal advantage.2

Application

Under the Corporations Act 2001, directors are vested with the following duties.

First, duty of care and diligence. This requires directors to exercise the care and diligence that a reasonable person could be expected to demonstrate as a director.3 The common law imposes the very same duty upon directors. However, a safe harbour is provided by the business judgment rule to directors, with respect to a claim under the Corporations Act or the common law. Second, duty of good faith. The directors of a company have to act in good faith to promote the best interests of the company for a proper purpose.4 This includes avoidance of conflicts of interest, and disclosure and management of conflicts that arise. This duty is one of trust and fidelity and is termed a fiduciary duty imposed by general law. This duty is enjoined by the legislation.5

Third, duty to make proper use of position. This commands that directors should not make improper use of their position to derive an advantage to themselves or others that causes a detriment to the company.6 Fourth, duty to make proper use of information.7 This requires directors to abstain from making improper use of information obtained by them during the course of their directorial duties to procure an advantage for themselves or others that proves to be detrimental to the company.8

Throughout the meeting, Judy remained absorbed with her mobile devices, and ignored the discussion. Towards the end of the meeting she made an impassioned appeal that promoted the antique clocks project. In recognition of her past record of being correct most of the time, the board passed the proposal to undertake the antique clock project.

Judy’s behaviour, during the board meeting, demonstrates her negligent attitude towards the affairs of the company Country Living Ltd.

In addition, two months after this board meeting Judy resigned from this company and commenced to work for Classic Trend Pty Ltd, whose managing directory was her brother Andrew. She discussed the survey outcomes with Andrews, who ensured the adoption of the outdoor home furniture project. This venture proved to be highly successful.

In ASIC v Plymin9 and DCT v Clark,10 the absolute nature and importance of the duties of directors had been emphasised. In particular, the expectation that the directors of a company should participate meaningfully in the management of the company was highlighted. In the past, it had been uncertain, whether a director could declare unfamiliarity with the affairs of the company to evade liability.11

This situation has changed for the better, and the decision in several contemporary cases, makes it very clear that the directors of a company have to participate actively in the management of their company. Moreover, the courts will have no compunction, whatsoever, in punishing a company director who is not up to the mark.12

According to the above decision Judy’s behaviour during the board meeting indicates her inactiveness and negligence towards the company’s affairs. As such, she has breached the duty of trust and fidelity, required by the common law.

Thus, the law has deemed that the directors of a company will be held liable for failing to participate in the management of the company to the required extent. As a consequence, it can be anticipated that directors will have a greater perception of their duties and responsibility whilst coming to corporate decisions. The case law, per se, demonstrated the growing trend that requires the directors to function more actively in the management of companies.

As such, in Aberdeen Railway Co v Blaikie Bros, the fundamental rule was introduced that a corporate transaction in which the director had an interest was voidable at the discretion of the company.13 Similarly, in Phipps v Boardman, it was held that the defendant Boardman, the solicitor of a family trust was liable for his breach of duty of loyalty, as he had failed to account to the company a certain sum of its money.14

In addition, a criminal offence transpires when there is a breach of the duty to act in good faith, is committed by a director or other officer of a corporation. This happens when the director or other officer of the corporation exhibited deliberate or reckless dishonesty.15 As such, the Corporations Act enjoins a civil obligation, whereby a director or other officer has to at all times, exercise reasonable diligence and care in the exercise of powers and discharge of duties.16 The term reasonable, in this context, denotes the extent of care and diligence that a reasonable individual in a similar position in a corporation would exercise under similar circumstances.17

Walker v Wimborne, it was held that a breach of duty transpired, whenever a director failed subjectively to consider the interests of the company properly.18 This transpires, whenever the interests of the director and that of the company coincide, and the director does not regard these as being separate entities.19 Moreover, in Daniels v Anderson, the court ruled that directors had to arrive at an independent and informed judgment regarding the decisions presented to the board of directors.20 In addition, directors had to guide the company and supervise its management.21

Moreover, in Thomas Marshall (Exports) Ltd v Guinle, the court ruled that directors had a fiduciary duty to abstain from taking undue advantage of confidential information obtained by them by virtue of their position.22

In our problem, Judy used the information gathered by surveys from Country Living Ltd regarding the marketability of antique clocks, to her brother’s company, Classic Trend Pty Ltd after her resignation from the former company. This amounts to breach of provisions of director’s duties under the Corporations Act, as well as under the common law provisions.

This obligation for a director or other officer of the corporation to exercise reasonable care and diligence is satisfied, with respect to a specific business judgment, provided; first, the judgment is made in good faith and for a proper purpose; second, there is no material personal interest in the subject matter of the judgment; third, the director or officer informs himself about the subject matter of the judgment to the extent that he reasonably perceives to be appropriate; fourth, the director or other officer of the corporation rationally believes that the judgment is in its best interests. The required levels of care, diligence and skill are not satisfied when directors delegate to colleagues or subordinates in the corporation and ignore the subsequent developments. At the very least, directors have to procure an overall appreciation for the business of their company, in addition to taking active interest in its affairs.23

Nevertheless, with respect to Judy, the business judgement rule will not apply, since she did not behave in a manner to benefit the wellbeing of the company Country Living Ltd. Moreover, she provided a benefit to her brother’s company Classic Trend Pty Ltd, by disclosing the information in the survey of Country Living Ltd.

Conclusion

According to the above discussion and case law, Judy has breached the duties of directors under sections 180 to 184 of the Corporations Act. In addition, she has violated the norms of trust and fidelity provisions of the general law. Hence, she can be prosecuted under the provisions of Corporation’s Act 2001, as well as under the common law.

Question B

Whether minority Shareholders can bring an action under statutory derivative claims under the Corporations Act 2001.

Whether minority shareholders have a remedy against oppressive action by the management of the company, under the oppression provisions of the Corporations Act.

Rule of Law

In Australia, a statutory right to initiate derivative action has supplanted the general law right to do so. The related procedure has been described under Part 2F.1A of the Corporations Act.24

Moreover, as provided under section 233 of the Corporations Act, a court upon determining an oppression pursuant to section 232 can make any order that it deems appropriate.

Application

A survey had been undertaken by the company Country Living Ltd, regarding the feasibility and profitability of their proposed expansion projects. After the results of the survey had been collated, a board meeting had been conducted, wherein Judy, a company director participated negligently. Moreover, the decision was taken by the directors, irrespective of survey results on antique clocks.

It is obligatory for directors to manage the company and exercise their powers to promote the interests of all the shareholders. All the same, the majority shareholders could demand or expect that the company should be managed in a manner that benefits them to the maximum extent, regardless of any detriment caused to the other shareholders. Wide ranging remedies are available for the oppressed minority shareholders under the Corporations Act.25

In general, the minority shareholders have scant capacity to influence company affairs. Nevertheless, directors should act equitably and make certain that their decisions prove beneficial to every category of shareholders. Failure to act in this manner, renders the erring director liable for infringement of statutory duties, and could invite action for exercising oppressive conduct.

In our problem, the directors of the company, Country Living Ltd, had taken the decision contrary to the interests of the company’s future. This is because, they had ignored the survey results relating to imitation antique clocks while taking their decision.

In the past, there had been considerable confusion regarding the employment of company funds during litigation related to derivative actions. For instance, in Wallersteiner v Moir (No2),26 Denning LJ held that applicants were to be indemnified against the costs incurred, by the company. However, they had to convince the court that such indemnification was appropriate under the given circumstances.27

Nevertheless, the statutory oppression remedy does not involve leave requirements that have to be fulfilled for the grant of standing. On the other hand, the filing of a statutory derivative action does not provide the complainant with any appreciable personal benefit. In fact, such complainant could be required to bear the costs of running the statutory derivate action.28 Hence, it is not employed to the same extent as the oppression remedy.

In Ebrahimi v Westbourne Galleries Ltd,29 their Lordships rejuvenated the provisions of the UK Companies Act.30 These provisions granted a remedy to minority shareholders, when the company’s affairs were being conducted oppressively towards them. In this case, the Law Lords held that under section 222(f) of the Companies Act, it was just and equitable to wind up the company.31

Moreover, the court is vested with the discretion to award an array of remedies, in order to provide relief from the consequences of oppression, to the minority shareholders. This is under the provisions of section 233 of the Corporations Act. However, it is not mandatory for the court to grant such remedies. Some of these remedies are an order that; first, requires one or more of the shareholders to acquire shares of the minority shareholders, at a price that the court determines. Second, obliges the company to purchase the shares of the minority shareholders. Third, enjoins the appointment of a receiver and manager. Fourth, obliges an individual to carry out a specific act. Fifth, issuing an injunction against the company or any entity against carrying out a specific act. Sixth, directing the winding up of the company. In general, plaintiff shareholders prefer an order that requires the company or other shareholders to purchase their shares at a price that the court determines.32

Conclusion

Minority shareholders can bring an action under the oppression provisions of Section 233 of the Corporations Act. Thus, the court can accord injunction against the company from proceeding with their decision contrary to the survey results. Bringing an oppression action against the directors is easier than filing a derivative claim, consequently the minority shareholders can bring an action under the oppression remedy provisions of the Corporations Act.

Bibliography

A Demetra, “’To be Active or Inactive’: Is this a ‘New’ Question for Company Directors?” (2003) 8(2) Deakin Law Review 335.

Australian Institute of Company Directors, “What are the duties of directors?” accessed on 5 January 2016 from .http://www.companydirectors.com.au/~/media/15E133BBD8664402AF9A24FD5352EEC0.ashx

Baxt R, Duties and Responsibilities of Directors and Officers, 2005, 18th edition, Sydney, NSW, Australia, AICD.

Cassidy J, Concise Corporations Law, 2006, 5th edition, Sydney, NSW, Australia, Federation Press.

Commonwealth Consolidated Acts, “Corporations Act 2001 – Sect 180” accessed on 5 January 2016 from .http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html

Easton M, “Don’t forget minority shareholders” accessed on 7 January 2016 from .http://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/April/Opinion-Do-not-forget-minority-shareholders

Frawley N, “The cost of bringing a statutory derivative action in Australia — is it time to reconsider the terms of section 242 of the Corporations Act 2001?” accessed on 7 January 2016 from .http://www.clta.edu.au/professional/papers/conference2007/2007NF_CBSDAA.pdf

Hofmann M, “The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore” accessed on 7 January 2016 from .http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012&context=cgej

Queensland Government, “Corporations Act 2001 (Cth) (the Corporations Act)” accessed on 5 January 2016 from .http://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx

Trebilcock M J, “A New Concern for the Minority Shareholder” (1973) 19(1) McGill Law Journal 106.

1 Commonwealth Consolidated Acts, “Corporations Act 2001 – Sect 180” accessed on 5 January 2016 from http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html.

2Mills v Mills (1938) 60 CLR 150.

3 s 180 Corporations Act 2001 (C’th).

4 s 181 CA.

5 Australian Institute of Company Directors, “What are the duties of directors?” accessed on 5 January 2016 from http://www.companydirectors.com.au/~/media/15E133BBD8664402AF9A24FD5352EEC0.ashx.

6 s 182 CA.

7 s 183 CA.

8 Australian Institute of Company Directors, “What are the duties of directors?” accessed on 5 January 2016 from http://www.companydirectors.com.au/~/media/15E133BBD8664402AF9A24FD5352EEC0.ashx.

9ASIC v Plymin [2003] NSWCA 91.

10Deputy Commissioner of Taxation v Clark [2003] NSWCA 91.

11 A Demetra, “’To be Active or Inactive’: Is this a ‘New’ Question for Company Directors?” (2003) 8(2) Deakin Law Review 335, at 347.

13Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461.

14Phipps v Boardman [1967] 2 AC 46.

15s 184(1) CA.

16 s 180 CA.

17 Queensland Government, “Corporations Act 2001 (Cth) (the Corporations Act)” accessed on 5 January 2016 from http://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx.

18Walker v Wimborne (1976) 137 CLR 1.

19 Cassidy J, Concise Corporations Law, 2006, 5th edition, Sydney, NSW, Australia, Federation Press, p. 222.

20Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438.

21 Baxt R, Duties and Responsibilities of Directors and Officers, 2005, 18th edition, Sydney, NSW, Australia, AICD, p. 194.

22Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227.

24 ss 236-242 CA.

25 Easton M, “Don’t forget minority shareholders” accessed on 7 January 2016 from http://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/April/Opinion-Do-not-forget-minority-shareholders.

26Wallersteiner v Moir(No 2) [1975] QB 373.

27 Frawley N, “The cost of bringing a statutory derivative action in Australia — is it time to reconsider the terms of section 242 of the Corporations Act 2001?” accessed on 7 January 2016 from http://www.clta.edu.au/professional/papers/conference2007/2007NF_CBSDAA.pdf.

28 Hofmann M, “The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore” accessed on 7 January 2016 from http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012&context=cgej.

29Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

30 s 210 Companies Act (c.38) 1948.

31 Trebilcock M J, “A New Concern for the Minority Shareholder” (1973) 19(1) McGill Law Journal 106, at 106.