Sources of Company Law in Australia: Director's Duties and Responsibilities

The Case

According to the given case, Peter is the managing director of the Waterloo Ltd merchant bank. He has intentionally appointed, Allcard, his best friend as a finance manager. Peter and Allcard misused Waterloo’s resources and managed the company’s finance badly. Waterloo is filing a case against Peter and Allcard.

This report will analyze the case and advice both parties: Waterloo Ltd. (later – the Plaintiff) and both Peter and Allcard (later – the Defendant) according to the Corporations Law of Australia, case law and other relevant sources.

Executive Summery

Sources of Company law in Australia
The laws governing director’s duties and responsibilities come from three areas:

The Common law
Statute Law, under the Corporations Act 2001
A company’s constitution

Introduction

In order to start analyzing the given case, it is important to define the ‘law’ itself:
… a set of rules, developed over a long period of time regulating people’s interactions with each over that helps to standardize and manage the behavior of individuals towards the other individuals, individuals and the government and that are enforceable through sanction. (Gibson & Fraser, Legal Foundations, 2012)

Businesses as companies and corporations have a separate legal entity from its members. It is considered as an independent person with its own rights and liabilities, therefore the corporation is obligated to pay its own liabilities and debts. Also, corporations have other rights such as the right to enter into contracts, sue or be sued, hold assets and properties in its own name, hire agents or even make its own laws. (Gisbon & Fraser, 2012)

The Defendant has appointed his best friend at a managerial position and put his private interests ahead of company’s interests, which contrasts with laws and duties under the Australian Law. As stated by Gibson and Fraser “a company can sue a director for breach of duty’’. (Gisbon & Fraser, 2012)

Plaintiff

According to the case the Plaintiff files a case against the Defendant for bad management of bank’s recourses, which resulted as an economical damage to the company. Analyzing the actions of the Defendant (appointing his best friend as a financial manager and misusing the bank’s recourses), it indicated that there is a case of breach of duty, also can be called as intentional tort. This section discusses what has to be established in order for a plaintiff to succeed in a duty breach action against a defendant with the respect to the tort law.
Intentional (or direct tort) is based on an action known as trespass. An intentional tort is one where a defendant intentionally carries out a wrongful act that directly causes harm to the plaintiff. (Gibson & Fraser, Civil Liability and insuring Against Risk, 2012). In the given case it is clear that Defendant’s misusage of the bank’s resources is an intentional act. We cannot assume that skillful and experienced employee at such a high position could perform wrongful actions unforeseeably.

Common Law Duties

Equitable Duties
In any company a director owes a duty of loyalty and a duty to act with reasonable care. He must exercise some degree of both skills and diligence in performing their functions on behalf of the company. The duty of loyalty includes these three main elements:

Good faith. Directors are required to act in a good faith for what they believe is for the benefit of the company as a whole. The court may intervene if there was an act that no reasonable director could perform as being in the interest of the company. In the current case, the defendant breaches the duty of bona fide by assuming that company’s interests correspond with his own interests. These false assumptions indicate that the Defender did not consider its interests as a separate entity. Therefore he and his friend have breached the duty by misusing the bank’s resources.

Proper Purpose. Every director is rewarded with powers to influence the company’s decisions. It is his obligation not to misuse these powers and not to let his own preferences prevail company’s interests. Defendant’s decision to appoint his best friend in the first place indicates his private intentions even thought it is not specified in the case what kind of personal advantage the defendant has gained. The new financial manager might not be qualified enough to hold the position and that could lead to unprofessional decisions that caused economical damages to the company. There is a possibility that the defendant could state that, in his opinion, his actions were justified and truly beneficial to the company. However, the director may be in breach of their fiduciary duty even if he honestly believes he is acting in the best interest of the company, as it is stated in Whitehouse v Carlton Hotel Pty Ltd 1987

Conflict of interest. Where, because the directors are fiduciaries, they have to avoid any situations where their company duties are in conflict with their personal duties. Making sure that the company has made the most favourable decision to its interests is the main role of a director. By any means, defendant’s choice did not result what would be the best outcome for the company, as his personal interests prevailed company’s needs. (Gibson & Fraser, Business Organizations and the Law, 2012)

Statutory Duties
Under the Corporations Act 2001, it is provided that a director is responsible for managing the business of the company and while doing so he may exercise all the powers of the company. The Corporations Act 2001 has adopted the common law fiduciary duties of directors. Therefore these duties have to be pursued by every director under the Australian Law.

Act in a Good Faith: under s 181.
Exercise Reasonable Care and Diligence: under s 180
Not make an improper Use of their Position as Directors: s 182
(Gibson & Fraser, Business Organizations and the law, 2012)

Considering the mentioned above, Defendant has breach several duties at once.
(Deliberately entered into a contract with Danial Ltd, 2011)

Civil Penalty

Civil penalties are combination of sanctions gathering both civil and criminal remedies. Civil penalties are applied to director’s duties in situations where a company’s employee has failed to act in harmony with the Act relating to the management of the company. (Gibson & Fraser, Business Crime and Ethics, 2012).
Civil penalty to be applied in case of violation Statutory Duties under s 181, 182, 183 of the Corporations Act 2001. Including duties such:

Intentional dishonesty
Failing to exercise their powers and discharge their duties in good faith in the best interest of corporation or for a proper purpose
Misusing the position, or information obtained because of their position, to gain themselves an advantage or cause harm to the corporation
Where a civil penalty provision in the Corporate Law is breached, the consequences include in the court may result:

Disqualifying the person who breached the duty from managing a corporation or a specific period of time AND/OR
Imposing a fine of up to $200,000 or five years’ imprisonment (or both)
The breach of the civil penalty provision allows the company to sue the person who’s actions resulted any loss suffered by the plaintiff, or any illegal profit made by the defendant or anyone related to him. (Gilligan, Bird, & Ramsey, 1999)
A court may also order a person to compensate a corporation for damages suffered. Damages include profits made by a person: s 1317H and s 1317HA. (Gibson & Fraser, Business Organisations and The Law, 2012)

ASIC V. Vizard (July 2005)

Case – Mr. Stephen William Vizard, a director of Telstra Corporation Ltd, Australian telecommunications and Media Company, obtained confidential information to a company that was market sensitive by reason of his position as a director. He had a strong personal gains and benefits in that corporation because it made share purchases and sales and collected profits for him.

Held – ASIC found that Mr. Vizard had breached his duties as director of Telstra Corporation Ltd in various occasions when he has exposed confidential information of Telstra to competitors. Mr. Vizard breached his duties by violating Statutory Duties under section 18 (under section 183 of the Corporations Act 2001) and this called for civil penalty. Mr. Vizard was disqualified from managing any other company in Australia for 10 years and was imposed a penalty of $390,000.

(Australian Securities & Investments Commission, 2005)

Defendant

Where a director is in a breach of their duty, as a general rule only the company can bring an action.
Under the Corporations Act 2001 directors and other officers of the company must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if he: was a director of a company in the company’s circumstances; and occupied the same office held by, and had the same responsibilities, as the relevant director (Corporations Act 2001: s 180)
Duty breached: Duty of Care, Skill and Diligence not actively monitoring the management of the company
If a defendant can satisfy the Business Judgment Rule (BJR), Corporations Act 2001: s 180(2), he will be taken to meet the requirements of his duty. The BJR essentially provides a defense to any breach if a defendant can establish that he:
1. Made business judgment in good faith and for a proper purpose
2. Does not have material or personal interest in the subject matter of the judgement
3. Informed himself about the subject matter of the judgement
4. Rationally believe that the judgement is in the best interest for the company. A belief will be rational unless it is a belief that no reasonable person in his position would hold.
(AU Domain Administration Ltd; AU Domain Administration Ltd)
Reliance on Advice

The act also contains a presumption of reasonableness where a director has relied on information or advice give or prepared by a professional adviser in relation to matter that a director reasonably believes to be within a person’s professional or expert competence, provided that the reliance is in good faith and the director has independently assessed the information or advice. (Corporations Act 2001: s 189)
(Latham, 2011)

Works Cited
AU Domain Administration Ltd. (n.d.). Retrieved December 4, 2013, from :AU Domain Administration Ltd: www.auda.org.au
Australian Securities & Investments Commission. (2005, July 28). (Australian Securities & Investments Commission) Retrieved December 4, 2013, from ASIC Website: www.asic.gov.au
Deliberately entered into a contract with Danial Ltd. (2011). Retrieved December 4, 2013, from LawTeacherNet: http://www.lawteacher.net
Gibson, A., & Fraser, D. (2012). Business Crime and Ethics. In A. Gibson, & D. Fraser, Business Law (pp. 127-128). Frenchs Forest, NSW, Australia: Pearson.
Gibson, A., & Fraser, D. (2012). Business Organizations and the law. In A. Gibson, & D. Fraser, Business Law (pp. 701-702). Frenchs Forest, NSW, Australia: Pearson.
Gibson, A., & Fraser, D. (2012). Business Organizations and the Law. In A. Gibson, & D. Fraser, Business Law (pp. 699-700). Frenchs, NSW, Australia: Pearson.
Gibson, A., & Fraser, D. (2012). Business Organisations and The Law. In A. Gibson, & D. Fraser, Business Law (pp. 707-78). Frenchs Forest, NSW, Australia: Pearson.
Gibson, A., & Fraser, D. (2012). Civil Liability and insuring Against Risk. In A. Gibson, & D. Fraser, Business Law (pp. 158-159). Frenchs Forest, NSW, Australia: Pearson.
Gibson, A., & Fraser, D. (2012). Legal Foundations. In D. Fraser, Business Law (p. 6). Frenchs Forest, NSW, Australia: Pearson.
Gilligan, G., Bird, H., & Ramsey, I. (1999). The Efficiency of Civil Penalty Sanctions Under the Australian Coprorations Law. Australian Institute of Chriminology. Canberra: www.aic.gov.au.
Gisbon, A., & Fraser, D. (2012). Business Organizations and The Law. In A. Gisbon, & D. Fraser, Business Law (pp. 688-711). Frenchs Forest, NSW, Australia: Pearson.
Latham, M. G. (2011, November 7). Company & Commercial - Autralia: nternational Law Office, Breach of director's duties: limits of reliance on advice as a defence. Retrieved December 4, 2013, from International Law Office: www.internationallawoffice.com