A director has been defined as someone who has merely been appointed to that position even when one is a shadow director or de facto director. In accordance to the rules and principles envisaged in the realm of Company law it is evident and abundantly pertinent clear that directors have a duty to the company pertaining to the carrying out of the business affairs Percival v Wright, thus the company solely has the power to raise a claim against any of directors whereby they fail to perform their duties and responsibilities towards the company’s business operations. Traditionally in company law position, shareholders were barred from bringing up claims against directors who were protected under company law, however, there is an emerging shift to this approach as depicted in the Corporation act 2001 and substance of common law which opines that the duties and powers conferred upon the company directors shall also be subject to oversight in order to ensure that such is incoherent with the company’s business objectives and commercial activities. It is imperative to underscore he fact that the management of a company is run by a few individual. It is not all members of the company that have the absolute right to control matters that are affecting the company.
Duty not use Information improperly section 183(1)
Pursuant to section 183(1) a director or company officer should use the information that is at his disposal due to the connection with the company for proper use. In the case of Commissioner for Corporate Affairs v Green the court affirmed that the information that the director should not be used to give the director an advantage. It bears noting that the duty of a director not to use information improperly has a profound interaction with the insider trading laws. In insider trading the director or company officer is prohibited from communicating information form the company that is confidential and price sensitive and which could have an effect on the price or value of security Under section I82 the directors of a company obligated not to use his position as a director of the company to gain unfair advantage for himself, a third party or to invite any loss to the company. In R v Byrne the court stated that a director will be held in breach of section 182 if he participates in trade with an intention to gain an unfair advantage or to cause loss to the company. As a matter of course, if a director conducts trade with the knowledge that the company is in a poor financial state he will be held to be in breach of section 182.
Directors have in the past exercised their powers for improper purposes where they had unfettered powers in the management of the affairs of the company that appeared only to limited by successful court actions.To cure the improper use of power by directors the was need of a legislation and thus the inclusion sec198 A gives the directors powers only to the extent that they represent the interest of the company and their powers seem to be derived from the company constitution, the replaceable rules or both .Being the managers of the business affairs of the company they are regarded as the mind and soul of the company. The effect of section 198 A is that it gives the director of the company power to do all that the company as a separate legal personality can do, however they will not perform any power that will require the authority of the general meeting.The power to manage the entire business affairs of the company is wide and it has been affirmed that the directors can also overturn the decision of the majority shareholders, only when it just and reasonable to do so, having been vested with powers under this section.
One of the fundamental duties of the directors in cases where there is a conflict of interest is to disclose any material personal interest on any matter that relates to the affairs of the company to other directors. This section was included in the act to ensure that the directors act in the best interest of the company. There have been rampant cases involving heavy corruption that has been perpetrated by the directors personal interest in some affairs of the company. It should be noted that the definition of the term and scope of material interest has not been defined in the act, however, in Grand Enterprises Pty Ltd v Aurium Resources Ltd it has been held that a matter will be of material personal interest only where it likely to affect the decision of the director when it comes to voting in general meetings. In case of conflict of interest the director is obligated to notify other directors of the interest. Pursuant to section 192 the notice of any conflict of interest must be made in form of writing and it is served to the directors during their meeting. In the case of Camelot Resources v MacDonald the court held that the notice of conflict must be comprehensible and explain the nature of the conflict clearly to the other directors during the meeting. It is because of the historical misappropriation of the company resources including financial recourses that the contravention of this section had to be backed by a criminal sanction that serves to punish the offender. Where a director goes contrary to this provision they will be liable for strict liability under Criminal Code part 6.1 where the offence of strict liability excludes the fault element such as negligence or intention. The director does not have to give a notice where they are acting on behalf of the company’s interest, where the interest concerns his remuneration as a director.
Under section 180 (1) of the act the director of a company or company officer has been obligated to apply reasonable care, skill and due diligence in all the responsibility that is undertaken on behalf of the company. It is imperative to note that in the case of ASIC v MacDonald it was held that the test that should be applied in finding whether there has been breach of reasonable care and due diligence is an objective test which involves examining a reasonable person in a similar position. In other words the court judges by what how a prudent person would ordinarily do the same act that the director is alleged to have done. The court should investigate all the circumstances of the fact on a case to case basis to establish breach of this duty. In the case of Re City Equitable Fire Insurance Co it was held that a reasonable and prudent director or a company officer is expected to know all the duties and responsibilities required of them under the corporation act. It bears noting that in the case of Daniels v AWA the court decided that a director is under a duty to know all the activities that are conducted in the company and should therefore ensure that reasonable care and due diligence is exercised. In the case of Vines v ASIC the court emphatically stated that the common law duty of care is in consonance with the statutory duty of reasonable care that is encapsulated in section 180 (1) of the act. It can be conceded that a director of a company must exercise his professional skill to avoid breaching the statutory duty of care.
A director has been mandated to avoid trading activities in the company. The director will be criminally liable if the company incurs another debt during the time that it is insolvent. It has been stated in the case of Woodgate v Davis that the idea behind this duty to the directors is to safeguard the interest of the stakeholders and investors of the company. It bear noting that a director may defend himself if they have been held in breach of this section. The director may argue that that at the time the trading activity was taking place there was no reasonable ground to know that the company was insolvent. The director may also argue that he was not at work or directly involved in the trading activity at the time the trade was taking place.Lastly, the director may argue that he had taken all reasonable and practicable steps to ensure that the debt was not incurred.
Fiduciary duty (Duty of Loyalty and to avoid conflict of interest)
Common law has placed a fiduciary duty on the director of company or company officer. The common law duty obligates a company officer to act in honesty, good faith and be loyal to the company. It has been held in the case of Walker v Windborne that a director will be held in breach of this duty if they act for an interest that does not benefit the company and conceals that fact. The test that is applied in establishing whether a director has breached the fiduciary duty of honesty and good faith is an objective one and it involves investigating what an ordinary reasonable person in the position of the director would do. However, in the case of Kinsela v Russell Kinsela Pty Ltd (in liq) the court held that when the company is undergoing the process of insolvency the interest of the director is considered first. A director of a company is under the obligation to ensure that they do not have any personal interest in the company affairs and they should zealously protect and safeguard the interest of the company.However, it should be noted that in the case of South Australia v Clark that a director is allowed to have a conflict of interest if there is an express provision in the company constitution that allows them.
The criminal offences of a director are encapsulated under section 184 of the corporation act. A director will be criminally liable if they fail to be honest, do not do their duty in good faith and fail to act for the benefit and interest of the company. Additionally, a director is also criminally liable if they act negligently or gain a personal advantage from trading in the name of the company. A director will also be criminally liable of they use information from the company in a dishonest manner so that a third party of they personally gain an advantage. A director will also be criminally liable if he fails to take necessary measures or precautions to ensure that the company does not trade when in insolvent.
The other legal barrier that is faced by the oppressed members of the company is that the wrong actions of the directors or other members of the company is at timed ratified by the company itself as a separate legal entity. It is apparent that there is a legal conundrum in the case of Regal (Hastings)Ltd v Gullive which maintains that a shareholder are allowed to ratify the action of the directors if they are in breach of duty and the case of Cook v Deeks in which it was remarked that the shareholders cannot ratify a breach of duty by the directors. There is still a conflict in the two decisions although the High Court in Malaysia in Teoh Peng Phe v Wan argued that a breach of duty which was done in line of duty which is authorizes by the company can be ratified by the shareholders. This decision has also ignited a magnanimous legal discontent in the legal fraternity in Malaysia with some contending that it does not conform to the two decisions above.
Conclusion
Lord Denning M.R in Moir v. Wallerstainer appears to be in agreement with the principle that a claim for remedies against the company may be brought in cases of fraud by the directors. He stated that the in cases of serious fraud by the insiders of the company, although the rightful plaintiff in the company itself as a separate legal personality, any other person deemed as a member of the company may apply for a remedy against the company. A director or a financial officer may be a person in control with respect to a derivative action. The person in control of the company may at times be perpetrators of fraud and serious incongruity in the company which may trigger the members of the company to pursue an action against the company for the fraud. It is apparent according to Prudential Assurance v Newman Industries that the term those ‘in control’ implies that that the persons, must be involved in daily management activities of the company. It is worth noting that an action that amounts to fraud cannot be ratified by the board or any other special meeting of the company and therefore any member of the company is entitled to bring an action in respect of the claim of fraud. The locus classicus in this section is Cooke v Deeks in which case the company directors decided to direct the opportunities of the company to themselves rather than put them open for other members of the company. It was held that such an action amounts to fraud because the directors portrayed selfish interest and personal interest on company affairs.
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
ASIC v MacDonald[2009] NSWSC 287
Camelot Resources v MacDonald (1994) 14 ACSR 437
Campbell v Rofe – [1932] UKPCHCA 3
Commissioner for Corporate Affairs v Green[1978] VR 505
Cook v Deeks UKPC 10 [1916]
Corporations Act 2002(cth)
Daniels v AWA(1992) 7 ACSR 759
Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997)26 ACSR 544.
Grand Enterprises Pty Ltd v Aurium Resources Ltd[2009] FCA 513
Halsbury’s Laws of Australia
Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3
McGuire v Ralph McKay (1987) 12 ACLR 107
Percival v Wright (1902) 2 Ch 421
R v Byrne(1995) 130 ALR 529
Re City Equitable Fire Insurance Co[1925] Ch 407
Regal (Hastings)Ltd v Gullive[1942]UKHL 1
Teoh Peng Phe v Wan 5 MLJ 149 [2001]
Vines v ASIC[2007] NSWCA 75
Walker v Windborne(1976) 137 CLR 1
Wallersteiner v Moir 1 WLR 991[1974]
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Woodgate v Davis(2002) 55 NSWLR 222
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