Analysis Of Director’s Duties In Two Different Legal Scenarios

Overview of Director’s Legal Obligations

The given case scenario is an analysis on the duties that a director must cater towards the company and the shareholders of the company.

As per the facts of the case, Chip-Eze Pty Ltd is a potato manufacturing company and dealing in the two businesses, that is, ‘potato crisp’ and ‘frozen potato chips’. The directors are Michaela, Jordon and Marianne holding 25% each and Ayub, Saeed, Donte, Neeve and Faizah are other shareholders together holding 25%.

Now, a company directors are the working officers of the company as authorized under section of 2001 Act. The directors are given responsibly to act for the company and to take decisions for the company as the company does not have a mind of its own. This power is enshrined on the directors under section 198A of the Act and is held in Deputy Commissioner of Taxation v Austin (1998). (Latimer 2012)

Now, there are various responsibilities that must be catered by the company director as they are the officers and agents of the company who take decisions on behalf of the company. some of the responsibilities that must be carried on by the directors includes:

Section 181 of the 2001 Act – The duty of good faith is enshrined under section 181 of the 2001 Act. an duty is casted on the every officer and director of the company and it was held that all the acts of the directors which are carried out in the name of the company should be such which is in the good faith of the company considering the interest of the company and the acts are carried out for proper purpose and is analyzed in Re Smith & Fawcett Ltd [1942].The acts that are carried out by the directors is cortically evaluated as per the understanding of the court and thus objectively and is held in The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008].

Section 191- 15 of 2001 Act – When the directors are acting for the company then it is the supreme responsibly of the directors that all their acts are in the company interest and if there are chances that there is conflict in the interest of the director with that of the company then it is the interest of the company that must be kept on priority and is held in ASIC v Adler [2002]

Common law duty of good faith – The directors are holding a fiduciary duty not towards the company but to every company officer. This fiduciary duty is equivalent to section 181 of the Act and must be cater in the most appropriate manner.

Scenario 1: Takeover Proposal by a Competitor Company

Now, the law is applied to the given situation,

It is submitted that the business dealing in potato crisp chips is running into losses and in order to avoid any payments to the creditors of the business of crisp chips the Chip-Eze Pty Ltd decided that they should form a new company in the name of Freeze Me Pty Ltd and that Chip-Eze Pty Ltd will transfer its profitable business of frozen chips to Freeze Me Pty Ltd. Thus, the only business that is left with Chip-Eze Pty Ltd which is running in loss and thus they can avoid the payment to creditors.

In these situations it is submitted that all Michaela, Jordon and Marianne are the majority directors of the company holding 75% of the shares. It is their duty that the acts that are carried out by them must be in good faith. It is submitted that all the directors have decided that they will shift their profitable business to the new company so that they can avoid the payment of due to the creditors. Thus, the acts are not in good faith and are clear violation of section 181 of the 2001 Act. The acts are not for proper purpose as the purpose for which they new company is created and the profitable business is transferred is to bring again to themselves and loss to the creditors. So, there is no honesty on the part of Michaela, Jordon and Marianne.

Also, the directors, Michaela, Jordon and Marianne, are preferring their own interest over the interest of the creditors. Thus, there is breach of section 191-195 of the 2001 Act.

Apart from the statutory law the com on law duty of fiduciary relationship is also exploited by Michaela, Jordon and Marianne to bring benefit to them at the cost of the suppliers and the creditors of the old company.

Now, apart from the stated duties above, there are also various other duties which are needed to be understand in order to advice Faizah who acted on the advice of Jordon.

Every director of the company is also imposed with the duty that whatever acts that are carried on by him should be accomplished in all careful and diligent manner to secure the interest of the company and the purpose for which the same are taken are proper and is held in section 180 of the Act. The diligence and carefulness is imbibed in every acts of the director. But, this duty is not analyzed objectively but is held in Statewide Tobacco Services Ltd v Morley (1990) that if the director can prove that the acts that are carried out by him are to the best of knowledge and are taken by seeking exert advice and in good faith, then, he can rely on section 180 (2) of the Act (business judgment rule) and safe guard himself and is held in Daniels v Anderson (1995).

Scenario 2: Directors Exploiting Position and Information

Also, when a person is appointed at the post of the director then he has several authorities and powers that are given to him. It is very necessary that he must use the position in the company interest and for proper purpose and no acts should be carried out that is beneficial to the director himself and against the company including the shareholders of the company. This duty is casted under section 182 of the 2001 Act. Likewise, no director is allowed to use the company information for his own advantage and which is detrimental to the company and its shareholders and is held under section 183 of the act and is analyzed in R v Byrnes (1995). (Latimer 2012)

Also, if the acts of the director are such that it brings loss to the shareholders of the company and the acts are carried intentionally then it is a kind of phoenix activity and such activities are not permitted in law.

Now, it is found that Faizah is the minority shareholder of the company. On 6^th August he visited Jordon and shows his intention to buy 5% shares in Chip-Eze Pty Ltd. now, Jordon being the majority shareholder is aware that Chip-Eze Pty Ltd is in the process of selling his profitable business to the new company. This information is received by him because of his position and information that is received by him. But, he misused this information and without letting anything know to Faizah, he sold his own shares to him. Thus, there is clear breach of section 182 and section 183 by Jordon.

Also, Jordon has a duty to carry his acts with all care and diligence. But by selling his shares to Faizah he has acted in the most careless manner which is not in the interest of the shareholders of Chip-Eze Pty Ltd. Thus, there is clear breach of section 180 by Jordon.

Also, by selling his own shares to Faizah, loss is inflicted by Jordon; so, Jordon is indulged in phenoic activity which is not permissible.

Thus, Faizah has every right to sue Jordon for the breach of directorial duties as he misused his position and information and the acts are not carried with care and diligence towards Faizah.

Reference List

Books/Articles/Journals

Australia, 2011, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations, CCH Australia Limited.

Cassidy, J 2006, Concise Corporations Law, Concise Corporations Law, Federation press.

Gillies, P 2004, Business Law, Federation Press,.

Latimer, P 2012, Australian Business Law 2012, CCH Australia Limited.

Case Laws

Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited (2004).

ASIC v Adler [2002] NSWSC 171.

Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2006] QSC 358.

Commonwealth Bank of Australia vs. Australian Solar Information Pty Ltd (1987).

Daniels v Anderson (1995).

Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565.

Gambotto v WCP Ltd (1995) 182 CLR 432;

Kelner v Baxter (1866) LR 2 CP 174