Question:
Discuss About The Director Company Liable Insolvent Under Act?
The question which has been identified in this case is in relation to the breach of directors duties as per the provisions of the Corporation Act 2001 (Cth) (the act)
Section 180-184 the act deal provides the duties which the directors must act in accordance with respect to discharging their obligation towards the operations of the company.
As provided in Section 180(1) of the act a director can be held accounting for the breach of this section if he or she does not apply proper skill and diligence while discharging their obligations in relation to the company.
When a question in relation to the compliance with such section has to be determined the court deploys an imaginary reasonable director in the same position when the direct in context was while taking a decision in relation to the company and then seen whether the reasonable director would have indulged in the same conduct or not. In case the court is satisfied that no reasonable director would have indulged in the same action committed by the original director, such director would be held liable to the breach of section 180(1) by the court.
In the case of Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 the court ruled that for the purpose of analyzing the violation of section 180(1) of the Act, no reasonable director would indulge in an actions which may result in the contravention of legal provisions as such contravention cannot be in the best interest of the company and definitely not a result of proper skill and diligence.
Section 181 of the Act is violated of the actions of the directors of the company are not in good faith and towards the best interest of the company.
In section 182 of the CA it has been ruled that the directors will breach the provisions of this section if it is found that they have used the position they have in the company to achieve personal interest by causing harm to the company. If there is any conflict of interest situation which a director of the company is facing where he has to choose between his interest and the companies interest he must always chose the interest of the company. In addition the directors also have to ensure that any conflict of interest situation is disclosed to the board as per section 192 of the Act.
Application
From the above discussed provisions provided by the Act it can be stated that the operations of the organization carried on by the directors are governed by the principles. In the given situation Eric being the non executive director of the company has the duty to act in the best interest of the company according to section 181 of the CA. he also has a duty to avoid any conflict of interest situation of his personal interest and company’s interest. Thus buy persuading the board to finalize the deal with a company where he is a partner to gain personal benefit and not disclosing such situation to the board accounts to the violation of section 181 and 182 of the CA.
Morton being the director of the company has been imposed with a duty to act with proper care and diligence in relation to the company. Under the section he has the duty to use personal skill and diligence to benefit the company, however he has not done so by not protesting against the deal which the company got into with Tricky Partners. A reasonable director if placed in the position of Mr. Morton would have not supported the deal knowing that the Eric is violating the provisions of the CA. Thus Mr. Morton is liable for the breach of section 180 (1) of the Act
Eric has violated section 181-182 of the act being the non executive director f the company. Whereas Mr. Morton has breached section 180(1) by not using appropriate skill and care towards the operations of Gold Coin Bank.
The question which has been identified in this case is in relation to the breach of directors duties as per the provisions of the act committed by the other three directors of Bricks Construction Co.
In the case of Asic v Adler and 4 Ors [2002] NSWSC 171, section 181 of the Act had been discussed in details. The section imposed a duty on the directors and other officers of an organization to discharge their obligation and use their powers towards the best interest of the company in good faith. The duties must also be discharged towards a proper purpose for the company. Section 181 can be also contravened by the director even if they believe they have discharged their duties in good faith through the application of the same test which is used to determine the contravention of section 180(1). In the given case it was clear that the defendant director have breached section 181 of the Act as they being the directors of the company indulge in activities which were not towards the best interest of the company.
In the same case the court also analyzed the provisions in relation to section 182 of the Act. The court stated that section 182 stands violated if the director of a company has used the power vested in him through the virtue off his position in the company in such a way where he is working for a personal interests rather than the interest of the company. As the director in the case has used his position to make the company gets into a deal for his personal interest and not the interest of the company the director violated section 182.
In the given situation it has been found that the other three directors of Bricks do not have good terms with the fourth director. By not involving the fourth director they are indulging in an oppressive conduct which can be punished under section 232 and 233 of the Act. Nevertheless here the breaches constituted by the other three directors in relation to the company are discussed. Through opening another company the directors have clearly violated the provisions of section 181 of the CA as such an action is not at all in good faith and is contrary to the interest of bricks as it would be deprived of its profits. They have also violated section 183 as they have used the information obtained from the company for such deal. In addition by passing a special resolution which stated that Bricks did not have any interest in the project the directors have violated section 182 of the Act by using their position information in a way which hampers the interest of the company for personal interest.
The question which has been identified in this case is in relation to the breach of directors duties as per the provisions of the act as well as fiduciary duties imposed by common law committed by the CEO and director of Comet Pty Ltd, Mr Hawker.
The directors in Australia not only are imposed with statutory duties but also fiduciary duties under the common law. These duties state that a director must always base his actions towards the company on bona fide intentions and not in a way which hampers the interest of the company in addition the powers of the directors given to them by the company must not be used for an improper purpose. the fiduciary duties also impose an obligation on the directors to avoid any conflict of interest as provided in the case of Chan v Zacharia [1984] HCA 36. In addition the directors also have the duty to retain their discretion over the affairs of the company.
In relation to the breach of general duties as opposed to the statutory duties the directors are likely to be subjected to the remedy of recession, statutory compensation or equitable damages.
Section 181 of the Act mirrors the duty of good faith, proper purpose and best interest provided by general law. The section imposes a duty on the directors and other officers of an organization to discharge their obligation and use their powers towards the best interest of the company in good faith. The duties must also be discharged towards a proper purpose for the company. Section 181 can be also contravened by the director even if they believe they have discharged their duties in good faith through the application of the same test which is used to determine the contravention of section 180(1).
Section 182 of the Act prohibits the director from misusing his position to case detriment to the company. Section 183 of the Act prohibits the director from misusing information to gain unfair advantage for themselves.
In the given case it has been provided that Mr Hawker who is the CEO and Director of comet has indulged into activities which are not good for the company in order to save personal reputation. Hawker by directing the funds from comet to the subsidiary in order to save personal reputation have violated the best interest fiduciary duty under general law as well as the section 181 of the act under statutory law as the act is clearly not in the best interest of the company which had to face insolvency as a result of Hawkers actions. In addition Hawker has violated section 182 of the Act along with the fiduciary duty of not making improper use if position by indulging in the act of fund transfer. Therefore it can be provided that Hawker can be held liable for the breach of section 181 and 182 of the Act as per statutory duties and the common law duty to act in best interest and not to make improper use of position.
As provided in Section 180(1) of the act a director can be held accountable for the breach of this section if he or she does not apply proper skill and diligence while discharging their obligations in relation to the company.
When a question in relation to the compliance with such section has to be determined the court deploys an imaginary reasonable director in the same position when the direct in context was while taking a decision in relation to the company and then seen whether the reasonable director would have indulged in the same conduct or not. In case the court is satisfied that no reasonable director would have indulged in the same action committed by the original director, such director would be held liable to the breach of section 180(1) by the court.
In the case of ASIC v Healey (2011) 83 ACSR 484 an argument was provided by the non- executive directors that they could rely on the company’s external auditors and management towards ensuring that the financial statement are in compliance with the Australian accounting standards. However the court in this case ruled that under the provisions of the Act every member of the board of directors has been imposed with a responsibility of focusing on and attending to the financial statements and such responsibility cannot be abdicated or delegated to others.
In the case of Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 it was ruled by the court that in case a director possesses a special skill their standard of care towards a company is held to be that of person professing such skills.
In the case of ASIC v Rich (2003) 44 ACSR 341 it was held by the court that the liability of the non-executive directors of a company are not limited to the knowledge, inaction , ignorance or experience of the directors.
As a defense Section 198D of the Act allows the directors to delegate any of their responsibilities to any person unless it is not restricted by the constitution of the company. Section 190(1) of the CA does not allow a director to abdicate responsibility. If the delegation of power has been done in a negligent manner the directors can only defend themselves if after making appropriate enquires the directors believed or have reasonable grounds to believe that the delegates are competent and reliable with respect to the delegated power under section 190(2) of the Act.
According to section 189 of the Act directors can reasonable have reliance on the decision of professional advisors, employees if the reliance was made after making proper independent assessment in good faith. However as provided by the Healey case reliance only be reasonable if the contrary is not proved.
In the Rich case the court ruled that whether the director have indulged in reasonably informed decision making is analyzed by determining the significance of the decision, time in hand for obtaining information, cost of information, confidence of directors in those giving the information, the nature of the decision towards the demand of competency by the board and whether the information was available reasonably and not considered.
In the given situation the COO of the company has recruited some of his friends for the purpose of preparing a report. The fresh recruitments are young graduates who are inexperience’s in handing a matter which is of high significance for the company and requires experienced experts. This is clearly a breach of exercising proper diligence and care in relation to the operations of the company. However in this case the COO can take the help of the business judgment rule as a defense as provided in section 180(2) of the Act according to which a director is free to marketing any judgment for the company in good faith and in compliance of law. However any reasonable director under the same circumstances as the COO would have not recruited the inexperienced experts as provided in the rich case. Given the significance of the decision and the reasonable availability of the decision the COO should have appointed more experienced experts. In addition he can take the defense of reliance as per which decision provided by other can be relied on under section 189. However there was no independent assessment done by the COO so this defense would also not be available.
With reference to the situation of the non executive directors as per the above discussed cases a subjective test is no longer used to determine the breach of duty. In the Healey case it had been specifically provided by the Court that the liability of the non- executive directors of a company are not limited to the knowledge, inaction , ignorance or experience of the directors. Thus in given situation the two non-executive directors one of which was a geologist and the other an engineer it can be provided that they should have made the board cautious about the decision in relation to the project. This can be said because as per their qualifications they had expert knowledge in the area of the project which they did not use in relation to the company. They cannot use their position of being non executive as a defense as discussed in the Healey case.
Section 588G of the Act expressly prohibits any director or officer of a company to indulge in any kind of trading activity when they have the information that the company has become insolvent or reasonably believe that the company may become insolvent as a result of such activity.
The directors of the company can evade the liability for a breach of duty if they were not present at the time which a decision had been made due to sickness of any their circumstances which were beyond their control.
Section 588h of the Act provides that if the directors of a company had reasonable grounds to believe that their activities would not make the company insolvent or the company is solvent at the time of such trading they can be excluded from the liability. The section had been used and discussed in the case of Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330 were reliance was put by the directors on other person to determine insolvency.
In the given situation it has been provided that the directors of the company had indulged in trading activities when they had been informed by the financial officer that the company is nearing insolvency. The directors did not take into account the advice provided but the CFO of the company very seriously. Thus they carried on with the trading and which could be considered as a breach of section 588G of the Act. Here the directors cannot take the defense available in section 588H of the Act as they cannot prove that they reasonably believed that the company would continue to be solvent after such activity.
The CFO who was not present at the time the decision was taken cannot use the above discussed defense of absence which can be used in case of circumstances beyond control and sickness as a anti aging surgery could have been postpone after the meeting about the decision.
References
Asic v Adler and 4 Ors [2002] NSWSC 171
ASIC v Healey (2011) 83 ACSR 484
ASIC v Rich (2003) 44 ACSR 341
Australian Securities and Investment Commission (ASIC) v project-management (No. 8) [2016] FCA 1023
Chan v Zacharia [1984] HCA 36
Corporation Act 2001 (Cth)
Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330
Permanent Building Society (in liq) v economics (1994) 14 ACSR 109
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