The issue in this case is to determine that whether any directors’ duties in the CA have been breached by the director of High Rise development Limited.
The Corporations Act 2001 (Cth) (the Act) imposes duties on all persons who are officers and directors of a company with respect to section 9 of the Act. The statutory duties are given out through Section 180-184 of the Act.
The directors have the duty to use their skill and diligence in an appropriate way while managing the operations of the company. Whether the decision taken by the directors is through the use of appropriate skill and diligence or not is determined by the court. This is done by applying the test provided in section 180(1) of the Act. A hypothetical and reasonable director is placed in the same position which the director in context is in. it is than considered that whether the reasonable director would have taken the same decision. If yes than the section is complied with and if not the section has been violated.
Section 181 of the Act purports to impose an obligation to act bonafide and for a proper purpose of the company on its directors. This means that the directors must act in good faith and always ensure the best interest of the company while discharging their duties.
Section 182 of the Act imposes an obligation on the directors of the company not to misuse there powers provided to them by their position in the company. The position must not be used for any personal gain or gain of any third party at the cost of the company. Where there is a conflict of interest between company and personal interest, the company interest always has to be given priority.
Section 183 of the Act imposes an obligation on the directors of the company not to misuse there information obtained by them through the company. The information must not be used for any personal gain or gain of any third party at the cost of the company.
As per the facts provided by the case study the company is governed by two directors. The company has recently entered into a deal to manage new high rise residential units. One of the directors of the organisation wants to give the cleaning contracts to the company owned by his friend’s wife. The quotes provided by such company are excessive however knowing the facts the director is willing to provide the contract to her company. If this contract is provided section 180(1) would be breached as a reasonable person would not have done so if he was placed in the same position. Section 181 of the Act is also breached as the act is not in the best interests of the company. The director would also breached section 182 and 183 as his act would ensure gain of a third party at the cost of the company. The only way in which the directors can avoid such breached is through obtaining a defense under section 180(2) or making proper disclosure to the other director under section 191 of the Act. Director can make disclosure at an Annual General Meetings or EGM to the Board and members of the company
The issue in this case is to determine whether oppressive remedy can be claimed by the two sons
The Act provides provisions related to oppressive remedy through section 232-234.
Section 232 of the Act provides that the court has the authority to make any order which has been provided in section 233 of the Act. The order can be made when a resolution or a resolution which has been proposed, the way in which the operations of the company is carried out or a proposed or actual omission or act on the part of the company is not overall beneficial for all the members of the company or unfairly discriminatory against, unfairly prejudicial to or oppressive towards a member or group of members in that or any other capacity. It further states that with respect to such acts the person to whom any shares have been transferred by the operation of law or by will, would be deemed as the member of the company.
In the given situation it has been provided that Malcolm and Lester have been allocated with 100 shares each in relation to Malta Harbourpty Ltd. Thus as per the provisions provided in section 232 of the Act they would be regarded as members who are entitled to bring a claim with respect to oppressive remedy. This is because Gangman has transferred them the shares through will. It can also be analyzed upon the facts of the scenario that the way in which Gangman is receiving personal profits which should actually be provided to the company. In addition Gangman was paying himself large bonuses to conceal profits. These actions are discriminatory and fairly prejudicial to the other members of the company. Therefore the two sons have the right to make a claim under section 232 of the Act. They can claim any order under section 233 and preferably an order of injunction or specific action preventing Gangman from operating the company in an unethical way.
Conclusion
Thus as per the provisions of section 232 and 233 the two sons can make a claim for oppressive remedy and ask the court to make orders for injunction to prevent Gangman from his unethical actions or specific performance to order Gangman to share profits with other members.
A small proprietary company is not required to prepare financial statements unless it is requested by the shareholders or the Australian Security and Investment Commission as per the provisions of the CA (Allen & Kraakman, 2016). In the given situation as Jasmine is the director of a small proprietary company it is not compulsory for her to maintain financial records unless it is requested by the shareholders or the AISC.
A small proprietary company may also be directed to prepare a financial report and director’s report under section 293 and 294 of the CA. Under section 293 shareholders who have 5% voting rights in a small proprietary company may order the company to prepare a financial report and send it to all shareholders. In the same way under section 294 Australian Security and Investment Commission can order a small proprietary company to prepare a financial report (Wahlen, Baginski & Bradshaw, 2014). Therefore Jasmine would only have to prepare the financial report if she has been asked to do so by the shareholders or the AISC (Lieberman et al., 2016).
The failure to comply with financial reporting in relation to a small proprietary company under section 293 and 294 of the CA comprises a strict liability offence under section 6.1 of the criminal code. Thus in the given situation if Jasmine fails to prepare a financial report she would be liable to be prosecuted under this section. She would be imposed with financial penalties under section 1317E of the CA and may also be suspended from managing a corporation for a period up to five years.
A liquidator is appointed to the order of a court by the shareholders of a company in accordance to the provisions of the CA. On the other hand a receiver is appointed through a secured creditor of the organisation under the powers of a security agreement (Crane & Matten, 2016). The role of the receiver is to sell the assets of the company by taking control of them which are secured against the money owed by the company to the creditor. When there is a receiver appointed in relation to a company it is allowed to trade whereas liquidator cannot indulge in insolvent trading. After the job of the receiver is over the company will come out of the situation of receivership. However when the role of the liquidator is completed the company comes to an end to the process of winding up and his struck off the registers of company.
If the creditor has secured all the Assets of the Company against the loan the receiver would take control of all the assets in the same way it would have been taken by a liquidator. A company can be under receivership and liquidation at the same time and where it can have only one liquidator at a single time a company can have more than one receiver at the same time. The powers of a receiver are provided under section 420 of the Corporation Act. The powers of a liquidator are provided under section 477 of the CA. A receiver cannot investigate the affairs of the company and has no authority to make the directors who have failed the company accountable; on the other hand these powers are present in a liquidator.
Section 459E of the CA provides that the creditors of a company are allowed to serve a statutory demand on the company if the debt is more than the minimum statutory amount. According to Section 9 of the CA the statutory minimum amount is $2000. The statutory demand can be made by the person in relation to one or more debts. Where the demand is in relation to a single debt the debt and its amount has to be specified and when there is more than one debt the total amount of the debt has to be specified. The statutory demand has to be in writing as well as it has to be in the prescribed form and must also be signed by or on behalf of the creditor. An affidavit has to be accompanied by the statutory demand which provides a verification of the debt and the total amount which is due to be paid by the company (Stout et al., 2016).
There are two grounds which have been provided by Section 459H on which the company has the right to dispute the statutory demand made by a creditor. The company can file a dispute within 21 days to the Supreme Court. The two Grounds on which the statutory demand order can be disputed are that there is a genuine dispute in relation to the existence of the amount payable and the claim of the recipient is offsetting. Offsetting claim means a genuine claim which can be raised through a cross demand or a counter claim.
Firstly by failing to exercise the degree of diligence and care which would have been done by a reasonable person in relation to the position in which the directors of Avestra were, the directors have contravened section 180(1) of the CA. The section states there where an officer or directors of the company fail to exercise diligence and care towards the company which any reasonable director would have done if he or she was in the same situation than the original directors have breached the section and is liable for civil penalty provisions.
Section 182 along with section 183 of the CA provides provision in relation to the equitable duty of conflict of interest. According to the duty the officers or directors of the company has the must take all measures to avoid a conflict of interest position (Cheeseman & Garvey, 2014). Where such a position cannot be avoided and the directors have to select between personal interest or the company’s interest than all the time priority has to be provided to the interest of the company as they have a fiduciary relationship. Such interest as per section 191 has to be disclosed to the board. Section 182 and 183 prevent the directors from using their position and information of the company to make personal gain.
While making a decision for the case it had been ruled by the court that “…if Avestra had observed effective compliance and conflict-management practices, it is likely that the episodes of misconduct described … would not have unfolded, or not to the same extent. Dempsey’s and Rowles’s omissions … were not merely procedural or technical contraventions. They were shortcomings that created or reflected a significantly deficient corporate culture, which enabled Avestra to act with a systematic and serious disregard of its fiduciary and regulatory obligations.” (Asic.gov.au, 2017). Through the judgment what the judge actually meant was that there was no effective compliance-management or compliance practices in place by the directors of the company which lead to the misconduct.
It is the duty of the directors to ensure that the company for a proper purpose complies with legal regulations at the minimum. No compliance with such regulations are a clear indication of negligence and inefficiency to manage an organization. The contraventions made by the directors were not technical and procedural which arise in the normal course of business. The actions of the directors reflected that there was a significant problems with the management of the organization which can be confirmed through the serious and systematic non compliance of the regulatory and fiduciary duties by the company.
It has been provided by the scenario that a liquidator had been appointed in relation to the company. According to the provisions provided in the CA the liquidator has been provided with a wide range of powers in relation to the company. In this case his primary role of the liquidator is to wind up the company by correctly managing the assets and liability of the company. All claims of the company have to be settled by the liquidator before the company is brought to dissolution.
References
Asic.gov.au. (2017). 17-140MR Federal Court disqualifies former directors of responsible entity | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-140mr-federal-court-disqualifies-former-directors-of-responsible-entity/ [Accessed 27 Oct. 2017].
Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business organization. Wolters Kluwer law & business.
Cheeseman, H. R., & Garvey, J. R. (2014). Business law. Pearson.
Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and materials.
Corporation Act 2001 (Cth)
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
Lieberman, J., Siedel, G., Warner, D., & Mayer, D. (2016). Business law and the legal environment.
Loewenstein, M. (2016). Benefit Corporation Law. Browser Download This Paper.
Schulman, S. H., Moscow, C., & Lesser, M. R. (2016). Michigan Corporation Law & Practice. Wolters Kluwer.
Stout, L. A., Robé, J. P., Ireland, P., Deakin, S., Greenfield, K., Johnston, A., … & Dine, J. (2016). The Modern Corporation Statement on Company Law.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.
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