Question:
Anthony, Ben, Catherine and Daniel are directors of Chaser Ltd., a company whose business is wine bottling. Given the downturn in the economy and entry of new countries into the “New World” wine market, competition especially in Asia is becoming increasingly stiff. The directors of Chaser Ltd. feel that it would be prudent to diversify and invest in other business opportunities. During the Easter vacation, Anthony caught up with his old friend from university, Wayne, who works for a green energy company in Norway that predominantly specialises in Tidal energy. Tidal energy is a very new form of energy that is picking up momentum in Europe and the Atlantic coast of the USA. The power created through tidal generators is generally more environmentally friendly and causes less impact on established ecosystems. Although not yet widely used, tidal power has a potential for future electricity generation. None of the energy companies in Australia currently use this form of energy. At the next board meeting Anthony mentions tidal energy as a possible business venture for Chaser Ltd. Anthony invites Wayne who has just formed a company, Westpool Pty. Ltd. that makes tidal stream generators, to come and speak to all the directors of Chaser Ltd., at their next meeting about tidal energy for thirty minutes. Wayne is a very convincing speaker who showed them great 3D underwater pictures of the tidal stream generators his company makes. After Wayne leaves, the directors are all very excited at the prospect of being pioneers in the field of tidal energy in Australia and believe that this will be a profitable business. Without much further discussion they decided to invest $20 million into this venture and to give the sole contract to supply tidal steam generators to Westpool Pty. Ltd. Three months later Chaser Ltd.’s tidal energy business is a disaster. They discovered that the Australian waters is not suitable for tidal energy. While it may be suitable in Europe and the USA, Australia is not a suitable site for tidal energy, mainly because of the Great Barrier Reef. The directors later discovered that although Wayne had been very convincing in his speech to them he really was not an expert in tidal energy and actually held an insignificant position in his company in Norway. Much to the directors’ surprise, they discovered that Anthony is a major shareholder of Westpool Pty Ltd.
Advise the directors of Chaser Ltd whether they have breached their directors duties under both the Corporations Act 2001(Cth) and general law?
In the present case, the directors of Chaser Ltd, Anthony, Catherine, Ben and Daniel have entered into a contract for the supply of tidal generators with Westpool Pty Ltd. after seeing a presentation by the director of Westpool, Wayne who is also a friend of Anthony. However only after three months, the tidal energy business turns out to be a disaster. The directors of Chaser Ltd come to know that the waters of Australia are not suitable for tidal energy. Later on, the directors also come to know that Wayne was not an expert on tidal energy and in reality he only had a minor position in the company in Norway. At the same time, the other directors of Chaser Ltd also find out that a major shareholder of Westpool is Anthony.
Legal Issues Involved:
Under the circumstances it needs to be decided if the director’s duties provided by the Corporation Act, 2001 as well as the directors’ duties prescribed by common law have been breached in this case or not.
Relevant Laws:
Common Law Duties:
Apart from the common law directors’ duties there are duties provided by Corporations Act 2001 also. At the same time, the Constitution of the company may also provide for the duties of the directors. The purpose of the duties of the directors is to promote good governance and at the same time they have also been designed with a view to make sure that the actions of the directors are in company’s best interests (Austin, 1995 p19). In this regard, the common law provides that the directors have a duty to act in good faith. It is also the duty of the directors not to act for an improper purpose. There are also the duties of care and diligence, to avoid conflict of interest and refrain from making improper use of position or improper use of information. There is also the duty which requires that the directors should not allow it to trade if it is insolvent (Keay, 2001).
In this regard, the duty of care and diligence requires that the directors should be aware of the financial affairs at all times including its solvency. It cannot be diminished in case the duty has been delegated by the directors. In the same way, the directors cannot use ignorance concerning the affairs of the company. Therefore, this duty requires that the directors should question information that has been placed before them. At the same time, the duty to retain discretion requires that the directors of companies should not put themselves in such a position where it will be difficult for them to make decisions that are in company’s best interests (ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd, 1991). This requirement includes entering into business transactions due to which a situation may be created as a result of which the director is not able to take part in making decisions for the company. An example in this regard can be given of the situation where the director is required to raise the interest of other parties before their company’s interests.
There is the duty to avoid conflicts of interest. It is considered that the directors owe fiduciary duties to their company. It is a significant legal relationship and includes the presence of the duty of trust and good faith (Ramsay and Stapledon, 2000). Therefore, it is required that the directors should give preference to the interests of the company instead of their personal interests. This duty also requires that the directors should avoid situations where a personal interest may be present which conflicts with company’s interest as the directors have a duty to protect company’s interests. Such a situation may take place in case there are the chances of a conflict (Regal (Hastings) Ltd v Gulliver, 1967). Such a conflict may be direct or indirect and the directors have a duty to avoid having an interest in a transaction that is taking place with the company. This duty will be breached in case a director enters into a transaction, direct or indirect (Statewide Tobacco Services Ltd v Morley, 1990).
Another duty another duty of the directors provided by the common law is the duty that requires that directors should not abuse corporate opportunities. Directors are required to avoid these situations where a conflict may exist between their own interests and that of the company. This situation may take place in case the act of the director is related with company’s affairs that the act has been done in course of management and also while using the special knowledge and opportunities that are available to the person as a director of the company. It is also required that there should be a causal connection amid directors’ fiduciary duties and the opportunity. In such a case, it needs to be seen that the opportunity arose under what circumstances along with its nature as well as the nature of company’s operations along with its future operations (ASIC v Rich, 2003). In case a connection is present amid the obligations of the director and such an opportunity, there are chances that the director has misused the opportunity. At this point, it also needs to be noted that in such a case it is not relevant if the company itself was not in a position to exploit the opportunity, except where it can be said that it is in the interests of the company that such opportunity may be pursued by the director (James, Ramsay and Siva, 2004).
Apart from the common-law duties of directors, chapter 2D Corporations Act also provides for directors’ duties. These include the duty of care and diligence, duty of good faith and the improper use of information and position by the directors. There are certain other provisions that are related with the duty of the directors to prevent insolvent trading, disclosing material personal interests, financial reporting, and reliance on delegates.
In this regard, s180 of the Corporations Act provides for the duty of the directors to use care and diligence and also provides the business judgment rule (AWA Ltd v Daniels, 1992). The director’s duty of care and diligence is also present under the common law and his duty has also been provided by s180 of the Corporations Act. According to s180(1), the directors of companies should use their powers with the same level of care and diligence that would be exercised by any other reasonable person under similar circumstances. In this regard, the reference that has been made to the reasonable person reveals that it is an objective standard of care which is consistent with an equivalent fiduciary duty of the directors. Therefore a balance needs to be maintained between the reasonably foreseen risk of harm and the probable benefits that may reasonably be derived by the company from such conduct. In this regard, the court considers the subjective elements like position of the director as well as the particular circumstances of the company while assessing if the duty of the director has been breached or not (R v Byrnes, 1995). Section 180 incorporates the business judgment rule. According to s180(2) the director of the company is required to make judgment for proper purpose and in good faith and such director does not have any material personal interest regarding the subject matter of such judgment. In the same way, the directors should inform them about its subject matter to the extent which they reasonably believe to be appropriate. At the same time, it should be reasonably believed by the directors that the judgment made by them is in the best interests. Therefore, it is important that these requirements have been satisfied by the directors in order to fulfill the duty of care and diligence has provided by the Corporations Act regarding a particular business judgment. At this point, it needs to be mentioned that a business judgment includes the decision related with taking or not to take action regarding a particular matter that is relevant for the operations of the company (Farrar, 2000 p106).
In the present case, the directors of Chaser Ltd. Anthony, Ben, Daniel and Kathleen have breached their duty as the director of the company to act with reasonable care and diligence. In this case, the directors of Chasers Ltd have not informed themselves adequately before entering into the contract with Westpool Pty Ltd. and have only relied on the presentation given by Anthony. They have not taken any steps to inform themselves if the tidal generation business would be suitable for the company or not. The result was that without making proper inquiries, they entered into a contract worth $20 million with Westpool Pty Ltd. However the business turned out to be a disaster within a short period of three months. The directors of Chasers Ltd came to know later on that due to the Great Barrier Reef, Australia is not suitable for the generation of tidal energy.
Section 181 of the Corporations Act provide for the directors’ duty of good faith. Therefore, the directors should use their powers and fulfill their duties in good faith. This section also provides that duties should be discharged and powers should be exercised by the directors for a proper purpose. In this way, this statutory provision is similar to the fiduciary duty of the directors which requires that the directors should act bona fide. In this way imposes a duty on the directors that they should act honestly even if there is a conflict of duties (ASIC v Vizard, 2005). This duty can be breached by the directors if they exercise their powers for an improper purpose although it is believed by the directors that they are acting honestly. Section 182 of the Corporations Act provides the duty of the directors according to which they should not use their position improperly. This section provides that the director of the company should not use its position improperly with a view to achieve personal advantage or for any other person or causing a detriment. This duty is breached by the director in case the director involves in conduct with a view to obtain a personal advantage or to cause a detriment to the company. In this regard it is immaterial if such benefit or detriment has been caused in reality or not (Greenhow, 1999 p33).
In the present case, this duty has been breached by Anthony who is a director of Chaser Ltd and at the same time also a major shareholder of Westpool. In this case, and then he has acted improperly with a view to achieve personal gain and at the same time, Anthony has also acted with a view to benefit Wayne, who is an old friend of Anthony.
At the same time, section 191 to 195 of the Corporations Act provides that material personal interests should be disclosed by the directors. Therefore a director who has material personal interest in any matter associated with company’s affairs should give a notice regarding the presence of such interest under section 191 of the Act. The Corporations Act provides a list of the interests that the directors are not required to disclose and all other interests have to be disclosed. The notice containing the details related with the nature and extent and also how it is related with company’s affairs needs to be given to the directors. This notice should be given as soon as reasonably possible after the director comes to know regarding the presence of such an interest.
Conclusion:
As a result of the above said discussion, it can be said in the present case that the directors of Chasers Ltd can be held liable for the breach of their duties as the director of the company prescribed by the Corporations Act and also for breaching the common law duties of directors. While the three directors of Chasers Ltd, Daniel, Ben and Catherine can be held liable for the breach of the common law duty of care and diligence as well as the statutory duty provided by s180, Corporations Act according to which the directors of companies have a duty of care and diligence.
On the other hand, the fourth director of Chasers Ltd, Anthony has breached his duty as the director of the company when he did not inform the other directors concerning the presence of a significant material interest in the deal with Westpool. Similarly, Anthony has also acted with a view to attain a personal benefit and to get a benefit for Wayne, his old friend. Therefore, all the directors of the company have breached different duties of directors prescribed by the Corporations Act and also the common law duties.
References
Anderson, (2006) ‘Creditors’ rights of recovery’ 30 Melb Uni LR 1
Farrar (2000) “A Note on Dealing with Self Interested Transactions by Directors” 12 Bond Law Review 106
Greenhow (1999) “The Statutory Business Judgment Rule: Putting the Wind in Directors’ Sails” in Bond Law Review 33
James, Ramsay & Siva (2004) “Insolvent Trading: an Empirical Study”
Keay, (2001) ‘The director’s duty to take into account the interests of company creditors: When is it triggered? 25 Melb Uni LR 315
Keay, 2001, “Directors Duty to Take Into Account the Interests of Creditors” Melbourne University Law Review 11
R P Austin, (1995) “Representatives and Fiduciary Responsibilities – Notes on Nominee Directorships and Like Arrangements” 7 Bond Law Review 19
Ramsay & Stapledon, (2000) ‘Directors’ Conflicts – Empirical Study’
Case Law
ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (recs and mgrsapptd) [1991] 2 Qd R 360
ASIC v StephenWilliam Vizard [2005] FCA 1037
ASIC v Vines [2006] NSWSC 760
Australian Securities and Investments Commission v Rich and Others (2003) 44 ACSR 341
AWA Ltd v Daniels (1992) 7 ACSR 759
R v Byrnes (1995) 130 ALR 529
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405
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