Commercial And Corporation Law For Administration Corporation

Directors’ Duties and Obligations

Describe about the Commercial and Corporation Law for Administration Corporation.

Generally it is seen, that function of the directors of a corporation is to administer the administration of the business for the benefit of the members of the corporation. Basically, they are the agents who are working for their shareholders. The authority to supervise the business is given to the directors by the company’s constitution, articles or by-laws. Directors owe a number of duties and obligations. The duties may vary from different jurisdictions in which the parent company has its subsidiary, such as (Paolini, 2014):

Obligation to behave in a truthful manner: The obligation to act truthfully means that the Board of Directors should make decisions for the fulfillment of the interest of the corporation and for a reason. Therefore they must:

• Not make wrongful use of their position and should not get personal benefits fulfilled
• Not use the information of the corporation for personal benefit or in a harmful manner
• Reveal all the conflicts of the Company and also should avoid them (Heller, 2014).

The Corporations Act allows a company’s constitution to include a provision to assist with subsidiary director duties(S 187). It states that the managers of a subsidiary corporation should act to serve best benefits to the corporation when:

• The organization of the company specifically makes a provision for the director to take action in the finest welfare of the Parent Corporation,
• Director behaves truthfully, etc.

Obligation to apply ability and mind: It requires each director to take concern and be practical in performing their job. Directors must:

• Act diligently and with reasonable skill and care
• Perform their role to the best of their ability based on their Knowledge and experience
• Familiarize themselves with the company and its activities, and
• Monitor the company’s financial and commercial Performance (Marshall and Ramsay, 2012).

Directors are expected to perform their role with an amount of carefulness that a sensible individual in a similar place would Exercise in similar circumstances. This will depend on the Size and activities of the company. Directors must understand the company and its activities and actively monitor its performance (Heller, 2014).

Obligation not to do trade when insolvent: The duty not to trade while insolvent is a specific Requirement which is usually classified as a subset of the responsibility to work out concern and skill, because it requires directors to turn their minds & apply their skills to assessing the monetary place of the subsidiary.

A corporation is considered bankrupt if it fails to pay its unpaid sum, when they fall unpaid. If a company becomes insolvent and Continues to trade, the directors can be held personally liable for debts incurred. To protect themselves, and meet their Obligations, directors should satisfy themselves at all times, when the business is capable to reimburse its sum unpaid as they fall due. This is usually straightforward for holding companies that do not trade, but for trading companies it requires diligent monitoring (Heller, 2014).

In Australia, directors are obligatory to make a statement that the business is solvent at least once each year. Directors should not make a solvency declaration until they have made proper inquiries and satisfied themselves that the company is indeed solvent. The company must keep sufficient monetary account to record it correctly, clarify connections and performance. The Director may be in breach of his duties if he fails to take all the important steps for the fulfillment.

Payment of Dividends

In the case of (In Liq) v McGee (1993) 11 ACSR 260 per Anderson J (at 289) it has been upheld that there are some situations where a manager is in the place of certain authority and control. The power includes the simple revelation of any clash among the attention and responsibility which refrain from appointment. This is inadequate to convince a manager’s responsibility. The manager may also be under a constructive obligation to take steps to defend the corporation’s concern such as by using such authority and pressure as he had to stop the deal from going away.

Payment of Dividends rests within the sound prudence and company opinion of the Board. Shareholders of the corporation have no right to dividends even if sufficient finances are available within the company (Elliott, 2016).

There are some responsibilities of the directors regarding the payment of dividends. They have the authority to state that dividends are special to the board and must be exercised by the Board as intact. A statement of dividend basically requires the board to take on a declaration authorizing the expense of dividend. Once the dividends have been declared in a lawful manner to its members then, the board may not cancel it or hold back the allocation of the said dividend without the consent of each such shareholder.

In order to determine the entitlement of shareholders to receive the payment of dividends, the board of directors may fix a date of record. In doing so, the board announces that the payment of dividends will be made on the date specified for payment to all the shareholders who are listed on the corporation’s books. The shareholders of the corporation may be listed in the books as owners as of the close of business on the date of record. If the board fails to mention specifically the date of record then the code fixes the date of such determination (Heller, 2014).

Dividends must be approved by the company’s directors, who are responsible for ensuring that the company is able to pay the dividend. Before approving a dividend, directors should review the company’s balance sheet and cash flows and satisfy themselves that (Keay, 2007).

• The corporation’s assets have increased its liabilities
• Just and sensible expense of dividends
• The sum of the dividend would not significantly intolerant for the ability of the corporation to pay off its creditors (Government Institute of Australia, 2014).

As per the case of Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd [2014] NSWSCA 326 it was held that it is the rights of the shareholders to be given set and obligatory dividends from the earnings of the corporation in situations where the company’s constitution has been amended to account for such. This is different from the traditional approach where a shareholder’s expectation of receiving a dividend is limited by the will of the board of directors (HopgoodGanim, 2014).

Shareholders’ Rights

The payment of dividends is an issue of major concern to the directors. The manner in which the accounting standards are currently developing means that it is possible for the company to have a reported profit which is low but still have significant available cash from which the dividends can be paid. This can lead to a significant intensity of reported income, even though the worth of the intangible asset and hence the superseding market value of the corporation has both improved. Under these situations, the current dividend rules mean that a company can only make a distribution to shareholders by seeking court approval for a return of capital (Odorisio, Davies and Clements, 2015).

Shareholders of the company are entitled to some rights under the Act. As per Section 232 of the Act it has been clearly stated that, “Minority shareholders are provided with some supplementary privileges and remedies because of their apparent exposure.” (Tomasic, Bottomley, and McQueen,2002). The additional rights which are being given to the members of the company include the rights to ratify a breach done by the Directors of the company (Janssen, 2016). Ratification has the effect of excusing a breach done by the company’s officer but it considers the concern of the creditors of the company (Australian Institute of Company Directors, 2013).

There are a number of remedies which are given to the members of the company under the Corporations Act (Hannigan, 2012). Remedies include:

Oppression Remedy: Section 232 of the Act states that this remedy is designed to give the minority shareholders with a remedy which is enforceable against the corporation for the conduct that may have been prejudicial to the interest of the minority shareholders (Boyle, 2002). There are certain situations which gives rise to the oppressive conduct (Brockett, 2012). The situations include:

Honest prevailing conditions of the case;

Accusation of injustice due to Substantial behavior;

Behavior of the members of the corporation;

Force of the suspected work on the interest of minority shareholders (Victorian Law Reform Commission, 2016).

In the similar case of Foss v Harbottle, it was held that there was misappropriation of assets of the business therefore the directors have to compensate.

Section 233 describes the types of remedies which are available to the litigants and are extensive such as:

Injunction; The statutory injunction, s 1324 a restriction is one of the temporary remedy required by ASIC or an artificial member if a business action breach the law. Conduct that can trigger this is:

Remedies Available to Members of the Company

Any breach of the Corporations Act

Aiding and abetting the infringement

Suggesting another to disregard

Involved in a contravention or Conspiring with others in a contravention.

Winding up Order; Winding up the company, s Court can order winding up by many ways. For example: The corporation has resolved by resolution to wind up. The business does not begin trade within one year of its registration. Managers should not act in the wellbeing of the members as whole.

The dealings of the corporation have been conducted oppressively, through an act or omission. The company is insolvent and it is in the interests of the public, members or creditors that it should be wound up. Modification of company’s constitution and injunctions.

In the case of Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561 it was held that: “to wind up a flourishing and wealthy corporation which is correctly managed must need a strong case to be made against it by the party to the suit.”

Statutory Derivative Action (S. 236):  Majority of the members of the corporation’s initiatives for the changes of the government to the Act. Under it, reply to the apparent lacunas of the pre-existing remedies wherein the corporation was not willing or was not capable to Act. It provides the members of the corporation with an action against the corporation whereby the actions are brought in the name of the company. Therefore, the action of the derivatives has proven to be a booming initiative in both state and courts (Bottomley, 2016).

In addition members of the corporation have some personal rights that they can practice against the corporation.

The right to be paid dividends

Dividends are payments potentially made out of company profit to the shareholders according to the number of shares held.

The assets test to pay profits, S254TA Company must not pay a dividend unless:

(a) The company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b) The payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c) The payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Members’ statutory remedies 

Section 232 and 233 allows the members of the company to apply to the court for giving an order under the act if the affairs of the company are being conducted against the benefit of the members of the company. Also includes the acts which are oppressive and unfair against the members of the corporation in the same ability or other ability (Victortse &Associates, 2016).

The statutory framework for oppressive conduct

In Australia, the applicable governmental guards are mentioned in Part 2F.1 of the Act which gives the court authority to help the investor if it thinks that:

1. a) The behavior of the corporation’s relationships;
2. b) A real or anticipated do something or error by or on behalf of a corporation; or
3. c) A declaration, or planned declaration, of members or a class of members of a company, is either:

Opposing the wellbeing of the members as whole; or

Unfair to, unfairly harmful to, or biased beside, a member whether in that ability or in any other ability (Latimer, 2012).

It is advised to Mr. Walter that as the directors have refused to meet the members, therefore it is clearly the breach of Duty of the director. In the case of Daniels v Anderson (1995) 37 NSWLR 438 it was upheld that under the corporations Act 2001, the Directors are subject to a number of responsibilities which they should perform. The responsibilities include the duty of the common law to behave with due care, skill and diligence. Therefore, it is clearly that violation of responsibility, which was done on part of the managers of the corporation. Section 180 of the Act also describe that there are statutory duties of the Directors to do something truthfully which helps to serve in the best concern of the corporation for a reason. The behavior will have the directors to avoid any conflict of interest and any abuse of position in order to obtain any personal advantage (CCH Australia Limited, 2011).

Therefore, it can be said that although the interest of the creditors must be considered as the corporation is the property of the shareholders. But there is no rule that in such cases of solvency or other matters the interest of the creditors is paramount. They may be paramount in some situations but there is no rule that requires this conclusion. So till the time the director is fulfilling the duties which are defined above in the favor of the corporation and not for personal benefit. The director can do such acts and perform for the company.

It is ultimately the court which decides as to the remedies which can be applicable or not. Under section 232 and 233 the court consider different situations under which it thinks that it is in the position to find out the situation under which company get claim to the court (French and Stewart, 2016). Although it is clearly written in the situation that the director refused the members for help so it has violated its duty. Therefore, Mr. Walter and his friends are entitling to compensation for the same as Directors have failed in fulfilling their duty.

References:

Australian Institute of Company Directors. (2013).Enhancing the rights of shareholders. Retrieved on 6^th September, 2016 from: https://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/May/Directors-Counsel-Enhancing-the-rights-of-shareholders.

Bottomley, S. (2016). The Constitutional Corporation: Rethinking Corporate Governance. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=FvLOCwAAQBAJ&dq=remedies+of+shareholders+under+corporation+act+2001&source=gbs_navlinks_s.

Boyle, A.J. (2002). Minority Shareholders’ Remedies.2. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=E081u9IcarQC&dq=cases+related+to+shareholders+remedies++in+australia&source=gbs_navlinks_s.

 Brockett, R. (2012). The Valuation of Minority Shareholdings in an Oppression Context – A Contemporary Review. Bond Law Review. 24.2. Retrieved on 6^th September, 2016 from: https://www.austlii.edu.au/au/journals/BondLawRw/2012/10.pdf.

CCH Australia Limited. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. 1. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=uMspq6WTSIMC&dq=can+the+director+make+decisions+under+corporations+act+of+australia&source=gbs_navlinks_s.

 Elliott, R.(2016). Payment of Dividends under the Corporations Act 2001. Retrieved on 6^th September, 2016 from: https://www.companydirectors.com.au/director-resource-centre/policy-on-director-issues/policy-submissions/2002/payment-of-dividends-under-the-corporations-act-2001.

French, K. and Stewart, A. (2016). Oppressed minority shareholders and appropriate relief – Is winding up a solvent company an extreme step. Retrieved on 6^th September, 2016 from:  https://www.holdingredlich.com.au/dispute-resolution-litigation/oppressed-minority-shareholders-and-appropriate-relief-is-winding-up-a-solvent-company-an-extreme-step.

Government Institute of Australia. (2014).Guidelines for Directors of wholly-owned subsidiary companies. Retrieved on 6^th September, 2016 from: https://www.governanceinstitute.com.au/media/656514/govinst_guidelines_whollyownedsubsidiary_2014.pdf.

Hannigan, B. (2012). Company Law. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=vsIyc8PSG-UC&dq=remedies+of+shareholders+under+corporation+act+2001&source=gbs_navlinks_s.

Heller, R.M. (2014). Have Directors Improperly Refused to Declare a Dividend. Retrieved on 6^th September, 2016 from: https://www.hellerlaw.com/Directors_Improperly_Refused_to_Declare_a_Dividend.html.

HopgoodGanim. (2014). HG Corporate Advisory & Governance Alert: Dividend payments – not just at the director’s discretion. Retrieved on 6^th September, 2016 from: https://www.hopgoodganim.com.au/page/Publications/HG_Corporate_Advisory_Governance_Alert_Dividend_payments_%25E2%2580%2593_not_just_at_the_director%25E2%2580%2599s_discretion_-_19_February_2015/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integratio.

Janssen, P. (2016). Minority Shareholders have the right not to be oppressed. Retrieved on 6^th September, 2016 from: https://corporatefirst.com.au/minority-shareholders-have-the-right-not-to-be-oppressed/.

Keay, A. (2007). Company Directors’ Responsibilities to Creditors. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=zfuNAgAAQBAJ&dq=remedies+of+shareholders+under+corporation+act+2001&source=gbs_navlinks_s.

Latimer, P. (2012). Australian Business Law. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=qOLW-XTET0MC&dq=remedies+of+shareholders+under+corporation+act+2001&source=gbs_navlinks_s.

Marshall, S. and Ramsay, I. (2012). Stakeholders and Directors’ Duties: Law, Theory and Evidence. UNSW Law Journal. 35(1). Retrieved on 6^th September, 2016 from:  https://www.unswlawjournal.unsw.edu.au/sites/default/files/12_marshall_2012.pdf.  

Odorisio, N., Davies, A., and Clements, A. (2015). Dividend payments – not just at the discretion of the board of directors. Retrieved on 6^th September, 2016 from: https://www.mondaq.com/australia/x/376496/Shareholders/Dividend+payments+not+just+at+the+discretion+of+the+board+of+directors.

Paolini, A. (2014). Research Handbook on Directors Duties. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=RsQwBQAAQBAJ&dq=duties+of+directors+under+corporation+act+2001&source=gbs_navlinks_s.

Tomasic, R., Bottomley, S., and McQueen, R. (2002). Corporations Law in Australia. Retrieved on 6^th September, 2016 from: https://books.google.co.in/books?id=zFSgs52KSmoC&dq=duties+of+directors+under+corporation+act+2001&source=gbs_navlinks_s.

Victorian Law Reform Commission. (2016).The oppression remedy in the Corporations Act. Retrieved on 6^th September, 2016 from: https://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act-0.

Victortse &Associates. (2016). Common remedies for parties to corporate disputes. Retrieved on 6^th September, 2016 from: https://www.vtselaw.com.au/content/common-remedies-parties-corporate-disputes.