1.A director of a company is responsible for acting in the best interest of the company, which requires them to take into consideration the interests of the creditors of the company at the time of insolvency along with the interests of the shareholders. Corporate governance may be defined as a concept wherein companies integrate environmental and social concerns in their respective business operations and in their interaction with the stakeholders, voluntarily (ArAs, 2016).
It is widely believed that the responsibilities of the companies include consideration of the interests of important stakeholders like customers, suppliers, regulators, employees along with related government agencies and community. Directors have a general legal duty to act in the best interest of the company and exercise their directorial power for proper purpose. The statutory obligation of the directors is stipulated under sections [180-183] of the Corporations Act. In Bristol & West Building Society v Mothew [1998], it was held that the directors have a fiduciary duty to act in good faith in the best interest of the company and for proper purpose. In the event of conflict of interest, the directors are obligated to give priority to the interests of the company instead of personal interests of the directors.
Further, section [588G] of the Corporations Act 2001 (Cth) states during company insolvency, the best interest of the directors corresponds with the interests of the creditors instead of shareholders. However, stakeholder is important to organization along with creditors and shareholders of the company. The potential stakeholder include employees, creditors, governmental authorities as well as the society altogether. The legal justification behind the engagement of company directors in CSR activities is to demonstrate relationship between the stakeholders and the company and building trust. The involvement of companies in CSR activities is to manage the business operations for producing an overall positive impact on the community. The perspective of the company about corporate governance based on the Principles of Corporate Governance is to comply with the values of CSR, which emphasizes on the need for the directors to strike a balance between the interests of the stakeholders and shareholders to attain long-term sustained value.
2.The audit committees are considered as an essential characteristic of effective corporate governance as it aims at strengthening the independence of the auditor by endowing the auditor with an independent forum to address audit related issues regularly (Bottomley, 2016). Nevertheless, audit committees have received significant attention with respect to its efficacy in preventing corporate failure. The ASX adopted a more flexible approach with respect to establishment of mandatory audit committees for listed companies. It requires listed entities to describe the corporate governance arrangements that are established within the corporation under Listing Rule 4.10.3 and such entities must mention whether an audit committee is in place.
The audit committee is a sub-committee of the governing body of an entity that mostly deal with auditing function and financial reporting. According to Principle 4 of the ASX Principles and Recommendation, two-fold responsibilities have been conferred upon the audit committee, which establishes its significance:
In order to ensure independence of audit committee, the ASX Corporate Governance Principles and Recommendations focuses on establishment of an audit committee comprising only non-executive directors with the majority being independent (Exchange, 2014).
The fact that the audit committee is failing to prevent failures is solely because of the lack of evaluation of the efficacy, objectivity and independence of the external audit process with respect to the ethical framework in the jurisdiction in which the entity operates. However, this does not imply that audit committee is not an efficient feature of corporate governance. This is because to ensure the audit committee performs its obligations with efficacy, the committee must have sufficient financial accounting expertise (Gitman, Juchau & Flanagan, 2015). This is evident from the requirement that an auditing committee must fulfill which includes understanding of relevant issues and ask insightful questions with respect to auditing processes and financial reporting thus, adding value to responsibilities of the audit committee. The audit committee thus, plays a significant role in preventing fraud and detecting any deficiencies or flaws, which might arise within financial reporting processes.
3.Under the Corporations Act 2001 (Cth), a company must have a Board of Directors to monitor the internal organizational operations and exercise external resources that are required to achieve the goals of the organization.
The formation and composition of Board of Directors with respect to the ASX Corporate Governance Council Principles and Recommendation must consider the following factors:
It is a well-known fact that the Board of Directors plays a significant role in the organizational corporate governance framework (Terjesen, Aguilera & Lorenz, 2015). Corporate governance within an organization is not possible without an effective and competent Board of Directors, thus, to ensure that an organization has a quality corporate governance framework, the Board must function effectively. In regards to the Board size, the Board must include
The maximum size of company board is advantageous as well as disadvantageous on the following grounds:
Now, if the skills and knowledge is taken into consideration, it can be stated that directors with necessary skills and expertise is important as it would ensure a better understanding of business operations and shall address any issues that might arise while carrying out such business activities.
Moreover, non-executive directors are usually not considered as independent directors but such directors may also be perceived as independent directors provided, they do not form a part of present management team of the organization. This is because ASX CGC 2007 states that non-executive directors often lack independency when they are substantial shareholder of the company or has been employed within any executive capacity in an organization for a consecutive three years (Tricker & Tricker, 2015).
Therefore, based on the facts of the case, it is observed that although the directors of i-design have sufficient skills, knowledge, and expertise but the board does not include female director. Further, to become an ideal Board, it is important for them to adhere to the components recommended by the ASC Corporate governance principles.
4.Under section [588G] of the Corporations Act 2001 (Cth), a director is obligated to safeguard a company that is incurring debts if reasonable grounds to suspect insolvency of the company exist within place. This process is termed as ‘insolvent trading’ (Tricker & Tricker, 2015). In Powell v Fryer [2001] SASC 59, it was held that a company must incur a debt to establish contravention of this legal provision. Insolvent trading may be established on the following grounds:
defendant was company director while the company incurred a debt;
director failed to safeguard the company that incurred the debt;
company was insolvent while the company incurred the debt;
reasonable grounds were existing to suspect such insolvency;
A person may be held liable for insolvent trading if such person is:
appointed as director;
a de-facto director;
shadow director;
The reasonable grounds to suspect such insolvency of a company include:
continuing losses;
unpaid taxes;
dishonored cheques;
inability to raise any further capital
In ASIC v Plymin [2003], it was held that under section 588G (2), a director must be proved to have failed to prevent a company from incurring a debt that arises within a course of business.
Moreover, under section [588H], the director may use the following defense to exempt from the liability of contravention of section [588G]:
while the company incurred a debt, the director believed and expected that the company was solvent [s.588H(2)];
the director relied upon the other directors for obtain adequate information regarding the company solvency;
the director undertook reasonable steps to prevent the company from incurring debt;
director was absent from management of the company for illness;
Bradley, Karen and Owen were not sole directors of the company and were acting as de-facto directors where Karen was the non-executive director. Bradley and Owen were aware of the fact that the company Pure Nectar Pty Ltd was experiencing cash flow problems but they did not acknowledge Karen about the same. Thus, the grounds to suspect insolvency exists as are evident from continuing losses and inability of the company to raise capital.
Further, Bradley and Owen were directors while the company incurred losses as was observed in ASIC v Plymin and was monitoring management operations of the company. Hence, they may be held liable for failing to prevent the company from incurring debts under the insolvent trading provision of section 588G of the Act.
However, Karen may use the defenses under section 588H of the Act that she believed that the company was solvent, as she was not acknowledged about debts of the company and that she relied upon the other directors, Bradley and Owen for adequate information about the financial status of the company and undertook financial operations. Furthermore, Karen did not take part in the management operations of the company, thus, she may be exempted from the liability of contravening section 588G of the Act.
References
ArAs, G. (2016). A handbook of corporate governance and social responsibility. CRC Press.
ASIC v Plymin [2003] VSC 123
Bottomley, S. (2016). The constitutional corporation: Rethinking corporate governance. Routledge.
Bristol & West Building Society v Mothew [1998] EWCA Civ 533
Corporations Act 2001 (Cth)
Exchange, A. S. (2014). Corporate Governance Principles and Recommendations . Sydney: ASX Corporate Governance Council, 27 March.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Powell v Fryer [2001] SASC 59
Terjesen, S., Aguilera, R. V., & Lorenz, R. (2015). Legislating a woman’s seat on the board: Institutional factors driving gender quotas for boards of directors. Journal of Business Ethics, 128(2), 233-251.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA
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