You are expected to research a specified topic reading and interpreting cases, journal articles and law reform policy reports. You are also expected to analyse the effect and operations of these laws and policies on companies and their stakeholders and you are expected to report on corporate legal issues using a Report format.
The directors of a corporation hold the apex position in the organizational structure and thus have certain duties towards the interests of the company and the stakeholders. Thus this essay will venture to state the duties and obligations that directors of a corporation are entrusted with and shall also explain the implications of acting in the best interests of the company. Thus in doing so it will venture to argue if Section 172 of the Companies Act, 2006 (UK) should be enforced in Australia and by doing so repeal the provisions of Section 181 of the Corporations Act, 2001[1]. The primary aim of this essay will be to establish the adequacy of the wordings in the text of Section 172 of the Companies Act, 2006 which sufficiently covers all required grounds.
Section 181 of the Corporations Act, 2001
In the case of Howard Smith Ltd v Ampol Petroleum Ltd[2]it was held by the Privy Council that the position of the directors mandates that they be regarded as the mind and soul of the company. Thus they must be treated as the same. It was also decided here that directors were empowered with the right to take decisions that went against the wishes of the shareholders and other stakeholders. It had also been held in Imperial Hydropathic Hotel Company Blackpool v Hampson[3] that the decisions of the Board of Directors could be superseded by a resolution passed by the members. Thus due to the wide range of powers that directors of corporations are entrusted with statutory law as well as common law imposes several duties on them to ensure that the powers are exercised in the best interests of the company. Additionally as the powers conferred upon the directors exist by virtue of the investment of the shareholders and thus it is the responsibility of the directors to act in their best interests as well. Thus when undertaking actions on behalf of the company the directors of a corporation must act with due care and diligence and understand the implications of all such actions. The case of Aberdeen Railway Co v Blaikie Bros[4] it was held that the directors of a company have a fiduciary relationship with the company and have a duty in equity to act in its best interests. This duty is given statutory force by virtue of the provisions of Section 181 of the Corporations Act, 2001[5]. This also mandates that such an act in the best interests of the company must also be for a proper purpose to meet the requirements of the imposed duty. It also thus follows that in case such duties are breached by the directors the shareholders would have a claim against them and could legally pursue to the directors.
In an instance where the duties imposed on the directors of an organization have been breached then the shareholders would have a wide range of remedies available to them under the law to compensate them for the misuse or abuse of power by the directors of that corporation. Section 180-184 of the Companies Act, 2001[6] ensures that the common law duties of directors are statutorily provided for. This however does not extinguish the imposition of the common law duties directly on the directors for such a breach. The Corporations Act, 2001 has made statutorily defined these duties and obligations in a way that enables the Australian Securities and Investment Commission (ASIC) to enforce these on directors who are in breach of these duties[7]. The purpose of giving statutory effect to these duties is that it would safely safeguard the rights of the shareholders and ensure that the Board of Directors of the company act in the best interest of the company. This is because the board of directors is tasked with the decision making process of the company. This position is clarified by the wordings of Section 181 of the act[8]. Brunninghausen v Glavanics[9]that the directors of a company do any owe any fiduciary duty under common law or statutory law to any individual shareholder but the class of shareholders as a collective whole. This means that the duty owed by directors is towards all shareholders in entirety and a shareholder cannot claim individual personal rights against any member of the Board of Directors. When shareholders become shareholders by virtue of relying on the representation of a directors or when such directors share interpersonal relationships with a certain shareholder then such directors do owe an individual fiduciary duty to such a class of shareholders. This has been reiterated in Coleman v Myers[10]. The directors of a corporation are expected to discharge their duties with utmost care and diligence and for proper purposes this is the underlying intent of Section 180 of the Corporations Act, 2001.
Enquiries into the issue
The PJC and CAMAC have started enquiries into the issue of companies engaging in CSR activities and the directors of the companies acting on ways that sufficiently safeguard the rights of the shareholders. The PJC after its enquiries into the requirement of companies to engage in CSR activities held that the provisions of Section 172 of the Companies Act, 2006 was adequate and did not require changes to be viable[11].
The enquiry initiated by CAMAC was based on the following considerations:
If the requirement of any of the queries were answered in the affirmative it would follow that the provisions of the Corporations Act, 2001 needs to be amended and thus would have to be superseded by legislations that embodied the UK act or any other provisions that could effectively meet the requirements of these duties.
CAMAC made its final observations in favour of the act and stated that it sufficiently allowed the directors to consider the rights of all relevant stakeholders during the decision making process.
Conversely the provisions of Section 172 of the act[12] are ambiguous about the extent to which corporations need to engage in CSR activities in order to meet these duties. Most corporations have preferred to implement their own code for CSR others have relied on the PJC for the interpretation of the section.
The Department of trade and Industry undertook a review that dealt with, inter alia, disputes regarding the members of the Board of directors and their fiduciary duties. Resultantly, Section 172 of the Companies Act, 2006 was enacted which defined and regulated the duties of the Board of Directors towards the directors and the shareholders[13]. A preliminary perusal of the text of Section 172 would give the impression that the codified duties represented the duties of directors in common law. A more observant glance however would lead to the observation the observation that this section provides for very different impositions when compared to Section 181 of the Corporations Act, 2001. This section sets out a duty on the shareholders to act as directors of the company. This meant that the interests of the shareholders in the company as a going concern are considered but the interest of the company are given proportionate representation as well the rights of other stakeholders of the corporation are taken into consideration. Thus, various organizations have applied to the PJC to amend the provisions of the Corporations Act and place in legislations with wordings similar to that of Section 172 of the Companies Act, 2006[14]. This would thus better protect the rights of all shareholders. However, it can be inferred that the text of Section 172 of the Companies Act, 2006 is amply ambiguous and thus would be difficult for practical viable application in the sphere of company law.
Section 172 of the Companies Act, 2006
The text of Section 172 of the Companies Act, 2006 lays down that the directors are to act in ways that they believe would be in the best interests of the company and thus promote the success of such a venture through every decision approved by the Board. The definition or the ambit of the operational term success here is vague and cannot be assigned a definite approach. Thus, this would lead to arbitrary interpretation of facts and circumstances and could eventually lead to a gross miscarriage of justice based on technical interpretations[15]. It has further been observed that this term cannot be interpreted to mean the same as acting in the best interests of the company and the bifurcation has not been made clear through case laws. Under such circumstances the interpretation would stand as arbitrary and discretionary as facts could be interpreted in various ways. There is also an inclusion of the phrase ‘For the Benefit of its Members as a Whole’ which is also a debatable subject when relating to the interpretation of the section. This thus implies that the directors must also act in the best interest of the shareholders and draws a nexus between the interests of the two. This would thus imply that the interests of the shareholders are synonymous to the interests of the company and the directors must adhere to both simultaneously. However, such a nexus had not been brought out through precedents and thus questions the viability of these earlier decisions[16]. This Section also speaks of “certain interests” which can be construed as a vague term entirely and thus would need revision for proper practical application. In case of such a term the court could be compelled to deliver judgments that are based on liberal interpretations of the section and thus could eventually give rise to new rights to the entities involved in such a dispute. This also makes room for arbitrary interpretation which could be detrimental for due process of law and the carriage of justice.
The application of such a provision for “certain interests” could also give rise to discriminatory practices among various classes of shareholders thus giving an unfair advantage to certain classes[17]. Ideally the rights of minority shareholders would be affected by such an interpretation and the act provides for protection of the rights of minority shareholders.
Another criticism to be considered when evaluating the provisions of Section 172 of the Companies Act, 2006 is that it provides too many opportunities to the shareholders to challenge the stand taken by the Board of directors for a particular issue[18]. Directors of a company are expected to carry out their duties with care and diligence and are expected to be well informed about the dealings of the company and their subject matters. This is why directors of companies are given access to the wide variety of powers that they can choose to exercise. They are also presumed to not carry any financial self-interest in the decisions of the company and thus are expected to observe their obligations with utmost good faith. The section might appear to enforce the duties of directors sufficiently but in reality makes such enforcement more difficult.
Conclusion
To conclude it may be inferred that incorporating the wordings of Section 172 of the Companies Act, 2006 into the Corporations Act, 2001 would not be an ideal step and would invariably lead to wider less concrete interpretations of the duties of the directors to act in the best interests of the company. Such an amendment could also lead to discriminatory conduct among various classes of shareholders. Furthermore, Section 172 of the Companies Act, 2006 is codified in a way that provides for arbitrary interpretation and such a provision does not adhere to the due process of law. Section 181 of the Corporations Act, 2001 amply covers the ambit of the duties and obligations of directors of corporations as prescribed by the principles of common law. The provision is also strategically worded to cover all circumstances that may arise and provides for a system where the duties can be conspicuously identified and given effect to. Thus Section 181 of the Corporations Act, 2001 is adequate and does not require amendments to cover the full extent of the legislative intent. The act also provides for criminal liabilities for breach of such duties along with the civil penalties prescribed under common law and thus acts as a deterrent against conflicts of interest.
Corporations Act, 2001.
Companies Act, 2006.
Coleman v Myers
Brunninghausen v Glavanics
Aberdeen Railway Co v Blaikie Bros
Imperial Hydropathic Hotel Company Blackpool v Hampson
Howard Smith Ltd v Ampol Petroleum Ltd
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Sealy, Len, and Sarah Worthington. Sealy & Worthington’s Cases and Materials in Company Law.Oxford University Press, 2013.
Barkan, Joshua. Corporate sovereignty: Law and government under capitalism. University of Minnesota Press, 2013.
Klausner, Michael. “Fact and fiction in corporate law and governance.” Stan. L. Rev. 65 (2013): 1325.
Idowu, Samuel O. Encyclopedia of corporate social responsibility. Eds. Nicholas Capaldi, LiangrongZu, and Ananda Das Gupta.Vol. 21. New York: Springer, 2013.
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