Discuss about the Incorporate the Provisions Of The Companies Act.
The purpose of this essay is to explore whether Australia should try to incorporate the provisions of the Companies Act 2006 as provided in section 172 of UK and replace the provisions of section 181 of the corporations Act 2001. This essay will also discuss the duties of the directors to act in the best interest of the company and will also highlight the meaning of the term of acting in the best interest o the company. This essay will consider the duties of the directors to act in the best of the shareholders of the company and the public. Finally this essay will highlight the adequacy of the words section 172 of the Companies Act 2006.
In the notable case Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd. it had been held by the court that directors of companies are to be treated as the mind and soul of the company. It was also held in the aforementioned case that the directors can make decisions related to the operations of the business against the wishes of the shareholders of the company. A held in the case Imperial Hydropathic Hotel Company Blackpool v Hampsonthe decision of the directors can be subsided by the resolution of the members of the company, if the directors have been granted the power to administer the operations of the company. However, it can be stated that since the powers of the directors are immense, the common law as well as statutory law imposes man duties on the directors. It can be stated that since the powers granted to directors of a company are provided by the shareholders, the directors are therefore required to act in the best interest of such shareholders[1]. As opined by[2] the directors of company can be held liable for breaching their duty to the company both through tort as well as contract. In the notable case Aberdeen Railway Co v Blaikie Bros[3]it was held that directors of a company owe duties in equity to the company as such directors share a fiduciary relationship with the company. As provided in section 181 of the corporations Act, it can be stated that directors are required to act in the best interest of the company and such duty should be fit for the proper purpose. Thus this implies that shareholders have the option of challenging the actions of the directors it such actions are found to be in violation of the statutory and general law provisions of directors’ duties.
There are several remedies available to the shareholders of the company if it is established that the directors breached the duties imposed on them, even if the company had not suffered an actual loss due to the breach of directors’ duties The duties of the directors which are imposed by common law are reinforced by the statutory duties as provided in section 180-184 of the Corporations act[4]. However it can be stated that the codification of the directors’ duties are not in derogation to, but the in addition to the common law duties of the directors. The Corporations Act 2001 has not only provided a codification of the duties of the directors but also has provided the government of Australia to enforce the breach of such duties by the Australian Securities and Investment Commission which had earlier been enforced by the company itself. It had been explained by the Senate Committee that the basic purpose of the codifying the duties of the directors in the sections 180-184 was to ensure that the directors act in the best interest of the company and the shareholders of the company(Aph.gov.au 2018). Furthermore, it can be said that the directors share fiduciary relationship with the company and therefore they ought to act in the best interest of the company rather than their personal interest or in the interest of the third parties. Section 181 of the Corporation act has thus clearly provided that the directors of the companies must act in good faith and for a proper purpose while discharging their duties (Talbot 2015). The company or corporation is generally regarded as the shareholders as a whole. It has been established in the case Brunninghausen v Glavanics[5] that the directors do not have any fiduciary duties to any individual shareholder. The rationale behind this principle is that a company can be regarded as a separate legal entity from its owners and its shareholders. Therefore in this regard it can be said that the directors do not have the obligation to make sure that each of the shareholders realizes his right as that would expose such directors to a large number of actions.
However an exception to this rule has been illustrated in the remarkable case Coleman v Myers[6]. In this case it was held by the court that the directors owed fiduciary duties to certain shareholders in addition to the company as the directors shared interpersonal relationships with such shareholders. Further it had been held that the shareholders had relied on the expert advice of the directors regarding investment. As provided in section 180 of the Corporations Act 2001 directors are required to discharge their duties with proper diligence and care so as to avoid liabilities of Equity, Contract and Tort.
It can be stated that there have been two parallel enquiries by the PJC and CAMAC to assess whether the companies should have corporate social responsibility and whether directors are to take into consideration the interest of the other shareholders n their decision making process. The first enquiry had been conducted by PJC in relation to the corporate social responsibility of companies. The PJC like the Senate committee stated that the law related to the duties of directors as provided in section 172 of the companies act 2006 did not require amendment[7].
The second enquiry had been conducted by CAMAC and the enquiry took into consideration the following points:
It can be stated that a positive answer to any of the aforementioned questions would have meant that the section containing the duties of the directors (section 181) required to be amended whether by adopting some of the provisions of the Companies Act[9] or otherwise.
However after analyzing the provisions of the current law and results of the enquiries, CAMAC reached the conclusion that the Corporations Act 2001 was quite flexible and allows the directors to consider the interest of the relevant shareholders[10].
However, it can be stated that the interpretation of the section 172 of the Companies Act in regards to assessing the extent to which the directors of companies are required to take in to consideration the interest of the shareholders differs. Many companies have adopted a code of corporate social responsibility to ensure that the operations of the company have overall good impacts on the society. Whereas other companies have made submissions to PJC stating that such companies have taken a more restrictive interpretation of the companies act[11].
The Department of Trade and Industry conducted a recent review concerning the duties of directors among other things. This review had led to the introduction of section 172 of the Companies Act containing the duties of the directors[12].It is worth noting that prior to the review conducted by the DTI, the duties of directors of companies had never been codified before. Although at first glance it may be apparent that the directors’ duties as provided in section 172 are based on the common law, however upon further scrutiny it can be seen that the aforementioned section has taken a very different approach to section 181 of the Corporations Act 2001 of Australia. It can be stated that the section 172 of the Companies Act 2006 sets the standard for the shareholders to act as other reasonable directors. The aforementioned section focuses on the importance of the interests of the shareholders while considering the long term interests of the company as well as the importance of acting fairly towards the different stakeholders of the company. It had been submitted to the PJC by many corporations that section 181 of the Corporations Act should be replaced by similar wording as provided in the section 172 of the Companies Act 2006. However, upon further analysis it had been found out that the wording of section 172 is ambiguous and is difficult to apply to the practical situations.
It has been provided in section 172 of the Companies Act 2006 of the United Kingdom that the directors of the company are to act in ways, which they consider to be in the best, interest of the company and likely to promote the success of the company. It can be stated that at first the words as written in section 172 of the Companies Act 2006 seem to be reasonable and logical, however upon further inspection the term ‘success’ seems to be ambiguous and creates a lot of controversy. It can be stated that the word success is uncertain in nature and is such word can be interpreted in a way, which is different from the traditional duty of directors to act “in the best interest of the company”. It has been pointed by the Law Society that unlike the phrase “acting in the best interest of the company” the phrase “promote the success of the company” is not supported by relevant case law.
The terms ‘For The Benefit of its Members as a Whole’ further add up to the confusion surrounding the interpretation of this section 172 of the Companies Act 2006[13]. It can be stated that this term is a deviation from the principle of the common law, which requires directors to act in the best interest of the company[14]. To act in the best interest of the corporation had never been related directly to the interest of the shareholders. In addition to the ambiguity surrounding the interpretation of this term, the deviation from the traditional wording makes the reader question the previous case laws.
Further it has been provided in this section the requirement of the directors to ‘Have Regard to certain’ interest. This can be considered to be a controversial and ambiguous term[15]. There are numerous issues that are related to the interpretation of this particular tem. It had been argued by the ASIC while submitting to the CAMAC that the requirement of directors to “have regard to certain interest’ entails difficulty in interpretation, as it does not provide any guidelines as to whose interest should be given priority to.
According to it can be stated that implying this section and giving preference to certain shareholders’ interests could result in exclusion of requirement of directors to take into consideration interests of other stakeholders[16]. This removes the flexibility of interpretation of section in future.
One of the major concerns that are raised by the interpretation of the section 172 of the Companies Act is that it gives more opportunity to the shareholders to challenge and attack the decisions of the directors made in the interest of the company[17]. However, it can be mentioned that courts have generally been reluctant to overrule the decision of the directors in respect of managing companies. The rationale behind this is judges are of the opinion that directors of companies have more expertise and knowledge about managing corporations than the judges. However, even though this section makes reviewing of directors’ duties easy, in reality enforcing a breach of director’s duty is much harder due to the way section 172 has been formulated.
Conclusion
Thus to conclude it can be said that, section 181 of the Corporations Act must not be amended to incorporate the wordings of section 172 of the Companies Act 2006. directors are given the responsibility of guarding and protecting the money of the shareholders. Therefore the duties of the directors have evolved to protect the interests of the shareholders. Further it can be stated that the flexibility of the duties of the directors as provided in section 181 of the corporations is one of the greatest strengths of the aforementioned section. Section 181 mandates the directors to make their decisions in the best interest of the company. However the directors are given the freedom to evaluate what interests should be taken into consideration. It can be stated that the flexibility of the duties of the directors is essential for the company to evolve and live up to the expectations of the community. Adopting the provisions section 172 of the Companies Act 2006 of the United Kingdom cannot be ideal as the wordings of the aforementioned section are ambiguous and difficult to apply in the jurisdiction of Australia. Further the interpretation of the section 172 entails multiple problems and controversies.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.
Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to legislate. Journal of Business Ethics, 121(4), pp.499-526.
Talbot, L., 2015. Critical company law. Routledge.
Reid, W. and Myddelton, D.R., 2017. The meaning of company accounts. Routledge.
Haldane, A., 2015, May. Who owns a company?. In Speech, University of Edinburgh Corporate Finance Conference, May 22nd.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.
Corporations Act 2001 (Cth)
Companies Act 2006 (UK)
Companies Act 1986 (UK)
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Imperial Hydropathic Hotel Company Blackpool v Hampson (1883) 23 Ch D 1
Aberdeen Railway Co v Blaikie Bros (1854) 1 Marcq 461
Brunninghausen v Glavanics (1996) 14 ACLC 342]
Coleman v Myers [1977]
Senate Committees
Aph.gov.au. (2018). Senate Committees – Parliament of Australia. [online] Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate [Accessed 26 Apr. 2018].
Corporations and Markets Advisory Committee
Camac.gov.au. (2018). Corporations and Markets Advisory Committee – Home Pages – Welcome to CAMAC. [online] Available at: https://www.camac.gov.au/ [Accessed 26 Apr. 2018].
Parliamentary Joint Committee on Corporations and Financial Services
Aph.gov.au. (2018). Parliamentary Joint Committee on Corporations and Financial Services – Parliament of Australia. [online] Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services [Accessed 26 Apr. 2018].
Barker, R. and Chiu, I.H.Y., 2014. Protecting minority shareholders in blockholder-controlled companies: evaluating the UK’s enhanced listing regime in comparison with investor protection regimes in New York and Hong Kong. Capital Markets Law Journal, 10(1), pp.98-132.
Department of Trade and Industry
Gov.uk. (2018). Department of Trade and Industry – GOV.UK. [online] Available at: https://www.gov.uk/government/organisations/department-of-trade-and-industry [Accessed 26 Apr. 2018].
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