Kinsela V Russell Kinsela Pty Ltd For Companies Act – Case Analysis

Introduction of Case

Discuss about the Kinsela v Russell Kinsela Pty Ltd for Companies Act.

An organization is an association of group of individuals who work together in order to attain some motive whether it be economic or social. No legalities and technologies can be attached to its meaning. An organization should make its registration under the Companies Act, 2013. An organization can be defined as a group of individuals who make contribution of funds and employ these funds towards business activity and also shares the loss and profit according to the contract signed by them. There are various features of organization under the Companies Act, 2013-

• Independence- An organization has a distinct identity from its directors, owners and employees and carries out its business activities after complying with all the legal requirements of incorporation.
• Perpetual- An organization has a succession on the perpetual basis and is considered as an artificial person. This states that the organization will continue its business to infinite period of time as it does not get affected by death and inefficiency of the directors to perform and because of any other event (Hayne, 2014).
• Common seal- The organization is an artificial person, therefore agents of the organization work on its behalf. The agents of the organization enter into a contract by the common seal of the organization.
• Liability- The liability of the members of the organization is limited. As, the organization has a separate legal entity therefore the organization is responsible for the repayment of debts and not the members and owners of the organization.

The family of Kinsela was doing the business of funeral and also was shareholders in different organizations in addition to the directors. The organization was effectively carrying out their business. The organization was involved in the business of providing claim of insurance in respect to the cost incurred on the funeral of their customer. The organization was receiving amount from clients and in order to this the organization used to provide funeral for free. But after a period of span, the organization incurred severe liabilities and thus losses were increased. Funeral Act 1979 was introduced in order to safeguard the creditor’s interest. When the organization was suffering losses, Kinsela family thought that they should continue their business in spite of all the losses. They thought of giving it lease for the time period of 3 years. But, In April the organization thought to wind up their business because of increase in liabilities (Langford, 2011). The reason behind increase in liabilities and huge losses of the organization is that the directors were not able to work in a proper manner and were unable to maintain funds for the organization.

 The duty of directors of the organization was to solve all the conflicts before winding up the operations of the organization and the organization should pay proper amount to their contributors if there is joint petition of winding up has been signed up by the creditors and contributories of the organization. The directors of the organization should look after the proper payment of funds to the creditors which were due to them. The liability of the organization has been raised at the time when the organization has give lease on the least market value and this the organization has dissolved (Koh and Oh, 2015). At the time of liquidation of the organization, the lease was being challenged as the director was not being able to pay to the creditors and other members.

The duties and responsibilities breached and the reasons behind it

The organization is an artificial person so it does not make decisions and cannot enter into contract on its own like a natural living individual. The agents act on the behalf of the organization and enter into contract on behalf of organization through common seal. Therefore the director is responsible to act in a proper manner for the benefit of shareholders and other stakeholders. Directors can be described as trustees, employees or as a part of the organization. The directors of the organization should work with diligence and with proper care. Directors are the trustees of the organization and should carry make proper transaction of the funds.  There are various duties of directors-

• As an employee- The directors are considered as an employee of the organization and has a position same as the employee in the organization. The directors can make some financial incentive as like any other employee from the organization. This creates a relationship of master and servant between the directors and the organization. The organization possesses full control over the activities of the directors. This can be drawn from the instance of Normandy V India Coope.
• As a Managing partner- It can be also considered as partnership business. A director has some interest in the organization as a partner. Therefore directors work for the benefit of the organization.
• As trustee- A trustee can be considered as an individual who hold the property for another individual on basis of trust. The directors are the trustees to the organization (Redmond,2012).
• As an Agent- Directors are also works as an agent of the organization. The organization act with the help of their directors. When any contract is made by the directors on behalf of the organization than the organization is held liable and not the directors.

In this particular case study, the director as an agent and as a trustee of the organization was unable to meet with their duties and obligations. The directors have breached their duties and also did not carry their duties towards the creditors of the organization. Shares of the organization are transferable and moveable as mentioned in the articles of association. This states that the shareholders have right to transfer or dispose of the shares which they are having. The directors are trustees of the organization and have a fiduciary duty towards the organization. In this case study the directors were not able to perform in suitable manner and the idea of improvisation lead towards increment in liabilities and losses.

From this case it can be analyzed that the organization was having huge liabilities and losses. So, it becomes quite impossible to carry out the business activities for the organization. Therefore the director will be held liable for the mismanagement in the business activities as they had a fiduciary duty towards the organization (Zahid and Ali, 2011). The directors cannot be held liable for the doings of third parties bur are liable for all the cats of the organization. From this case it can be analyzed that the company can be held liable for all the fraudulent practices and also sale of the assets of the organization at a lesser value than the market price.

Section 425 of the companies Act 2002 states two ways of winding up of the organization i.e. winding up by court or tribunal and winding up on a voluntary basis. There are various ways of winding up of the organizations. The company can be wound up if a special resolution has been passed. If the organization has made any default in carrying of the statutory meetings and the organization has not started its business activities within the stipulated time period. The organization can also be wound if it is unable to meet its debt and liabilities. From this case it can be analyzed that the organization was having huge liabilities and losses. So, it becomes quite impossible to carry out the business activities for the organization. The directors did not perform their duties and also not able to make repayment of debts and this is because the case has came into the court. The reason behind winding up of the organization is its inability to pay the debts. The winding up of the organization should take place by the liquidator as appointed by the court under Sec 488 of the act of companies (Keay, 2015). The liquidator as appointed by court should carry out all the duties at the time of winding up as directed by the tribunal or court.

Analyze the tribunal decision and the reason for the decision in view of the Corporations Act in Australia

Sec 457 states the powers of the liquidators in the event of winding up. The liquidator has power of making definition of suit, to sell the property of the organization whether moveable or immoveable, to make loans and also to make inspection of the records of the organization. It is found that at the time of the formulation of lease the organization was facing various financial crises and landing the organization towards liquidation. Therefore, the directors of the organization were under a duty towards creditors to make them payments but this duty was breached by the directors when the lease was made (Humphery-Jenner, 2014).  This lease was made by the directors in order to make asset of the organization out of the reach of the creditors of the organization and this will lead towards nonpayment to creditors. This was a fraudulent activity carried out by the directors.

When a company went in to the proceedings of winding up then always interests of the creditors got arise. The creditors become entitled to deal with the assets of the organization if the process of liquidation has been started and the creditors also has the power to get the payments before shareholders and the directors. The assets of the organization were used by the directors for their own benefit. It was stated that the lease was not ultra vires and also void as it exceeded the capacity of the organization. When the directors made lease, it can be clearly identified that there was breach of duty by the directors and this lead towards inefficiency to the creditors in terms of making payment (Keay, 2015). This can be stated that it is a voidable action by the organization and which the organization has to avoid it.

The court stated that in various situations the director’s duty extended to the corporate social responsibility and not limited to only the interests of the shareholders.  The court emphasized that the directors of the organization should consider the interests of the shareholders and the creditors. If, the directors failed to do so than they can face various adverse results. The tribunal decision was that the director had acted in breach of their duties and their conduct was fraudulent in respect to creditors. In the process of liquidation this was decided that the asset of the organization should be the asset of the shareholder and creditors which was correct in many sense (Hargovan and Harris,2013).

In a case of Parke v. Daily News which was decided in the year 1961. In this case there was a dismissal of the statement and argument that the directors had a duty towards the employees of the company and also had a duty towards the shareholder of the organization as they have invested funds in the organization. But, in the case of Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) the court has developed greater corporate responsibility for the directors of the organization. The duties of directors have been extended to customers, society, employees and shareholders. The duties of the directors have become more apparent after this case. After this case, the argument was raised the courts should extend the liabilities and duties of the directors of the organizations from the traditional system which was prevalent. The directors duties should be extend to the serious problems of the interests in the organization. The directors of the organization should consider the interests of the creditors in the limits of benefits of the organization (Keay, 2005). When some duties are identified by the directors than there are possibilities that such duty can raise a conflict with the duties that are owed by the directors of the organization in respect to the shareholders and various other stakeholders.

References:

Hargovan, A., & Harris, J. (2013). For whom the bell tolls: Directors’ duties to creditors after bell. Sydney L. Rev., 35, 433.

Hayne, K. M. (2014). Directors’ duties and a company’s creditors. Melb. UL Rev., 38, 795.

Humphery-Jenner, M. (2014). Barristers Operating as Corporations. Journal of Corporate Law Studies, 14(1), 277-286.

Keay, A. (2005). Wrongful trading and the liability of company directors: a theoretical perspective. Legal Studies, 25(3), 431-461.

Keay, A. (2015). Directors negotiating and contracting in the wake of their companies’ financial distress. Journal of Strategic Contracting and Negotiation, 1(3), 214-230.

Keay, A. (2015). The shifting of directors’ duties in the vicinity of insolvency. International Insolvency Review, 24(2), 140-164.

Keay, A. R. (2015). Challenging Payments Made by Insolvent and Near Insolvent Companies. Nottingham Insolvency and Business Law e-Journal, 3, 215-228.

Koh, J., & Oh, E. (2015). Re-Examining Bondholders’ Rights in Exchange Offers. Bus. L. Int’l, 16, 119.

Langford, R. T. (2011). The Duty of Directors to Act Bona Fide in the Interests of the Company: A Positive Fiduciary Duty? Australia and the UK Compared. Journal of Corporate Law Studies, 11(1), 215-242.

Mayanja, J. (2014). Clarifying the Object of Directors’ Endeavors: What Australia Can Learn from the United Kingdom. UNSWLJ, 37, 874.

Redmond, P. (2012). Directors’ duties and corporate social responsiveness. UNSWLJ, 35, 317.

Zahid, A., & Ali, H. M. (2011). Director’s Obligations towards Creditors under the CSR Regime: Common Law versus Islamic Principles. US-China Law Review, 8, 981.