Legal Duties Of Directors Under Corporation Act 2001: A Case Study Of Rio Tinto

Overview of the Case Study

Issue

The current issue is based on Rio Tinto and its former chief executive along with the chief financial officer that are charged with the fraud by the US authorities that supposedly made an attempt in covering up the multi-billion dollar losses on the African coal investment.

Rule: 

“Section 181 of the Corporation Act 2001” defines that the directors and the other officers must act in the good faith and should comply with the civil obligations. The directors and other officer of the company are required to exercise their powers and discharge their duties by acting in the best interest of the company and in good faith for proper purpose. Similarly, under the “section 182 of the Corporation Act 2001” it has been stated that the directors are prohibited from improperly using their position for gaining an advantage for themselves or for someone else and causing the detriment to the corporation.

Additionally, “section 183” provides that the directors are barred from using the information derived in consequences of the role with the company in order to gain the advantage for themselves or for anybody else or causing any detriment to the company. The above stated provision results in civil obligations and accompanies civil penalty provision. As evident there are circumstances where the court determines the civil provision that has been breached. The court under such circumstances might order by way of declaration to pay the commonwealth a pecuniary penalty of $200,000 and might order individuals to compensate for the losses arising out of the breach.

As evident from the case study Rio Tinto was charged with the purchase of Mozambique coal assets during the year 2011. Additionally, it was noticed that the directors of the company failed to follow the accounting standards and had hidden or delayed the disclosure of the increasing losses. The directors are obliged to company with the duties under the general law and statute. The directors in this present situation failed to act in the best interest of the company.

As held in the case of “Greenhalgh v Ardenrne Cinemas Ltd (1951) Ch 286” the best interest of the company will be usually associated with the best interest of the shareholders as a general body. According to the advisory committee “section 181 (1) (a) of the Corporation Act 2001” was legislated that remained in agreement with the common law test of acting in the best interest of the organization that contains the objective element. In the present case study, the directors of the Rio Tinto and the company is fiduciary relationship and sets down the high standard of loyalty. It must be noted that the standard of loyalty is stated in the number of positive duties undertaken by the directors of the Rio Tinto. The positive duties of the loyalty for Rio Tinto and its directors included the duties to act in the good faith and in the best interest of the company to act in the proper purpose. Under section “181 of the Corporation Act 2001” has reinforced these duties.

Sections 181, 182, and 183 of the Corporation Act 2001

In respect of the present case of the Rio Tinto there prevails a statutory business judgement rule which is applicable in the business judgement rule concerning the statutory duty of the care and diligence. By its terms the statutory business judgement rule is applicable to the duty of care and diligence in respect of the section 180 and not the duties that is imposed by the “sections 181 or 182” or any other equivalents at the general law.

The statutory business judgement rule lay down that the director and other officer of the Rio Tinto that are involved in the business judgement have failed to meet the requirements of “section 180 (1)”. Similarly, their equivalent duties have been breached at the common law and hidden disclosure of the increasing loss.

Conclusion: 

Conclusively, the directors have failed to comply with the accounting standards and have hidden or delayed the disclosure of the accounting losses.

The present issue is concerned with the misuse of the position improperly for not complying with the accounting standard and causing a detriment to the company. The issue clearly defines that the directors have been breach of the duty where they have indulged in the conduct with the objective of gaining the benefit and causing the detriment loss to the company.

According to the “ASIC info 151” enforcement action is considered to be one of the several regulatory tools that is available to the authorities in explaining the approach of its enforcement particularly to the breaches caused to the law in numerous ways. ASIC regulates the firms, managed investment schemes and the participations of the financial services industry under the “Corporation Act 2001” and the “ASIC Act 2001”. The “ASIC act 2001” directs the ASIC to take into the considerations the actions that can be taken along with the necessary step in enforcing and giving effect to the laws of the Commonwealth which confer functions and power on it.

As evident in the present state of affairs the investors have been allegedly misled over the subsidiary of worth US 680 million. The SEC has alleged that the project immediately suffered the setbacks immediately. Apparently the SEC has stated that the Rio along with its senior officers were aware of the lower coal and the lesser quality which was previously thought of. Such issues provide the law enforcement with the power of detecting and dealing with the unlawful conduct in order to recover the money under the appropriate circumstances. By undertaking such measure, the company determines the misconduct and responds to the breaches of laws conducted by the officers inside the regulatory responsibility.

Duties of Directors under General Law and Statute

In relation to the present case study of Rio Tinto the power of issuing shares has paved way for significant amount of case law relating to the duties under “section 181”. With reference to the guiding principles that the directors and the other officers should not make use of the power for collateral purpose. The present case study has paved way for the law enforcement authorities such as ASIC by prioritising the regulatory powers. ASIC in the present situation can assess the significance of the alleged misconduct and especially the market impact along with the impact that is created on the market integrity or the confidence of the investors and the financial consumers. ASIC assess the regulatory benefits of the pursuing the misconduct performed by the Rio Tinto. ASIC considers the issues whether the misconduct is widespread or the part of the growing trend. Similarly, in the case of Rio Tinto ASIC could consider taking enforcement action which will send an effective message to the market.

As held in the case of “Harlowe’s Nominees Pty Ltd v Woodside Oil Co NL (1968) 121 CLR 483” the judgement of the court stated that the primary objective of the power to issue the shares is raise the necessary capital for the company. In light of the case study of Rio Tinto the directors and other officers have used their power for collateral purpose and the directors used the power of issuing shares were in breach of the duty of care and diligence to issue the shares for no better reason.

In light of the above case study ASIC can undertake enforcement actions to punish the directors and protect the investors for correct disclosure. ASIC might assert the right of making an enforcement result in public and forms an important tool for regulatory transparency and effective deterrence.

As held in the case of “Australian Securities & Investments Commission v Rich [2009] NSWSC 1229” was concerned relating to the alleged failure of the two executive directors that have failed to disclose the board of directors regarding the true and fair view of the financial positions of the organizations. The board of directors have alleged that they should have known the same.

According to the judgement held in the case of the “Bell Group Ltd v Westpac Banking Corporation [2008]” it has been held that a director or the officer would contravene the necessary requirement of the section 181 given that the director indulgence in the certain actions were not in the good faith or for the appropriate objective for the benefit of the organization. By citing another example of “Howard Smith Ltd v Ampol Petroleum Ltd [1974] ASCR” the subjective intention and believe of the directors becomes relevant. The basic principles governing the judgement of the case study states that the directors and the other officers must make use of the powers for their intended purpose and not for the collateral purpose.

Statutory Business Judgement Rule

In another leading case of “Australian Securities & Investment Commission v Adler (2002)” the judgement of the court stated that by enabling the company to purchase the high risk asset at the same time when the organizations wanted to lower down the risk exposure would ultimately result in the breach of duties that is owed under the “Section 181”. The court of law has stated that under circumstances where the interest of the shareholders is found to be diverge the directors must act fairly between the different class of the shareholders.

Under the “ASIC v Maxwell (2006)” the court of law provided that the duty of the directors under the “section 180” is concerned with the delineation of the interest to be taken at the time of performing the duties. The constitution of the corporation under this case stated that the identify those that are assigned with the duty which is owed to the directors. The constitutions hold important since the duties is referred in “section 180, 181 and 182 of the Corporation Act 2001” as the duties that are not owed in the abstract but the duties that is owed to the corporations

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