Discuss about the Law of Business Organization for Stock Exchange.
Slater and Gordon was the first law firm to be listed on an Australian stock exchange. It was a reputed law firm and was expected to be a successful venture which is what attracted numerous investors around the country. However an expansion tactic that involved an acquisition of the professional services wing of a United Kingdom based law firm “Quindell”. Shortly after the acquisition “Quindell” was under investigation for fraud. Additionally, there were claims that the assets of the company were overvalued in the balance sheets. The first and foremost claim of the shareholders is that the company did not inform their investors of the accurate financial stand of the company. The issue here is to determine the legal implications of the incident.
Corporations functioning within the jurisdiction of the Australian Commonwealth are regulated and governed by the provisions of the Corporations Act, 2001[1]. As per Section 180 of the Act directors of a company have a duty of care to observe utmost care and diligence when undertaking actions on behalf of the company[2]. This is a civil obligation and it denotes that all directors must fully understand the implications and consequences of the actions they are undertaking before they enter into transactions of behalf of the company.
As per Section 181 of the Act the directors of a company have a duty to act in good faith and in the best interests of the company[3]. The company’s foremost responsibility lies towards the shareholders (investors) and the directors have a responsibility to act in good faith when mobilizing the investments of the shareholders. This obligation also includes a duty to disclose all material information to the shareholders and additionally represent a true and accurate image of the company’s financial position.
Section 183 of the act says that if a director uses any information gained by him by virtue of his position and uses it to gain an advantage for themselves or a third-party which causes a detriment for the company would be in breach of their statutory duty[4].
Section 184 of the Corporations Act, 2001 lays down a criminal penalty in cases where a director’s obligations under Sections 180-183 are breached[5].
In the given set of circumstances the directors of Slater and Gordon had a statutory duty to ensure that the actions undertaken by them on behalf of the company do not have detrimental effects on the company. When acquiring the Professional Services wing of “Quindell” they had a statutory duty towards care and diligence to fully understand the implications of the acquisition. This followed the provisions of 180 of the act[6]. If they had observed this duty the fraud being committed by “Quindell” would become evident and material and would be identified before it has detrimental effects on the company as a whole.
As per the director’s duty to act in good faith and in the best interests of the company as mandated by Section 181 of the act, the directors of Slater and Gordon had a statutory duty to ensure that their actions are in the best interests of the company[7]. They had however fabricated financial statements and represented an inflated asset value which deluded the shareholders. Furthermore, the acquisition of “Quindell” was clearly not in the best interests of the company and could be construed as financial self-interests of the shareholders. This would be conflict of interest which is a breach of the director’s duty under common law and statutory law as laid down in the Judgment in Chan v Zacharia[8]. Thus this conflict of interest was an unfair advantage gained by the directors (since informing the investors would make them withdraw their investment by disposing off the shares) and it had detrimental effects on the company. They were thus in breach of their statutory duties under Section 183 of the Act[9].
The directors had also not informed the shareholders of the alarming financial predicament of the company. This would form a part of their duty to act in good faith and in the best interests of the company and thus was a contravention of Section 181 of the act.
Conclusion
To conclude, the directors of Slater and Gordon were in breach of their common law duties to act in the interests of the company and in good faith as laid down in Chan v Zacharia. They were also in breach of their statutory duties under Section 180,181 and 183 of the Corporations Act, 2001.
In the case of Slater and Gordon the options available to law enforcement officials and directors of the company need to be determined. The issue here is thus to determine the best recourse for the directors of Slater and Gordon and the remedies available to the law enforcement authorities.
Section 184 of the Corporations Act, 2001 imposes a criminal liability in case the directors of a corporation are in breach of their statutory duties as prescribed by the act. The consequences for such a breach as stated by the act are[10]:
It has been reiterated in the judgment in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4[11]) that directors of a company have a duty under common law to act in good faith and in the best interests of the company. It has also been decided that such a breach of their obligations under common law would amount to equitable damages.
The Australian Securities and Investment Commission (ASIC) is the primary regulatory body that enforces statutory duties under the Corporations Act, 2001. Thus, this is the regulatory authority that would legally pursue corporations in breach of their statutory duties[12].
In the given set of circumstances the directors of Slater and Gordon had been in breach of their statutory duties as per the provisions of Section 180 of the act when they undertook the acquisition of “Quindell” without first analyzing all implications of such a takeover and the paper trails to all their transactions. This meant that they had not been reasonably diligent in determining the state of affairs of “Quindell” before entering into such a transaction and had thus not observed the reasonable duty of care that they had by virtue of their powers in the apex position within the organizational structure.
They had also not informed the shareholders about the alarming financial position of the company following the investigations into “Quindell”. This was material information which needed to be conveyed to the investors immediately as it was their investment which was at risk. This was a duty in good faith and in the best interests of the company as per the provisions of Section 181 of the act[13]. They were thus in contravention of this provision. They had also fabricated financial statements and reported inflated assets which mislead the investors into thinking Slater and Gordon was a stable investment which was also a breach of this statutory duty. The non-disclosure was also a breach of the director’s duties under Section 183 of the act to the extent that they had used the information to gain an advantage for themselves which caused a detriment to the company[14].
Thus under these circumstances, the acts of the directors would attract criminal liabilities as per the provisions of Section 184 of the Act.
The acts of the directors also display financial self-interests and are thus a breach of their common law duties against conflict of interest. Thus, following the judgment in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) the directors would be liable to pay damages to any injured parties.
Conclusion
Thus, in this predicament ASIC would have the power to enforce statutory penalties on the directors for the breach of their duties under Section 184 of the Act. This would impose criminal liabilities.
The shareholders would also have the option of approaching the law enforcement authorities with their claims under the breach of their common law duties and in such a case civil penalties in the form of damages would apply.
The directors would have the option of making appropriate disclosures which would establish the true and accurate financial stand of the company and may show cause to establish they had no knowledge of Quindell’s fraud. However, unless backed by evidence there would be no defenses available to directors in such a case.
The issue is to determine if such a case (Slater and Gordon) warrants the lifting of the corporate veil.
A company is a separate legal entity and can sue and be sued in its own name. This however does not imply that in cases where the acts of the company have had detrimental effects on its investors and other stakeholders the corporate personality cannot be pierced to hold the persons originally responsible for the decision making process which lead to such acts.
It was held in Campbell v Gordon[15] that in cases where the directors of a company have used to corporate veil to facilitate fraud the veil would have to be lifted and the directors would be held personally liable. This has also been reiterated in VTB Capital plc v Nutritek International Corp and others[16].
It has already been established that the directors of Slater and Gordon were in breach of the statutory duties under Section 180,181 and 183 of the act. This also meant that the fabrication of financial statements and reporting of inflated profits would be construed as fraud if established. Following the judgment in Campbell v Gordon it may be inferred that in such a case the court would have to look beyond the corporate veil and attribute responsibility to the ones originally responsible for the decision making process which brought about these actions on behalf of the company, namely, the directors.
Thus in case such a veil is lifted it would attribute personal liabilities on all the directors who ratified the actions in question jointly and severally.
Conclusion
Under the given set of circumstances, the corporate veil would have to be lifted and it would amount to criminal liabilities and civil penalties on part of all the directors of Slater and Gordon. This would be because of the fraud found in their disclosures and transactions.
Statues:
Corporations Act, 2001.
Case law:
Chan v Zacharia [1984] HCA 36.
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963.
Campbell v Gordon [2016] UKSC 38.
VTB Capital plc v Nutritek International Corp and others [2013] UKSC 34.
Articles:
Bronitt, Simon H. “Policing Corruption and Corporations in Australia: Towards a New National Agenda.” (2013).
Haas, Jeffrey J. Corporate Finance. West Academic, 2014.
Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University Press, 2014.
He, William Peng, and Andrew Lepone. “Determinants of liquidity and execution probability in exchange operated dark pool: evidence from the Australian securities exchange.” Pacific-Basin Finance Journal 30 (2014): 1-16.
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