Describe about the Business Law for Legal Obligations Imposed.
The topic that has been chosen for discussion is whether directors in Australia should face a heavier duty than currently exists and comments on below written statement. The legal obligations imposed on directors are not onerous enough. Directors should be under a higher duty of care. Recent cases involving breaches by duties demonstrate that the Corporations Act is not strong enough to punish directors. Directors of a company have a very important role to play. They are responsible for appointing the chief operating officer of the enterprise, providing overall direction and strategy for the company, creating a governing system for the organization also by putting in place auditing processes within the concern. It is the duty of directors to take steps for the protection of assets of the company and also meet requirements of various outside regulating bodies. If there is breach of duties by directors, they would be punished by law. This is done to protect the interests of various parties like shareholders and creditors of the company.
There are a number of duties imposed on directors of Australian companies under the Corporation Act (Australian Securities And Investments Commission, 2016). The directors of a company are required by the Australian law to use their powers and carry out their duties with care that a person with reasonable intelligence holding such an important position is expected to show. The duties of a director of a company include ensuring that proper financial records are kept by the firm which makes it possible for the company to explain its business transactions to the relevant legal authorities. The directors are further expected to make sure that the company does not trade if it has become insolvent. Moreover directors are required by law to exercise powers for the best interests of the company. Further, the directors are required by law not to use their position in the company to make a personal gain or to put a third part at an advantageous position in relation to the company.
The directors of a company are given wide ranging powers to influence the affairs of the company. The assets of a company have been brought with the money invested by the shareholders and creditors of the company. Different provisions have been provided in the Australian law to protect the interests of the shareholders and the creditors of a company. There have been cases where the directors have been involved in frauds and have misappropriated the assets of companies. The shareholders do not manage the day to day activities of a company. So they must have access to financial statements of the company which they can rely upon to give a true picture of the financial position of the company. The shareholders expect a fair return on the money invested by them in the company. Further the potential investors would also like to know about the true financial position of the company. Moreover the corporations are also taxed on the basis of their earnings. It is because of all the above reasons that the Australian law has imposed serious legal obligations on the directors of the companies.
The Australian Securities And Investments Commission has been playing a very active and effective role in ensuring that directors of companies are held responsible where they have committed breach of duties under the Australian law. This becomes clear in a legal case ASIC V Fortsue Metals Group Ltd (FMG). In this case, Fortsue Metals Group Ltd and its director Andrew Forest entered into negotiations and reached an agreement with three Chinese companies to construct a mine, port and railway under Pilbara Infrastructure Project. FMG then made disclosures to ASX and made press releases that it had reached a binding agreement with the Chinese companies. In fact FMG had not done so. ASIC lodged a case under three sections of the Corporations Act which also included the charge that the directors had not acted with care and diligence and misled the potential investors also.
In the above case the directors of FMG put up the defence on the basis of Section 180(2) of the Corporation Act (also called business judgement rule). But the court disagreed and held directors responsible for breach of duty (Bartier.com.au , 2016).
The directors also become liable personally for acts of the company employees in cases of negligence by them in their duties as brought out in case King v Milpurrurru33 in 1996 by judge Beazley J in Federal Court (Epublications.bond.edu.au , 2016).
In another legal case ASIC V Healey (2011) 196 FCR 291 it was held by the court that directors of a company are expected to have basic level of financial literacy and understanding of accounting matters. In this case the directors were found guilty of breach of duty even when the corporate governance standards of the company were according to the recommendations of ASX (Sydney.edu.au , 2016).
The judgements given in legal cases involving breach of duties by directors have on several occasions pointed to the need that there is the need to improve corporate governance in Australian companies. This can also be done by making sure that wherever there are indications that provisions of the Corporate Act have been violated by directors, there should be legal proceeding against them. Moreover the directors should be made to do more to improve corporate governance. The auditing standards need to be made more elaborate and strict meeting the changing needs of business world (Gay and Simnett, 2015). At present the directors are required to give their assessment regarding the chances of the company remaining a going concern in a report which is attached to the financial statements which are required to be duly audited.
In cases where the directors of a company have caused a loss to the enterprise resulting due to the breach of their duties, they would be made by the court to compensate the company. The directors are made to do so as they have violated civil or criminal provisions of Corporations Act in this case (Australian Securities And Investments Commission, 2016). The directors would also be held guilty under the Corporation Act if they allow the company to trade even if it is insolvent. The directors are punished by monetary fines or imprisonment or both in the above cases.
All the above mentioned punishments are sufficient to deter directors from committing breach of duties. More resources should be made available to Australian Securities and Investment Commission. There is also need to improve the operations of courts of law. The judges need to interpret the laws in a correct manner. The laws also need to be more clear and specific on different issues (Lowry, 2012). As business world and society in general evolves there would be need to make additions to the current laws. The accounting and auditing standards would also need to improve as financial transactions become more complex and varied.
Conclusion
Directors of companies are entrusted with assets in which large amount of money has been invested by shareholders. If directors are not subjected to appropriate form of regulation by law, they would be tempted more to misappropriate money of shareholders who do not have close control over the operations of the business. But there has to be a limit to the duties and obligations of directors. Moreover, there is the need also to take steps to promote ethical behavior in corporates and also society in general. If people believe in good values they would not engage in corrupt practices. There is need to educate people better. Investors need to be more aware of how business is done in the corporate world. They should not get lured by promise of unreasonably high returns. They should develop a better understanding of what the financial statements of a company really convey. Moreover, employees in organizations need to be trained better in adhering to internal rules and regulations and also laws made by the government and regulating authorities (Christensen, Kent and Stewart, 2010). Environment has to be created where honest people come forward to report irregularities and frauds in organizations.
References
Australian Securities And Investment Commission (2016) Director’s Liabilities When Things Go Wrong. Available at: https://asic.gov.au/for-business/your-business/small-business/small-business-resources/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/ (Accessed 12 September 2016).
Australian Securities And Investments Commission (2016) Directors- What Are My Duties As A Director? Available at : https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/ (Accessed 12 September 2016).
Bartier.com.au (2016) Business Judgement Rule- Recent Lessons For All Company Directors. Available at: https://www.bartier.com.au/publications/publicationDetail.aspx?PublicationID=264 (Accessed 12 September 2016).
Christensen, J. , Kent, P. and Stewart, J. (2010) ‘Corporate Governance and Company Performance in Australia’, Australian Accounting Review, 20(4), pp. 372-386, [online]. Available at: https://onlinelibrary.wiley.com/doi/10.1111/j.1835-2561.2010.00108.x/full (Accessed 12 September 2016).
Epublications.bond.edu.au (2016) Personal Liability Of Directors For Corporate Torts. Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1125&context=blr (Accessed 12 September 2016).
Gay, G. and Simnett, R. (2015) Auditing and Assurance Services in Australia, Sixth Edition. Australia: McGraw-Hill Education.
Lowry, J. (2012) ‘The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey’, The Modern Law Review, 75( 2), pp. 249–260, [online]. Available at: https://onlinelibrary.wiley.com/doi/10.1111/j.1468-2230.2012.00898.x/full (Accessed 12 September 2016).
Sydney.edu.au (2016) The Origins Of Company Director’s Statutory Duty Of Care. Available at: https://sydney.edu.au/law/slr/slr_37/slr37_4/SLRv37n4TeeleLangford.pdf (Accessed 12 September 2016).
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