There are several duties that have been mentioned for the directors of corporations by the common law, statutory law and company’s constitution. The statutory duties imposed on the directors are mentioned in the Corporations Act, 2001 (Cth). In this work, the statutory and common law position of the above-mentioned directors has been discussed.
In the present case, Vesna convinced the board of Borisda Builder Pty Ltd. that it should enter into a contract with Doug The Designer Pty Ltd. this is a company owned by Vesna’s brother, Doug. On the other hand, the duty mentioned in s181 of the Act mentions that the directors should use their powers and discharge their duties: (i) in good faith and in best interests of the corporation; and (ii) for proper purpose. These provisions are consistent with the fiduciary duty of the directors which requires them to bona fide and for the benefit of the corporation (AWA Ltd v Daniels, 1992). In contrast, this duty will be considered to be violated by the directors, where it has been found that the directors have used their authority for improper purpose though the directors believed themselves to be performing sincerely.
There is a common law duty imposed on the directors, according to which they should avoid any conflicts of interest. The law presumes that the directors have fiduciary duties in favor of the company (Statewide Tobacco Services Ltd v Morley, 1990). This is a significant legal relationship and it is important that the directors always prefer the interests of the corporation as compared to their own interest (Woolworths Ltd v Kelly, 1991). As a result of this duty, the directors should not place them in a situation where they can be conflict between their personal interests and the interests of the corporation as they are bound to protect these interests.
This section contains the duty of care and diligence imposed on the directors (R v Byrnes, 1995). The duty is also present under the common law. However, it has been reinforced by adding in s180(1) of the Act. According to this provision, the directors of the company are under an obligation to use their powers and discharge the duties with the same level of care and diligence that can be expected from any reasonable person in such person was the director of the company under similar circumstances and occupied the same office with same responsibilities. Due to the reason that a reference has been made to a reasonable person, it can be stated that an objective standard of care that is consistent with the equivalent fiduciary duty is applicable (ASIC v Vines, 2006).
It is the possibility of the directors that they should maintain a balance between the probable advantages that can be reasonably anticipated from the conduct in question against the probable risk of harm that may be caused to the business (ASIC v Stephen William Vizard, 2005). This section also contains the business judgment rule.
In this regard, s588G of the Act imposes a duty on the directors. This duty requires that the director should prevent insolvent trading (Woodgate v Davis, 2002). This section provides that when a person is a director, at the time when it incurs a liability and the corporation is insolvent or may become so due to incurring the debt and there are reasonable grounds to suspect that either the company was insolvent or it may become so and the director knew regarding these grounds or any other reasonable person would have known regarding these grounds under like conditions but the director failed to prevent the company from incurring such a debt.
Vesna is a director of Borisda Builder Pty Ltd. She has university education and an engineering degree as well as a Masters of Business Administration. In this way, Vesna has good knowledge regarding building industry.
Ilyych is an accountant and helps the company in creating monthly financial reports. He strongly recommends to the board of Borisda Builder Pty Ltd that the company should become involved in constructing in cubby houses for children around the building sites of the company. However, the board of the company decides to focus on the main area of house building. Under these circumstances, Ilyych signs a deal with another building company, Canweafixdat? Pty Ltd. according to this deal, Ilyych was going to be paid a commission of 10% and also a place on the board of the company.
Sergey: In this case, is the brother of another director of the company, Zviad. He has a long history of depression and lack of self-esteem. Although he did not have any relevant inexperience, still he was made, a member of the board. Sergey never reads the financial statements of the company. Similarly, he never checks the financial returns of any year before he was appointed and never read any records after his appointment.
Mikhail and Zviad: Along with these two directors, the other directors of the company can also be held accountable for the violation of duty to prevent insolvent trading. In this case, the directors allowed the company to trade even if the company was facing financial problems.
Conclusion
Vesna had violated the duty imposed by s181.
Therefore this case, it can be stated that Ilyych had breached the duty which requires the directors avoid any conflicts of interest.
Under the circumstances, it can be stated that Sergey is responsible for the violation of duty mentioned in s180.
Therefore in this case, it can be said that Mikhail and Zviad, along with other directors of the company can be held liable for the violation of duty to prevent insolvent trading.
References
ASIC v StephenWilliam Vizard [2005] FCA 1037
ASIC v Vines [2006] NSWSC 760
AWA Ltd v Daniels (1992) 7 ACSR 759
R v Byrnes (1995) 130 ALR 529
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405
Woodgate v Davis (2002) 55 NSWLR 222
Woolworths Ltd v Kelly [1991] 22 NSWLR 18
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