The definition of a director is contained in the provisions of Section 9 of the Corporation Act 2001. Under the Act, a director has been defined as a person who may or may not be elected as the director of a company, if such person has been acting as a de facto director while discharging the duties of the main director. It is worthwhile to refer here that, a person who is authorized to act on behalf of a director shall be liable to perform all the duties associated with such director however; such a person shall not be appointed as the formal director of the company. It is noteworthy to mention here that, according to the provisions of Section 9 of the Corporation Act 2001, that sometimes directors of a company acts according to the instructions authorized by a shadow director. A shadow director is a person who does not reveal himself as the director however; such a person is involved in the process of decision making on behalf of the company. In this regard, it is worth mentioning that a shadow director are authorized to influence the majority of the shareholders present in the company and even involves himself in the decision of the company. However, it is worth noting that a shadow director shall not be able to involve himself in all the decisions taken for the benefit of the company.
According to the provisions of Section 9, the person may be appointed for the position of a director who may act as an alternative director. The alternative director may not be selected through proper appointment. The duties of a director is concerned with the protection of the shareholders from the risks would may harm the company. In this regard, it is worthwhile to define the officer of a corporation which would include the executives of a company holding senior positions. However, such a person shares the same characteristics to that of a shadow director. In ASIC v Adler (2002), it was observed that, Adler was the director as well as the officer of the HIH subsidiary. In this case, it was observed that as Adler was authorized as the director of the company and the officer of the subsidiary holding company therefore, he actively participated in the process of decision making which affected the substantial or whole part of the business.
Therefore, in the present scenario, it can be stated that Lana has not been properly appointed as the director of the company however; she was authorized to act as the director and attend board meetings for the purpose of assisting the other directors in making decisions.
According to the provisions of Section 180(1) of the Corporation Act 2001, it is important on the part of the directors and the other officers of the company to exercise their duties and discharge them with due diligence and care. According to the provisions of Section 180(1) (a), the directors or the other officers of the company shall have the same duties and responsibilities as shared by the directors under the provisions of Section 180 (1) (b) of the Corporation Act 2001. In this regard, it is worthwhile to refer the case of Daniels v Anderson (1995) 37 NSWLR 438, which clarifies the fact that, same standard of duty of care, has been imposed upon the executive and non-executive directors of the company. Therefore, it can be rightly mentioned that, executive directors can be considered as the full time directors of a company who involve themselves in the day to day business activities. In relation to their day to day responsibilities, these directors are entrusted with special responsibilities as they possess appropriate knowledge regarding the day to day operations of the company. However, non-executive directors are entrusted with part time duties but still they are involved in the regular business activities. Under the provisions of Section 180(1) of the Corporation Act, there is a duty of care, skill and diligence on the part of the directors. However, traditionally, the Courts determined such duty and care on the part of the directors by keeping in mind the intention of the directors while they were making a decision on behalf of the company. After the decision of the case Daniels v Anderson (1995) 37 NSWLR 438, the Courts applied the objective test for the purpose of determining the breach of duty on the part of the directors. In this regard, the provision of Section 180(1) requires that all the directors as well as the officers of the company must carry on their duties with care and due diligence. The Courts while deciding that whether the directors have acted according to care and diligence would be measured in terms of degree of reasonability. The degree of reasonability deals with the fact that whether the director has exercised his duties and responsibilities as it would have been carried out by any reasonable man of prudent nature. The Courts have also applied the subjective test for the purpose of taking into consideration specific circumstances in which the individual directors or the officers has acted for the purpose of making decisions for the company.
Therefore, in the given case study, it can be observed that, Rik being the director of the company took the decision in the board meeting regarding the shifting of premises. The decision was taken on the part of Rik without even informing Patel and Lana who were also the directors of the company. In this regard, Rik do not act according to the provisions of Section 180(1). Therefore, Rik being a director of the company has not taken due care, skill and diligence in regard to the shifting of the business premises.
The defenses which are available in the present case can be explained with the application of the provisions of Section 180(2), Section 189 and 190 of the Corporation Act 2001. According to the provisions of Section 180(2) of the Corporation Act 2001, any director of a company or other officers who is involved in making business judgment shall not be held liable according to the rules and regulations under both common and statutory law. The best judgment rule is defined as the decisions which the directors of a company are authorized to take for the purpose of carrying on the business operations. In the case of ASIC v Rich (2003), it was held by the Court that the officers of the company may be entrusted with certain power and responsibilities however; the authorization of certain powers and responsibilities shall be considered while determining the fact that whether the directors have applied duty of care, skill and diligence while making the best judgment rule.
It is worthwhile to refer here that, from the very beginning; the best judgment rule has been protecting the directors from personal liability in relation to the judgments made for the purpose of business. However, such business judgment has to be valid and has been made in good faith for the best interests of the company. In some cases, it can be observed that the directors with an intention of making the business profitable by acting honestly and rationally, often lands up taking decisions which causes loss to the business of the company. In this regard, the case of ASIC v Adler (2002) can be referred because in this case, it was observed that the directors Adler, Fodera and Williams has breached their statutory duties according to the provisions of Section 180(1). However, they could not escape personal liability by relying upon the provisions of Section 180(2) because Adler could not satisfy the provisions of this section while making the business judgment rule. Secondly, there was conflict of interest in the decision taken by Adler regarding the investment. The business judgment rule did not apply in the case of Williams because he failed to comply with the correct safeguards however; he also failed in his part to provide reasonable evidence that the business judgment was done in good faith.
According to the provisions of Section 189 of the Corporation Act, if the director of a company relies upon the information and advice on the part of a professional or expert that has been prepared by an employee, another director, an expert advisor of the Corporation in reliance to the fact that such information would be reliable and made in good faith, then such director of the company shall not be held personally liable for the best judgment. According to the provisions of Section 190 of the Corporation Act 2001, the directors of a company are responsible for the delegation of powers if the power delegated has been exercised by them. In this regard, it is noteworthy to mention here that, if such director believes that the delegation of power has been on reasonable grounds and has been made in good faith by proper inquiry, then such delegation of power can be considered to be reliable.
Therefore, in the present scenario, it can be stated that the directors of the company can escape personal liability for breach of their duties on the defense of best judgment rule. This is due to the reason that, Rik has taken the decision for the purpose of prospering the business and such decision was taken in good faith.
2.The defenses of business judgment rule which are available to the directors of a company for the purpose of defending a claim for breach of duty of care and diligence in the process of making decision on the behalf of the company can be emphasized as-
In this regard, it is worthwhile to refer the provisions of Section 127 of the Corporation Act 2001. According to the provisions of Section 127(1), a document may be executed on the part of the company with the common seal. However, such document needs to be signed by 2 directors of a company or by the director or the secretary or by the proprietary or the sole director of a company. In this context, it is worth noting that, if a document has been executed by the company in such manner, then the assumptions depicted under sub-section 129(5) shall be relied upon. According to the provisions of Section 127(2), a company is authorized to execute a document with the help of a common seal, if the fixing of such common seal has been witnessed by any 2 directors of the company or the secretary of the company and the director or the sole in case of a proprietary company. In this regard, it is worth mentioning that, for the purpose of executing the document in such manner, the assumptions of sub-section 129(6) shall be relied upon.
In the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, it was observed that one of the directors of the defendant company has been allowed to act as the Managing director on behalf of the company. However, it was observed that such Managing director was not formally appointed. The other directors of the company was aware of the fact that though the Managing director was authorized to take decisions on behalf of the company, he acted outside his actual authority and as a result of which the company held liable. In this regard, it was held by the Court that, as the principal (company) authorized the agent (Managing director) to act on behalf of the company. Therefore, the company shall be held liable for his acts.
In the present case study, it can be stated that the company shall not be liable for the acts of Rik regarding signing the lease contract. This is due to the reason that, the contract has been signed in the name of Rik rather than the company.
The assumptions made by third parties in order to deal with the directors of the company can be emphasized. According to the provisions of Section 129 of the Corporation Act, it may be assumed by any reasonable person that the provisions of this act that can be applied to a company can be complied with the rules regarding the director or company secretary or officer or agent or proper performance of duties on the part of the director or document duly executed with or without seal. According to the provisions of Section 129(5), it may be assumed by any reasonable person in case of document that has been duly executed by the company. In such cases, the document has to be signed according to the provisions mentioned in Section 127(1).
According to the provisions of Section 128(3), such assumptions can be made in cases where an officer or any agent of the company has involved in fraudulent act or has forged a document in relation to business dealings. According to the provisions of Section 128(4), a person is not authorized to make assumption under the provisions of Section 129, if at the time of making the dealing such person was aware of the fact or has suspected that it was an incorrect assumption.
In the present scenario, it can be observed that Rik signed the contract without prior consent from the other directors. Therefore, in this case, the defenses of business judgment rule can be applied. It can be rightly stated that, the business judgment rule can safeguard the directors from personal liability if it can be proved that such director was acting in good faith, had no personal interest behind such decision and made the decision for the best interests of the company. In the present case, Rik being a director can escape liability on the ground that he decided to move to new premises for the purpose of prospering the business of the company. In the present case, it can be observed that Rik while making the decision on behalf of the company has not complied with the provisions of Section 127(1) because it states that in order to produce a valid document; it has to be signed by 2 directors which Rik has not done. In this regard, it can also be observed that, the document was not prepared by using the common seal which has not been witnessed by 2 directors i.e. Patel and Lana. In the present scenario, it can be observed that, the assumptions contained in Section 129(5) and 129(6) have not been relied. Therefore, in this context, it can be stated that the company Fruut Pty. Ltd. cannot be forced to keep leasing the new premises for a term of three years because, the lease contract is not valid as it did not met the abovementioned provisions and as it has been only signed by Rik alon
References:
ASIC v Adler (2002).
ASIC v Rich (2003).
Daniels v Anderson (1995) 37 NSWLR 438.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
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