The issue is that whether the directors have breached their duties.
From the very beginning, the provisions of Section 9 of the Corporation Act 2001 deal with the definition of a director. According to the provisions of Section 9 of the Corporation Act 2001, a person may not be appointed as the formal director of a company, if the nature of the duty of the director is such that it can be regarded as de-facto (Gelter & Helleringer, 2015). In this regard, it is noteworthy to mention here that, any person who has been appointed on the behalf of the director of a company to perform certain tasks can also be referred to as the director (Pugliese, Nicholson & Bezemer, 2015). In this context, the subject-matter of shadow-director can be emphasized. A shadow director is also the director of a company who does not reveal his identity and the fact that he is working on the behalf of the company (Smith & Rönnegard, 2016).
An individual may also be appointed by the main director of the company for the purpose of acting as an alternative director (Williams, Bingham & Shimeld, 2015). The requirements for the appointment of an alternative director are contained in the provisions of Section 9 of the Corporation Act 2001. The directors of the company have a duty towards the shareholders and the other members of the company which is concerned with the protection of their interests (Rauterberg & Talley, 2017). In the case of ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171, it was seen that though Adler was elected without formal appointment to act as the director, he decided matters for the benefit of the company. Various defenses are available in order to protect the interests of the directors of a company. These defenses are briefly explained in the provisions of Sections 180(2), 189 and 190 of the Corporation Act 2001. In order to protect the interest of the directors in relation to the nature of the decision taken on their part, it is important to emphasize upon the best judgment rule (Laster & Zeberkiewicz, 2014). In this regard, it is worthwhile to refer here that, if a director makes best judgment for the best interest of the company, then in such case his interest shall be protected under the provisions of Section 180(2) of the Corporation Act 2001. In the famous case of ASIC v Rich (2009) 236 FLR 1, the importance of the best judgment rule has been explained. In this case, the Court held that, directors may take decision on behalf of the company however; in such process the intention of the directors must be taken into consideration that whether the directors have taken such decision in regard to duty of care, skill and diligence. The best judgment rule protects the directors from being liable for the decision made on their part in company matters (Williams, Bingham & Shimeld, 2015). However, if the nature of the business judgment is such that it has been done with a good intention and for increasing the profits of business of the company, then the directors can escape liability (Pugliese, Nicholson & Bezemer, 2015). In the case of ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171, it was seen that the directors of the company has breached their duties in regard to the statutory provisions contained in Section 180(1) of the Corporation Act 2001. There involved as conflict of interest in regard to the decision taken by Adler. In this case, it was held by the Court that the provisions of Section 180(2) which deals with best judgment rule shall not be applicable because the directors have not taken their decision in due care, skill and diligence and failed to present evidence that their best judgment was for the best interests of the company.
In order to protect the liability of the directors of a company in regard to the best judgment taken by them, the provisions of Section 189 of the Corporation Act can be emphasized. The director shall be able to escape from personal liability, if he relied upon the information provided to him by an employee, advisor and another director of the company according to the provisions of Section 189 of the Corporation Act. However, the nature of the information has to be such that it can be relied upon. According to the provisions of Section 190 of the Corporation Act 2001, the directors of the company have an obligation regarding delegation of power however; it is important that the delegated powers must be exercised by them. If the nature of the power has been delegated in good faith, then it can be relied upon (Rauterberg & Talley, 2017).
The directors should exercise their duties with proper care and due diligence which are contained in the provisions of Section 180(1) of the Corporation Act 2001. In this regard, reference can be made to the case of Daniels v AWA Ltd (1995) 13 ACLC 614. In this case, it was held by the Court that the directors in order to carry on their duties must exercise them with care, skill and diligence. Therefore, the directors of a company must possess a basic understanding regarding of the business involved in the company. The case of Daniels v AWA Ltd (1995) 13 ACLC 614 can also be applied for the purpose of differentiating between the powers of the executive and non-executive directors of the company. In this regard, it is worth noting that executive directors are also the main directors of the company whose function is to carry on the business operations of the company. On the other hand, non-executive directors are part time directors. In order to determine that; whether the directors of a company are acting in due care and diligence, the objective test have been applied by the Courts. However, the Courts applied the subjective test in cases where there was a purpose to determine that certain circumstances could be taken into consideration in order to evaluate the fact that whether the decision taken on the part of the directors were for the interest of the company.
Conclusion:
It can be observed that though Lana was not formally appointed as the director of the company, she actively participated in the decision making of the company and attended board meetings in such process. In the present case, it can be emphasized that, Rik is the director of the company and the decision he took during the board meeting for the purpose of shifting the premises was not in accordance with the provisions of Section 180(1) of the Corporation Act 2001. This is due to the reason that, Rik took such decision without even informing the other directors i.e. Patel and Lana and therefore he has not acted in due diligence and care while performing his duties. In the present case scenario, it can be emphasized that the directors of the company has the authority to escape personal liability by using the defense of best judgment rule. In this case, as the decision taken by Rik was for increasing the profits of the company, therefore he can escape personal liability by relying upon the best judgment rule.
The issue in this case is that whether Fruit will be forced to keep the lease running for a period of three years.
For the purpose of defending claim involving breach of contract, three defenses are available to the directors under the business judgment rule (Kraakman & Hansmann, 2017). These defenses can be undermined as-
According to the provisions of Section 127(1), in order to execute a document on the behalf of the company, it must be accompanied with a common seal. It is required that such document needs approval by way of signature of two directors of the company. In this regard, the assumptions contained under the provisions of Section 129(5), shall be rightly applied to the regulations regarding the execution of document as contained in Section 127(1). The document that has been executed on the behalf of a company by using the common seal should have been witnessed 2 directors of the company according to the provisions of Section 127(2) of the Corporation Act 2001. Therefore, in this case, it can be emphasized that in order to execute the document according to the terms mentioned in Section 127(2), the assumptions depicted in the provisions of Section 129(6) of the Act can be relied.
Various assumptions are made by third parties in regard to the duties of the director (Pugliese, Nicholson & Bezemer, 2015). According to the provisions of Section 129, the third parties can assume that the provisions of this Section can be rightly applied to the duties on the part of a director or officer or an agent regarding the execution of a document with or without seal. In this regard, it is worth mentioning that, the document that has been executed on the behalf of the company has to be duly signed by 2 directors by using the common seal as depicted in the provisions of Section 127(1) of the Corporation Act 2001. It is worthwhile to mention here that, assumptions can also be made by third parties in cases, where there is an involvement of directors in actions concerned with fraud in relation to business operations. Such provisions are contained in Section 128(3) of the Corporation Act 2001. In this regard, the provisions of Section 128(4) of the Corporation Act 2001 can be rightly applied which states that, a person is not at the authority to make assumptions as stated by the provisions of Section 129 of the Corporation Act 2001. The terms contained in such provision shall come into effect only if during the time of making the deal; it was suspected that the assumption made by the concerned person was not correct.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, it was seen that one of the directors acted as the Managing director of the company however; he was not appointed formally. In this regard, it was observed that such Managing director performed the duties by exceeding his authority and for which the company was liable. In this case, the Court held that, the company acted as the principal while the Managing director being the agent acted on behalf of the company. As a result of this, the company was liable. Similarly, in the present scenario, it can be observed that the contract was signed by Rik in his own name and not on the behalf of the company. Therefore, in this case, the company shall not be held liable for the lease contract signed by Rik.
Therefore, from the given case study, it can be observed that the contract has been signed by Rik without receiving previous consent from the rest of the directors i.e. Patel and Lana. In this regard, the three defenses available under the business judgment rule can be referred in order to safeguard the interest of Rik and to save him from being personally liable. It is noteworthy to mention here that, the business judgment rule can be applied in cases here the directors has undertaken business judgment or decision in good faith and for the benefit of the company. In order to escape personal liability by relying upon the defenses of the business judgment, no personal interest of the director should be involved. In the present scenario, Rik can rely upon the defenses under the business judgment rule. This is due to the reason that, Rik took the decision of moving the company to new premises because he wanted to increase the profits of the company and therefore the decision was made with good faith. However, while making such decision, Rik has not acted according to the provisions of Section 127(1) of the Corporation Act 2001 because it was not signed by the two directors i.e. by both Patel and Lana. The document was not prepared by accompanying with a common seal and such execution of the document was not witnessed by the two directors of the company. It is worth examining the fact that, the assumptions depicted under the provisions of Sections 129(5) can be relied upon because it was previously assumed by Lana that Rik should not have signed the lease agreement without informing the existing directors of the company. This is due to the reason that, it can be assumed by any reasonable person of prudent nature that the document must be duly signed by 2 directors of the company which was not followed by Rik. The provisions of Section 128(3) of the Corporation Act 2001 shall not be relied upon as Rik was not involved in any fraudulent act. However, the provisions of Section 128 (4) can be relied upon because in the present case, from the very beginning Lana assumed that the lease agreement made by Rik was not valid as it was made without informing her and Patel.
Conclusion:
Lastly, it can be stated that Fruut Pty. Ltd cannot be forced by Watel Pty Ltd in order to keep the new premises for lease for a period of three years. This is due to the reason that the new contract was not valid as it was signed by Rik by not acting according to the provisions explained above.
References:
Cases:
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Rich (2009) 236 FLR 1.
Daniels v AWA Ltd (1995) 13 ACLC 614.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Journals:
Gelter, M., & Helleringer, G. (2015). Lift Not the Painted Veil: To Whom Are Directors Duties Really Owed. U. Ill. L. Rev., 1069.
Kraakman, R., & Hansmann, H. (2017). The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.
Laster, J. T., & Zeberkiewicz, J. M. (2014). The rights and duties of blockholder directors. The Business Lawyer, 33-60.
Pugliese, A., Nicholson, G., & Bezemer, P. J. (2015). An observational analysis of the impact of board dynamics and directors’ participation on perceived board effectiveness. British Journal of Management, 26(1), 1-25.
Rauterberg, G., & Talley, E. (2017). Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers. Columbia Law Review, 1075-1151.
Smith, N. C., & Rönnegard, D. (2016). Shareholder primacy, corporate social responsibility, and the role of business schools. Journal of Business ethics, 134(3), 463-478.
Williams, B. R., Bingham, S., & Shimeld, S. (2015). Corporate governance, the GFC and independent directors. Managerial Auditing Journal, 30(4/5), 324-346.
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