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Duties of Company Directors: Corporate Law

BULAW5915 Corporate Law

Purpose 

To enable you to consider and research a topic of current interest of relevance to Australian corporate law. The Assignment will be marked out of 100, adjusted to a final mark out of 30 in accordance with the weighting of this assignment to your final grade for the course: 30%. It is important for you to take time to think through how to structure and present arguments and to review and discuss what the law is or should be in a particular area. Whilst discussion with others is encouraged, the final piece of work must be your own.

Assignment fact situation 

Fruut Pty. Ltd. owns an orchard and also grows and sells young fruit trees. Rik and Patel are directors and shareholders. There are another six shareholders who have committed money to the business but take no part in decisions. Rik manages the day-to-day financial operations. Patel, who has no tertiary qualifications, is in charge of the orchard and growing the fruit trees for sale. Lana is Rik’s girlfriend and is a qualified accountant. Although not named as a Director she often attends Board meetings to help the others with difficult decisions. She has also provided a guarantee to the Bank for a loan to the business.

Until recently Fruut had been very profitable. However, six months ago a competing business opened nearby and profits have fallen. Rik thinks that Fruut should move. He starts looking for new premises and decides the first place (owned by Watel Pty Ltd) he sees is perfect. It is an old shop, located at the front of a large block of land with excellent soil. Although the rental is quite high there is not another business selling trees nearby. He thinks they could serve coffee in the shop area and grow and sell fruit trees out the back. Without talking to anyone else, Rik signs a lease for three years.

Rik calls a board meeting and tells Patel and Lana that moving will solve all the company’s problems. He says they will need to spend some money to fit out the old shop so they can serve coffee; and also to complete some work at the back and plant the fruit trees. Patel and Lana cannot think of any questions to ask, although Lana feels that Rik should not have signed the lease without them all having a chance to think about it.

The shop alterations are completed, Fruut moves to the new premises and staff are employed to run the coffee side of the business. The company had to borrow more money from Bank for this purpose. Business in the coffee shop is slow following a worldwide shortage of coffee beans caused by a disease affecting coffee plantations. In addition, there is a drought and Fruut’s trees are not looking healthy. Potential customers are delaying the decision to buy fruit trees as water restrictions mean gardens (including trees) can only be watered occasionally. Even with the new coffee shop, sales have fallen below those obtained in the old premises. Lana is worried that they have made a mistake moving.

Assume you are invited by Lana to address a Board meeting to talk about options for the company. Lana asks you to talk about whether any of them may have breached their duties as directors.

a. Write an explanation in preparation for this meeting, setting out what the duties of directors are under s.180(1)of the Corporations Act, explaining  the effect of s.180(2) and assessing whether any of the directors may have breached their duties under this section.

In your answer you should compare their situation to at least two cases you have studied

Now assume that Rik, Lana and Patel agree that their only solution to the money problems facing Fruut is to move back to the old premises that are still empty. Lana suggests that the new lease is unenforceable anyway as Rik signed it with his name rather than that of the company. The agent for Watel Pty Ltd objects, saying that the lease is perfectly valid and enforceable against Fruut.

b. Explain to Lana, Rik and Patel whether Fruut can be forced to keep leasing the new premises for the three year term.

In your answer you should compare their situation to at least two cases you have studied.


Answer

Corporate Law

It is to be noted that there are total eight shareholders in the company named Fruut Pty. Ltd. Further, there are 2 directors in the company. The company is engaged in the business of orchard. The directors are performing their own part of operations. Rik is performing the task of financial operations. He is technically sound in the financial management of the company. He is therefore engaged in taking the key role in regard to the financial management of the company. On the other hand, Patel is handling the ownership of the orchard. He is having the rich expertise and knowledge of the crops, grown grass etc. Due to the existence of one more competitor in the nearby area, they are suffering from the loss of sales of the products. It started occurring from the last six months. Earlier, there was no such kind of issue because they were having the monopoly in that area. The new competitor started the business in the same stream in the same area six months before. Therefore, one of the directors named Rik has taken the decision to shift to the other place and has also taken the shop on lease for three years. He took such a decision without any prior consultation with any of the directors or the shareholders.   

In this regard, we are supposed to check and suggest the duties of the directors. Further, the actions that are being performed by the directors of the company are in order with the corporation act or not. The section 180(1) and 180(2) specifies the duties of the directors. The summary of the responsibilities of the directors as has been extracted from the Corporation Act is as follows:

Primary duties of the directors of the company as per the provisions of the act

The primary responsibilities can be elaborated as follows:

  1. Due Care and diligence

It requires the director to exercise the due diligence while taking any of the decision regarding the company. The company is having the interest of various stakeholders, shareholders, directors, debenture holders, bondholders etc. Therefore, the decisions taken by the directors should take into account the benefit of all the persons associated with the company rather than his interest. The common law, therefore, requires the directors to exercise due care while finalising the situations in the company's success. Some of the decision may not be in the interest of the individual, but it may be I the interest of the company. Further, there may be the situations wherein the directors have to take the instant decision without considering the prior consent of the other directors or shareholders. Whether the director can be blamed for not making their prior approval? In this context, the law has laid down the provision to give the limited freedom to the directors of the company. The directors can take the decision and later on get it ratified by other eligible persons relating to this decision.

  1. Bona fide act 

 The fiduciary duty lies upon the directors. The fiduciary duty can be defined to mean the responsibility to be performed in good faith. The directors should try to mischief the company or the other stakeholders of the company. It is to be kept in mind by the directors that they are having the powers restricted by the other shareholders of the company. Therefore, if the directors are proved to be the wrongdoers, they may be regulated by the shareholders or by the company. The directors are supposed to be the representatives of the stakeholders of the company. They are therefore in the very delicate position wherein the mistakes; notably, the unintentional errors cannot be tolerated. The evidence has to be given by the directors for every decision. Further,  the directors have to get all these things ratified by the other directors. 

  1. Proper use of position

The controversy of interest ought to be avoided through "abstain and disclose." The regulation to tell the opposite stakeholders just in case of the conflict would facilitate in following the incident. The anti-corruption policy would be admired to be implemented in the position of the directors. These are just the examples that the director has to be considered to be aware of the duties that he is supposed to perform. Further, the rights should be used restrictively. The company should make the control policies to ensure the honest dealings and business conducts. The internal operations, therefore, are being undertaken with the right approach with the introduction of regulations. Values like integrity, honesty, responsibility, and challenges facing ability help within the building of healthy culture within the company. Empowering the staff with the progressive outlook has been attainable solely with the internal management regulation. Giving the possibility to correct the views on the innovative policies is that the superior facet as designed by the policy. The potency is going to be increased as a result of internal controls implemented by the govt. Enforcing adherence to the laws and respecting the regulations has been the moral purpose in this regard.

  1.  Proper use of information

The corporate has created it the matter of relation to give the services underneath code of conduct. Accurate details and reports area unit generated to regulate the interior operations. The protection of IPR has been potentially attributable to the code of conduct solely. The government can so be making the sound and quality competition within the market through the management of operations and creating the laws. It has created the corporate to be sturdy through management over internal commercialism & antitrust problems. Therefore, the directors have to be more careful regarding the use of the information. There should be no manipulation as well as there should be no misutilization of the information available internally that may affect the decision of the users of the financial statements.

Case laws

The directors' power to handle the affairs related to the business has been taken by authorities to be wide. As declared by the Senate Committee in the year 1989, director's is the representation unit of the company sector' and he is considered the soul for the company in context of handling the affairs of the business. The reliance can also be placed on decision upheld by the council in Howard Smith Ltd v Ampol fossil fuel Ltd, administrators will build choices against the bulk shareholders’ objectives. Similarly, in Imperial treatment edifice Company Blackpool v Hampson, it was held that if the powers have been given to the directors regarding the decision in some respect, the shareholders can not deprive them of their rights just by passing the resolution manipulatively. It suggests that when such influence is passed on to the directors, the persons having the shares of the company will have solely selection to change the composition and put the restriction on the use of the powers being given to the directors, thereby avoiding the misuse by the company.

Question 2: 

Now assume that Rik, Lana, and Patel agree that their only solution to the money problems facing Fruut is to move back to the old premises that are still empty. Lana suggests that the new lease is unenforceable anyway as Rik signed it with his name rather than that of the company.  The agent for Watel Pty Ltd objects, saying that the contract is perfectly valid and enforceable against Fruut.  b.   Explain to Lana, Rik, and Patel whether Fruut can be forced to keep leasing the new premises for the three-year term.  In your answer, you should compare their situation to at least two cases you have studied

Solution: 

Section 182 of the Corporation's Act states that the position should not be used in such a way that undue gain or advantage is taken out in this respect. Further, it clarifies that the decisions should not be against the goodwill or the interest of the shareholders. It should not be detrimental to the importance of the company.  

It is evident from the provisions of the act that all the cited duties are meant to guarantee that directors perform the functions or activities in the interests of the institution or the legal entity. The meaning of the term ‘corporation’ in this regard can be interpreted to mean and include the persons possessing the shares of the company. Therefore, the term in its entirety cannot exclude the interest of the stakeholders other than directors.  

Consequently, typically administrators are not bound by the duty to individual shareholders.   Although it may appear strange, it's vital to that the corporation may be a separate legal personality different from shareholders. As expressed by Handley JA Brunninghausen v Glavanics, there are smart reasons for this general rule; if every shareowner had a private right, administrators would be exposed to an oversized kind of alternatives. It, of course, suggests that that administrator will create choices that are in the best interests of the company, however, in the of persons having the shares of the company. It includes disbursement of a number of the company's funds to realise long-run profits at the expense of minor gains of the company.

Further, it is to be noted that directors can take the decision on their own and after that can be ratified by the other stakeholders of the company. Therefore, the decision made by the director regarding taking the premises on the lease is right enough since the same has also been ratified in the subsequent meeting. However, the meeting should be called as per the provisions of the act. The provisions that have been explained in the corporation's act regarding the notice to be served for calling the meeting, and other consequential measures in this regard have to be compiled by the company’s director.  

 As per the provisions of the corporation's act, the notice that would be served to call the meeting for ratifying the decision of the Rik would comply with the following guidelines:  

  1. It should have the specific date on which the meeting is supposed to be held. Further, the particular time should also be mentioned on the notice viz. when the meeting will be started and then when the meeting is supposed to be concluded it can be estimated. 
  2. The location where the meeting of the company is supposed to be held. It can be any place either on the premises of the company. It can also be the place outside the premises of the company itself. There is no restriction in the provisions to the act regarding the location of meeting to be in the premises only.
  3. Further, the question arises regarding the manner of communicating the notice to the various attendees of the company. It is given on the liberal basis that the notice may be sent to the directors physically or through the mail. The notices that are being sent via mail have been given the equal recognition as have been given to the physical mode of the notice served.
  4. The notice should also contain the agenda of the meeting. The primary business that needs to be discussed has to be elaborated in the notice served for the meeting. It is because of the reason that the directors may collect the required information in this regard for the healthy discussion at the meeting. It would also help the directors to form their mind regarding the decisions to be taken in the conference. They can, therefore, exercise the intelligent brain for using the decisions in this regard. Thus, the purpose of the meeting has been said by the provisions to be included in the notice to the meeting.               
  5. If there is any requirement of the special resolution to be passed, the same also has to be mentioned in the notice. There are some of the instances in the Corporations act wherein it is mandatory to issue the special resolution. The special resolution is the kind of judgment where the consent of more than seventy-five percent of the people id required approving the decision.
  6. The proxy I also allowed for the specific cases. If there is any case involved for the proxies, the same also have to be included while issuing the notice of the meeting.    

In the case of the Re Smith & Fawcett Ltd, Lord Greene M.R. upheld the decision about the mechanism in which directors are supposed to discharge obligations, exercise the duties, perform the functions etc. It all is already laid out clearly in the provisions of the corporation act and explained in the paras mentioned supra. 

Therefore, the decision taken by Rik cannot be said to be wrong in the eyes of the law. The director named Rik has made in the bonafide interest of the company. He was thinking to increase the sales o the company. Therefore, the entire focus and the intention of the directors was for the benefit of the company only. Thus, there is no breach of any section.

The same also been upheld in the case of the Hutton v West Cork Railway Co (1883) 23 Ch D 654. It also talks about the best interest of the company. In this case, the proposal was submitted by the directors to give the compensation to the employees in the process of winding up. However, the same is not required to be made or mandatory to be made. It was just the general proposal. The shareholders ratified it, and therefore, the directors could not be blamed for misusing the money of the company.

It can, therefore, be said, relying on the judgment mentioned above that Rik cannot be blamed for taking such a decision. He has made his best efforts to comply with the legal provisions of the law. The Director has called up the meeting to ensure that everyone in the company is satisfied with the decision. There is no defalcation of the money out of the purchase of the premises through the use of the money of the company. The company is doing the business from there, and he is not carrying out any personal business. Therefore, corporation act is complied with.

One more issue is to be considered in this regard. Lana is not the appointed director of the company. She is just the girlfriend of the director of the company named Rik. As per the provisions of the act, only the directors of the company are allowed to attend the board meeting of the company. Lana is therefore not the eligible person to participate in the board meetings of the company. The shareholders may dissent against this practice of the company. Thus, the directors need to reconsider the same to adhere to the provisions of corporations act.

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