ACC2006 Company Law

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ACC2006 Company Law

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ACC2006 Company Law

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Course Code: ACC2006
University: Australian Institute Of Higher Education is not sponsored or endorsed by this college or university

Country: Australia

Discuss about the Ford Principles of Corporations Law.

In the present case, the issue the issue arises on the basis of the present facts if the directors of Lovells Ltd have breached their duties that have been imposed on the directors by the Corporations Act, 2001. Simultaneously, it is also required to be seen if any defenses are available to the directors. The reason is that one of the directors of the company, Larry has incorporated his own company, Events Galore Pty Ltd for the purpose of taking benefit of a business opening that was available to Lovells Ltd. Similarly, the other two directors of the company, Tony and Greg had also approved this act after they were offered the position of non-executive director in the new company, along with attractive remuneration. In the same way, shares have been issued by the three directors of the company, Larry, Tony and Greg for the purpose of diluting the shareholding of Earnest Pty Ltd. Another issue that is present in this case is if the directives can be held liable for being involved in insolvent trading.
A corporation is run by its directors on behalf of the shareholders. In s198A, Corporations Act, it has been mentioned that the business of the Corporation needs to be run by or in accordance with the directions given by the directors. In this regard, certain basic legal duties and responsibilities have been imposed among the directors (Austin and Ramsay, 2013). The duties and responsibilities that have been imposed on the directors by the Corporations Act are applicable in case of several organizational structures like public companies or proprietary companies.
Duty of care and diligence: In view of this duty, the directors should act with the same level of care and diligence that can be expected from any other reasonable person who is acting under similar circumstances and in the same position. This duty is present in s 180. A similar duty is also obligatory for the directors under the common law (Ford and Austin, 1995). On the other hand, the business judgment rule provides a safe harbor to the directors regarding a claim that has been made against the directors under the common law or for the breach of section 180.
The next duty of the directors is to act in good faith, keeping in view the best interests of the company (Ford, 1978). For this purpose, the directors should act for a proper purpose as mentioned in section 181. This requires that any conflicts of interest should be avoided by the directors between their personal interests and companies interests (Elder v Elder and Watson, 1952). This duty is the duty of fidelity as well as of trust. It is known as a fiduciary duty that has been prescribed for the directors by the common law and simultaneously, this duty is also present in the Corporations Act (Morgan v 45 Flers Avenue Pty Ltd., 1986).
Another duty of the directors is to make proper use of their position in the company. This duty requires that the director should not use their position in the company improperly (Farrar and Hannigan, 1998). An improper use of position occurs when the director’s position is used in order to gain a private benefit or to cause a detriment to the corporation. This duty has been mentioned in section 182 of the Corporations Act.
Section 183 of the Corporations Act provides for the duty of the directors according to which they should use the information received by them, properly. This duty requires that any information should not be used by the directors for the purpose of achieving your personal advantage or for causing a loss to the company (Paterson and Ednie, 1976).
Another duty mentioned in the Corporations Act is the duty of the directors to prevent insolvent trading. Therefore, apart from the general duties of the directors, it is also the duty of the directors to prevent the company from trading if reasonable grounds are there to suspect that the company is insolvent or may become insolvent after incurring a debt (Menzies, 1959). A company can be described as insolvent if it is not in a position to repay its debts as and when they fall due. As a result of this duty, whenever the company is going to incur the new debt, it is the obligation of the directors to consider if any reasonable grounds are present to suspect that the company may be insolvent or may become so after incurring such a debt.
In the present case, the above mentioned duties have been breached by Larry when he incorporated his own company for taking advantage of a business opportunity. In the same way, the other two directors Tony Greg were also liable for the breach of their duty of care and diligence, as well as the duty which requires them to act in good faith. They were quite upset initially but later on, they agreed when the position of nonexecutive directors was offered to them, along with effective remuneration. Larry has also breach did his duty, which prevented him from using his position improperly and also using the information received by him improperly. Another breach of duty by the three directors is the breach of duty to prevent insolvent trading. Although the company was facing financial problems, still Larry, and the other two directors decided to continue with aggressive advertising and marketing efforts. Therefore, these directors have also breached the duty prescribed was written by 588G.
Advise the directors whether any defences are available to them.
A defense is accessible to the directors under section 180 in the form of the business judgment rule that has been incorporated in the Corporations Act, 2001. Section 180(2) provides that if it can be established by the director that the judgment was made by them in good faith and for a proper purpose and the director did not have any individual interest concerning the subject matter and at the same time, if the director had informed themselves concerning the subject matter of the judgment to reasonable extent and the director also believe that the judgment is in the best interests of the corporation, a defense is available to such a director against an allegation of breach of duty. For this purpose, it is required that the director should fulfill the above-mentioned requirements for the purpose of claiming the protection provided by the business judgment rule and in such a case, it can be said that the statutory duty of care and diligence prescribed by the Corporations Act has been satisfied in a particular case.
However in the present case, it cannot be said that the above-mentioned requirements are satisfied and as a result, the defense of business judgment rule is not available to these directors.
Advise Mark what members’ remedies in the Corporations Act 2001 (Cth) are suitable for him.
In this question, the issue is if the majority shareholders and directors of Katlin Groceries Pty Ltd, Sam and Bob have been involved in oppressive conduct and as a result, if there are any remedies available to the minority shareholder of the company, Mark.
While managing the affairs of the company, sometimes the majority shareholders may want to use their influence for achieving the personal benefit, as compared to the benefit of the company as a whole. However, such conduct has not only been declared as illegal by the law but at the same time, such conduct also have the effect of diminishing the value of the few holdings or to cause damage to the company generally. This is not a particularly welcome situation for the minority shareholders. Under these circumstances, the question arises, what can be done by the minority shareholders to deal with such conduct.
Generally the term minority oppression describes the conduct mentioned in s 232. It includes the conduct that is against the interests of the shareholders as a whole or the conduct that is oppressive, unfairly prejudicial or discriminatory. Oppressive conduct is assessed by using an objective test based on the fact if the particular conduct can be described as unfair by any reasonable person. Moreover, it is not enough that prejudice or discrimination is present, it is also needed that an element of unfairness should exist that is something more than causing a disadvantage.
Therefore when the minority shareholders have to face oppressive conduct, certain remedies have been provided in section 233, Corporations Act for such a conduct. According to the provisions of this section, discretion has been provided to the court to grant extensive remedies to minority members who have to face oppressive conduct. Particularly section 233 allows the court to make an order, which it considers to be appropriate, keeping in view the circumstances where the conduct of the affairs of the company can be described as being against the interests of the members of the company as a whole or, if such conduct is oppressive, unfairly prejudicial or discriminatory against a member or members of the corporation.
The power of the courts to give relief in case of oppressive conduct allows the courts to make orders (but is not limited to), that the majority members should buy the shares of the minority member at the price that has been determined by the court; or that the company buys the shares of the minority member; or that a receiver and manager should be appointed and to wind up the company; or that an injunction be issued against the corporation or director or majority member, which restrains them from a particular act. For example, in Roberts v Walter Developments Pty Ltd & Ors (1997) the court had discussed the relevant principles concerning oppression and business judgment. Hence, in this case, the court arrived at the conclusion that the course of conduct of the chairman and a majority shareholder, including the fact that the company failed to pay dividends, failure of the company to consider the request made by the minority shareholders that the remuneration of majority shareholders as the director of the company should be reduced and the refusal to allow the minority shareholders to look at the company records, can be considered as oppressive (Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd., 2001).
In this case, the majority shareholders and the directors of Katlin Groceries Pty Ltd, Sam and Bob have not paid any dividend to the members of the company even if the company has been doing very well. Both these directors reject the requests made by Mark to pay dividends. At the same time, when Mark asked them to purchase his shares, they refused to do so. Moreover, they make Mark resign from his position as the director of the company. Similarly, they also deny access to Mark to the financial statements of the company. When Mark was leaving his office, he finds out that excessive payments have been made to the consulting firm of Sam and Bob as consultancy fees.
Under these circumstances, it can be concluded that Sam and Bob have been involved in oppressive conduct and as a result, the remedies for oppressive conduct mentioned above are available to Mark, which includes an order by the court according to which Mark’s shares should be purchased by the other two majority shareholders at a price decided by the court.
Austin R.P. and Ramsay, I.M. (2013) Ford’s Principles of Corporations Law, LexisNexis Butterworths, 15th ed, 432
Farrar J.H. and Hannigan, B (1998) Farrar’s Company Law (Butterworths, 4th ed, 382
Ford H.A.J.,  and Austin, R.P., (1995) Ford and Austin’s Principles of Corporations Law (Butterworths, 7th ed, 262
Ford, H.A.J., (1978) Principles of Company Law (Butterworths, 2nd ed, 345
Menzies, D., (1959) ‘Company Directors’, 33 Australian Law Journal 156
Paterson W.E. and Ednie, H.H. (1976) Butterworths, Australian Company Law, vol 2, 2nd ed.
Elder v Elder and Watson (1952) S.C. 49
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882

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