Masters Of Professional Accounting

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Masters Of Professional Accounting

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Masters Of Professional Accounting

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Question:

Under section 180(1) of the Corporations Act 2001 (Cth), directors have a duty to act with care and diligence, according to the size of the company and according to the responsibilities expected of that particular officer. Under section 180(2), there is a defence that the decision was a proper one under the circumstances, even though the decision later turns out to be not so good for the corporation.
What is the criteria that a director needs to satisfy under section 180(2) in order to establish this defence? Do you think that section 180(2) does a good job in protecting directors in making business decisions? Does it need to protect director’s better?

Answer:

Discussion on section 180(2) of Corporation Act 2001 (Cth)
The Section 180 under the Corporation Act 2001 suggests that the directors of any company must exercise their duties with required care and diligence in order to meet the purpose of the company in best possible way. At the same time, the section 180(1) in the Corporation Act 2001 (Cth) states that the directors of the companies must conduct their duties with proper care and diligence and by considering responsibilities of the directors and the size of the organization or company. However, on the other side, the 180(2) under the same act that is Corporation Act 2001 states about the defence that the decision or actions of the directors must be proper under the particular circumstances, however, it may happen that the actions taken by the directors will not provide such advantage to the company in future.[5]
However, this defence under section 180(2) of Corporation Act 2001 (Cth) can be established only if the following criteria are met. The criteria are stated as under:
The first criterion is the director must take the decision or action in order to fulfill some good reason or for an appropriate reason that will serve the company a good result in that specific circumstance.
The second criterion is that the director of the company must not have any personal interest on that action or decision.
The director of the company who has made the decision or taken the action must inform about the main subject matter behind the particular decision or action. The subject matter must be appropriate or proper to be believed.
The last criterion is that the decision or action taken by the director must provide the best interest to the company or organization.
Therefore, these are the criteria that the director of a company must satisfy in order to appeal for this defence under section 180(2) of Corporation Act 2001 (Cth).
As per the above discussion and as per the section 180(2) under the Corporation act 2001 (Cth) it can be said that the section 180(2) can protect the directors of the company at the time of taking decision for the business. This particular section of the Corporation Act 2001 (Cth) provides such a guideline that shows the right path to the directors of the company. The section 180(2) states how the directors must take their decisions. This means the section talks about the factors or situations that the directors must consider at the time of taking the decision. At the same time, the section also states that if the directors fail to maintain the guidelines then the directors will be penalized by the court.
The section 180(2) of the Corporation Act 2001 (Cth) states that the director of the company must consider the goodness of the company and must not consider his or her personal interest. If the director of a company takes any decision as per this particular act or this particular section of the Corporation Act 2001 (Cth), then there are more chances of taking decision in order to achieve best interest of the company as per the particular situation in which the decision is being taken. On the other side, if the director takes the decision to increase the value of the organization or company then there are more possibilities for the personal growth of the director also. This means the Section 180(2) under the Corporation Act 2001 (Cth) guides the directors of the company in achieving their personal growth by fulfilling the company’s interests in best possible manner.

Need for expanding defenses available under Section 180(2)
Under Section 180(2) the defenses are available to a director under the following circumstances:

The directors have acted with a bona fide intention and for a proper purpose;
They have no material interest in the judgment which they have made

The judgment should be rational

They have made the judgment keeping in mind the best interests of the Corporation.

Under the present regulatory regime the defenses are narrow and it is difficult for directors to explain or defend a short term risk which they take in response to the rapid changes in the market. The test laid down under Section 180(2) is an objective test which requires rationalization of judgments made by the Directors. This will put Directors in great difficulty who tend to take huge risk. Many persons who are eligible and who have an innovative mind and who are prone to take risks, as a result, hesitate to become a Director. The defenses available under Section 180(2) are not of much use and there is necessity of a more wide and broad defense provision which would allow the directors to take vibrant risks and which would allow the economy to prosper and grow in the light of brave steps taken by the Directors. [6]

Conclusion
During this study it has been identified that there are different types of legal structures available to a business organization. The discussion in the question 1 of the study has identified that the business of Denise and Freda is a partnership business and the present poor financial situation of the company can be improved if the partners of the company convert the structure of the company into a limited company. The study has also found out how a non executive director and a minor shareholder can protect himself or herself from any unethical decision taken by the directors of the company. In the answer of question 2, it has been identified that the directors of The Best Coffee Limited have breached their duties and have not shown proper care and diligences in their activities. In question 3, the study has stated about the rights that Rick can apply by using the sections 232, 181 and 182 of Corporation Act 2001.
The question 4 of the study discussed about the section 180(2) of the Corporation Act 2001 (Cth) and identified that there are different criteria those are important to be maintained by the directors of the company establish the defence. The answer of the same question also suggests that the section 180(2) provides a better protection to the directors of the companies in taking decision for the business.

Bibliography
[1] Scott, Jason, Business Structures: What Legal Designation may be Right for You? (Journal Publications Inc, 2014) vol 30
[2] Anonymous company Director (Oxford University Press, 4th ed, 2012)
[3] Lowry, John, ‘The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey’ (2012) 75 The Modern Law Review 249
[4] Holland, Peter and Amanda Pyman, ‘Trade Unions and Corporate Campaigning in a Global Economy: The Case of James Hardie’ (2012) 33 Economic and Industrial Democracy 555
[5] Baxt, Robert, ‘The Law Relating to a Director’s Duty of Care and Diligence: Giving a More Encouraging Interpretation in the Federal Court’ (2015) 89 Australian Law Journal 843
[6] Fox, Judith, ‘Honest and Reasonable Director Defence’ (2015) 67 Governance Directions 218.

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