Business Laws

Business Laws

Part A

Issue 1

Through the analysis a question arises that whether the directors of SkyTrans have failed to comply with the statutory directors duties as provided under the sections 180-184 of the Corporation Act 2001 (Cth) (CA)

Rule

Any person who has been found to be a director of a company according to the rules of the CA (Section 9) is bound to follow the duties which have been set out by the CA under section 180-184. The duties also comprise of common law equitable duties which the directors of the company have to abide with. These duties state that the directors have to work with “due care and diligence”, “in good faith and proper purpose” , “not making misuse of position” and “not making misuse of information of the company” to bring a loss to the company.

The duty of due diligence and care

This duty is stipulated through the provisions of section 180 of the Act. The section is sub divided into two parts where the first part is in relation to the breach of the duty and the second part incorporates the common law provisions of the business judgment defense[1].

The duty of duty of due diligence and care is stipulated via section 180(1). Under this duty the directors are required to continue their work with respect to the company with a degree of care and diligence which any reasonable person would have been expected to depict in the role of the director. A similar kind of duty is also imposed in the directors via the provisions of common law[2]. The duty has been emphasized in recent court cases where it had been applied to approval of financial statements in the case of Australian Securities and Investments Commission v Healey and Others [2011] FCA 717[3] and on board approval of statements issued by a company in the case of ASIC v Hellicar [2012] HCA 17[4]. The duty is complied or not can be found out by applying an objective test which is stated in the section. As discussed above the test stipulates that the duty will not be deemed to have not been complied where the reasonable director in similar situation did not indulge into making similar decisions. Further in the case of Australian Securities and Investments Commission v Cassimatis (No 8) – [2016] FCA 1023[5] it has been ruled that the duty is applicable even on the sole shareholders of the company and the powers of the majority shareholders to ratify the decision of the directors would not be adequate to save the directors form the contravention of the duty.

The duty of good faith

The duty is set out under the rules of section 181 of the CA. Under the duty the director is required to “act in good faith and in the best interest of the company.” Further their actions under the duty have to be carried out for a proper purpose. The duty incorporates the common law duties to avoid conflict of interest  and in relation to this give priority to the benefits of the company. The duty also incorporates the duty of trust and fidelity which is called fiduciary duty[6]. One of the primary cases where the breach of the duty had  been discussed is the case of Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1[7]. In this case it had been ruled by the court the duty to act in good faith and proper purpose are both different duties. Further it had been stated by the court in the case of Australian Securities & Investments Commission v Adler (2002) 168 FLR 253[8]  it had been held by the court that the director violated the duty under the provisions of section 181 by letting the company to purchase high risk assets when it actually had to reduce its risk exposure.

The duty of not to improperly use position and information

Under this duty the directors are required to not indulge into improperly using their position for the purpose of gaining a personal advantage or the advantage of any third party which may cause detriment to the company. The duty has been stated through section 182 of the CA[9]. a similar duty is provided under section 183 under which directors are required to not indulge into improperly using information for the purpose of gaining a personal advantage or the advantage of any third party which may cause detriment to the company[10].

Application

It has been stipulated via the scenario that Simon and Marilou are the directors of SkyTrans which carries out a business in form of a mobile phone store. It is further provided that Simon is the Managing directors of the company and he is looking after the finances of the company. It has been suggested by the case study that there has been failure on the part of Simon to pay supply Co who supplied for the company.  In relation to such circumstances it can be provided that Simon has breached the provisions of section 180 of the CA. As he is the director of the company he has been provided with an obligation to ensure due diligence and care in relation to his operations. As discussed above the test stipulates that the duty will not be deemed to have not been complied where the reasonable director in similar situation did not indulge into making similar decisions. When the test is applied it can be analyzed that Simon had not indulged into careful and diligent working as it would have not appeared to a director diligent and careful to not pay the creditors of the company. This is because the reasonable director will think about the reputation and goodwill of the company. In the case of ASIC v Cassimatis the directors had been held liable as the company has suffered loss of good will. As the actions of Simon has made supply co to not provide supplies to company without cash there has been loss of reputation to the company and thus Simon will be liable for the contravention of section 180(1).

Through the comparison of the rule in section 181 and the facts of the case it can be further states that Simon as breached the provisions. This is because under the section it is the duty of Simon to act in good faith and proper purpose for the best interest of the company. The scenario provides that Simon indulged in purchase of luxury cars and threw a lavish party when the company was subjected to financial difficulties. These actions are in pursuit of personal interest only rather than the interest of the organization. These actions are also not in proper purpose of the company and have been evidently carried out in bad faith.

Simon has also made a breach in relation to the provisions of section  182 and 183 of the CA. the sections imposes an obligation on Simon not indulge into improperly using their position or information  for the purpose of gaining a personal advantage or the advantage of any third party which may cause detriment to the company. However personal profits have been pursued by him with respect to the procuring the luxury cars and getting other personal benefits. This has been evidently done by him through the use of his position and information from SkyTrans.

As discussed above when the directors have failed to take into consideration the duties under section 180-183 in a way which may be regarded as reckless and negligent the director can made liable for an offence under the legislation. As Simon has deliberately indulged into the actions provided through the facts he would be held liable for contravention of the provisions.

Marilou have also contravened the provision of section 180(1) as it was his obligation as a director of the company to exercise independent judgment in relation to managing the affairs of the company.

Conclusion

Concluding the analysis of this section it can be stated that Simon and Marilou have been guilty of contravention of duties as discussed above.

Issue 2

Another issue which has been analyzed with respect to the case study is whether the provisions of section 191 of the CA have been breached.

Rule

The CA via the rules under section 191 imposes an obligation of the director to disclose all matters to the board where they may have a material personal interest[11].

Application

It is clearly provided through the scenario that Simon has a material personal interest in all the transactions which have been undertaken by him.  Thus it was his duty to disclose to the board such interest which he has not and thus have violated the provisions of section 191 of the CA

Conclusion

Provisions of section 191 of the Act have been violated by Simon

Issue 3

It also needs to be identified that whether the directors of SkyTrans  have failed to observe the insolvent trading rule under section 588G of the Act or not.

Rule

The rules which prohibit the directors of an organization not to indulge in insolvent trading have been provided via the provisions of section 588G of the Act.  It has been provided through the provisions of the section that the section will be applicable when an individual is the director of a company which the company has incurred a debt; at the time in context the company is insolvent or the company becomes insolvent through getting the debts; at the time in context there are reasonable grounds through which it can be suspected that the organization is insolvent, may come become insolvent; the time in context initiates after the commencement of the act[12].

Sub section (2) of the section 588G provides that where a person fails to prevent a company from incurring debts the provisions are violated if the person has suspicion that such situation may take place and a reasonable person would have been aware of the situation[13].

Sub section (3) of the section 588G provides that an offence has been committed by a person when a company has incurred a debt, the person is the director of the company at such time, the company has incurred the debt or is likely to incur the debt being insolvent, the person suspected about such insolvency and with dishonest intentions failed to prevent the company from getting into the transaction[14].

Application

Simon was dealing on behalf of the company even where he had knowledge that the company is in significant financial difficulties. In the given situation as discussed above the provisions are applicable on a person who was the director while the company indulged in insolvent trading. Further it can be stated that the company has incurred a debt which is worth $35000. At the time in context when the dealing were done by Simon the company is insolvent or the company became insolvent through getting the debts.  At the time in context there are reasonable grounds through which it can be suspected that the organization is insolvent, may come become insolvent; the time in context initiated after the commencement of the act. Thus the section has been violated by the company.

Under subsection 3 an offence has been committed by Simon when a company has incurred a debt, Simon is the director of the company at such time, the company has incurred the debt or is likely to incur the debt being insolvent, any reasonable person in the place of Simon would have suspected about such insolvency and Simon with dishonest intentions failed to prevent the company from getting into the transaction.  Simon had purchased cars worth $110000 and thrown a lavish party worth $ 40000 even where the company was facing financial difficulties and thus it can be stated that he had violated the provisions of the CA in a dishonest and malicious manner for which he would be made personally liable under section 588G (3) of the CA.

Conclusion

The insolvent trading provisions have been breached by the directors of the company and specifically Simon had breached the provisions in a dishonest manner.

Issue

Whether the company has not complied with the duty of maintaining appropriate financial records under the provisions of the Act is also an issue in this case

Rule

Rules have been provided via the provisions of CA that a registered company has the obligation of maintaining proper financial records. These rules have been provided under the provisions of section 286 of the CA[15]. The section stipulates that written financial records have to be maintained by a company through which accurate information about financial and performance position of the organization. The financial records also should be prudent enough through which true and fair statements can be made by the auditors in relation to the company. These records have to be kept for seven years.

Application

It has been stated via the situation that Simon has not took necessary steps to maintain financial records of the company in a way which has been stated though the provisions of s. 286 of the Act. Therefore it can be stated evidently that the provisions of this section has been violated.

Conclusion

SkyTrans have violated the provisions of section 286 of the CA.

Issue

The issue in this case is to determine the position of Marilou in relation to the above discussed contraventions

Rule

It has been stated through the provisions of section 180(2) of the CA that a person would be held to not have breached section 180(1) if the decision had been taken in good faith, the decision was an informed decision, the decision has no personal interest and it is not a decision which no reasonable director would take in the situation[16].

It has been provided via the rules under section 189 of the CA that a director would not be held to violate a duty if his actions were in reliance of an advice provided by a third party which has been believed to have been true in good faith and by making an informed decision[17].

Further according to the rules under section 588H of the CA where a person is able to show that when the debt had been incurred by the company the person reasonably believed that the company is solvent or would still be solvent after the transaction it is a defense against section 588G of the Act.  Defense can also be obtained where it is proved that a reasonable and competent person’s advice has been followed by the director who had the responsibility of providing financial advice. In addition the section can be applied if the director had expected reasonably through reliance upon the advice of the other person that the company is solvent of likely to be solvent.

Application

Through the scenario it has been stated that Marilou had reasonably believed upon the financial advice which was being provided by Simon. In addition he did not have any personal interest in the transaction it was had in good faith, it was an informed decision and it is not a decision which no reasonable director would take in the situation. Further Simon is a reasonable and competent person who had the responsibility of providing financial advice and Marilou has reasonably relied on such advice. In addition Marilou had expected reasonably through reliance upon the advice of Simon that the company is solvent of likely to be solvent. Thus he is not liable under the situation.

Conclusions

Marilou is Not liable for breach of duties as defenses under section 180(2), 189 and 588H apply.

Part B

Issue

The issue analyzed for this part of the assignment is to identify the remedy for the contravention made by Simon

Rule

It has been provided through the provisions section 180-183 that when such provisions are contravened civil penalty provisions are invoked. The civil penalties have been provided under s 1317E[18].  The court must provide a declaration with resects to the contravention of civil penalty provisions. There are various remedies which the ASIC have the right to seek in relation to civil penalty provisions.

The ASIC may seek suspension of the director form being a manager who has breached the provisions for a period as deemed fit by the court under the provisions of section 206C of the CA[19].  In the case of Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) – [2016] FCA 42 the court imposed a ban of 20 years.

The ASIC may seek pecuniary penalties form the court against the person who has violated the civil penalty provisions in compliance with provisions of 1317G of the CA where a maximum fine of $20000 can be imposed by the court[20]. In the case of ASIC v Lindberg [2012] VSC 332 the court awarded a penalty of $100000  and a ban of 2 years for contravention of the civil penalty provisions[21].

The directors can be personally held liable under the provision of section 1317H the directors can be made to provide compensation to those who have incurred losses where civil penalty provisions have been violated[22].

Criminal sanctions are also imposed under section 6.1 of the criminal code for breaching section  184 and both section 6.1 and 6.2 for breaching section 588G

Application

It has been analyzed that although Simon and – have breached the civil penalty provisions, Marilou have escaped the penalty through the application of the defenses. However in this case Simon has been found to have violated civil penalty provisions as well as criminal provisions under the CA. thus he would be liable under 1317G, 1317H, 206C and also personally liable in a criminal manner for the above identified breaches.

Conclusion

The above penalties are applicable

References

  ASIC v Hellicar [2012] HCA 17

  ASIC v Lindberg [2012] VSC 332

  Australian Securities & Investments Commission v Adler (2002) 168 FLR 253

  Australian Securities and Investments Commission v Cassimatis (No 8) – [2016] FCA 1023

  Australian Securities and Investments Commission v Healey and Others [2011] FCA 717

  Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1

  Corporation Act 2001 (Cth) s 180

References

Corporation Act 2001 (Cth)

Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103

McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).

Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146

Royal British Bank v Turquand (1856) 6 El & Bl 327

[1] Corporation Act 2001 (Cth) s 180

[2] Corporation Act 2001 (Cth) s 180 (1)

[3] Australian Securities and Investments Commission v Healey and Others [2011] FCA 717

[4] ASIC v Hellicar [2012] HCA 17

[5] Australian Securities and Investments Commission v Cassimatis (No 8) – [2016] FCA 1023

[6] Corporation Act 2001 (Cth) s 181

[7] Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1

[8] Australian Securities & Investments Commission v Adler (2002) 168 FLR 253

[9] Corporation Act 2001 (Cth) s 182

[10] Corporation Act 2001 (Cth) s 183

[11] Corporation Act 2001 (Cth) s 191

[12] Corporation Act 2001 (Cth) s 588G

[13] Corporation Act 2001 (Cth) s 588G(2)

[14] Corporation Act 2001 (Cth) s 588 (3)

[15] Corporation Act 2001 (Cth) s 286

[16] Corporation Act 2001 (Cth) s 180(2)

[17] Corporation Act 2001 (Cth) s 189

[18] Corporation Act 2001 (Cth) s 1317E

[19] Corporation Act 2001 (Cth) s 206C

[20] Corporation Act 2001 (Cth) s 1317G

[21] ASIC v Lindberg [2012] VSC 332

[22] Corporation Act 2001 (Cth) s 1317H

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