The Corporations Act 2001 places civil obligations on directors and officers of a company similar to the duties established in general law to avoid conflict of interest. Sections 182 and 183 provide

Contracts with the company

Directors are in breach of their fiduciary duty if they enter into contracts with their company because they are then in a position where their personal interests conflict or may conflict with the company’s interests. This is illustrated in Transval Lands Co. v. New Belgium [1914] 2 Ch. 488  in that case, the court held that the director’s interests conflicted with his duty. He breached his fiduciary duty to that company even though he did not vote on the board’s resolution which agreed to the contract. In the meantime Alphabet Pty Ltd has been providing services to Immunity & Co at a reduced rate through a contract made with Immunity & Co and signed by Alpha and Bravo as directors of Alphabet. Alpha and Bravo owed a good faith for Alphabet. They enter into contract and put themselves in a position where they may further their own interests. The directors also made personal profits through this contact --- reduce rate.

Misuse of company funds

Directors are under a duty to act in their company’s interests with respect to the use of the company’s funds. Alpha and Bravo distributed the profit as a dividend to the members. It occurred that Alphabet no longer has sufficient capital to develop the spy ware programs which could produce bigger returns for the company. They used this funds to develop their own program. Obviously, they obtain funds for their personal use. This is a misuse of company funds.

Duty of Care and Dilig ence

In general law directors have the duty of care and diligence. The care that a director is bound to take has been described as reasonable care and the diligence of directors has been referred to as a continuing obligation to keep informed about the activities of the company. The rule in Foss v Harbottle prevents shareholders from bringing a negligence action against directors on the company’s behalf. Since the directors owe their duties to the company, the rule in Foss v Harbottle regards the company as the proper plaintiff to bring the legal proceedings not the shareholders. According to Pavlides v Jensen [1956] Ch.565 , in the absence of proof of actual fraud by directors, the fraud on the exception to the rule in Foss v Harbottle does not apply to allow minority shareholders to bring an action against negligent directors on the company’s behalf. However, in Daniels v Anderson [1995] 16 ACSR 607 state that responsibilities of directors required that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. Alpha and Bravo has breached the duty of care and diligence by reducing rate. They take the advantage; they are director of Alphabet, to make a contract what benefit for them.

The independent valuer had also been used by Immunity to provide a valuation of the product. It was on this valuation that Immunity had made the offer to Alphabet. The valuer was not independent. Alpha and Bravo has breached the duty of act good faith. The most important case dealing with R v Cook [1996] ACLC 947 .

There are restrictions on voting power by majority shareholders against minority shareholders. Alphabet Pty Ltd cannot change its share capital structure to disadvantage minority. By allocation 20 shares each to the majority, Alpha and Bravo, for no consideration, and not allocating a similar amount to the minority, this is clearly disadvantage the minority.

Statutory Law

Improper Use of Position or Information

The Corporations Act 2001 places civil obligations on directors and officers of a company similar to the duties established in general law to avoid conflict of interest. Sections 182 and 183 provide that directors or other officers must not make improper use of their position or information to gain an advantage for themselves or another person or to cause detriment to the company.

It could be argued that Alpha and Bravo have made improper use of both information acquired by virtue of their position and their position to gain an advantage. Consequently they contravened s182 and s183. As managing director, Alpha and Bravo gained information about the spy ware program. They have improperly used this information for his own benefit by taking the opportunity to be involved as director of the company that will develop the spy ware program.

A contravention of these provisions is a civil penalty provision actionable by the Australian Securities and Investment Commission (ASIC). If the court finds Alpha and Bravo in contravention of a civil penalty provision it may make a declaration and order him to pay the Commonwealth a pecuniary penalty of up to $200,000 under s1317G or disqualify them from acting as director. The court could also make a compensation order, which may include profits made by them resulting from the contravention.  Furthermore, if it could be proven that Alpha and Bravo acted dishonestly or recklessly with the intention of gaining an advantage this would be a breach of s 184, a criminal penalty provision and could result in imprisonment.

Material Personal Interests

Under s 191 a director has a duty to notify other directors of material personal interests when a conflict arises unless the section provides an exemption.  

Section 195 places restrictions on voting of directors of public companies who have a material personal interest in a matter that is being considered at a directors meeting. Those directors with a material personal interest are not permitted to be present while the matter is being considered or to vote on the matter. An offence based on s 195 is an offense of strict liability.  If Alpha and Bravo have not disclosed their interest and have not removed them from position of influence over the board’s decision they will be in a position to influence the outcome of any decisions relating to the negotiations with Immunity & Co.13

Directors of proprietary companies that have a material personal interest that has been disclosed are not restricted and may vote on the matters that relate to the interest. Members of Alphabet were aware that the partners in the firm Immunity were Alpha and Bravo. Alpha and Bravo are able to vote as director of Alphabet on matters relating to the negotiations with Immunity.13

Removal of directors

The general meeting of a proprietary company can only remove a director if empowered to do so by the replaceable rules or constitution. The replaceable rule in s203C which applies only to proprietary companies, permits the shareholders by resolution to remove a director and appoint another person. In the case of a proprietary company, the constitution may permit the majority of members to remove a director. However, it is possible for Alpha and Bravo to remove Charlie. Charlie may also permit majority of members to remove Alpha and Bravo.

Remedies

Civil Remedies

As discussed above, where there has been a contravention of ss 180-184, the ASIC may seek a pecuniary penalty order, a disqualification order or a compensation order.

Alphabet Ltd may also be able to obtain a compensation order as a civil remedy for breaches of statutory duties. In addition, Alphabet Ltd may seek civil remedies for breaches of general law for example, an injunction, a compensation order, an account of profits, or rescission of contract.

Criminal Penalties

If ASIC believes that a breach of the statutory duty is so serious that a criminal penalty should be imposed it can bring criminal proceedings under s 184. A director or other officer who commits an offence and can be subject to criminal penalties if they are reckless dishonest or fail to act in good faith in the best interests of the company or for a proper purpose.

General Law Remedies

If a company has suffered a loss, then compensation can be sought for damages for negligence or deceit. As discussed above, where directors have enriched themselves at the company’s expense the company may take action for account of profits for breach of fiduciary duty.

Members’ Statutory Remedies

A member has a statutory right to enforce the constitution as a statutory contract under

s 140 and under s 1324 a member can seek an injunction to stop a director, member or other person contravening the Corporations Act 2001. However a member cannot apply for an injunction under s 1324 in relation to a breach of a statutory duty contained in ss 180-183.

Oppressive conduct

Minority shareholders may apply for a court order under pt 2F.1 ‘Oppressive conduct of affairs’s 232 where directors fail to act in the interest of the company and breach their fiduciary duties. If minority shareholders of Alphabet Ltd had grounds for such a court order s 233 confers the power to the Court to order that the company institute legal proceedings or authorize a member to institute or defend legal proceedings in the name of the company. Such an order would be appropriate in cases where a company ratifies a breach of duty by directors or if it fails to bring an action against a director for a breach of duty in circumstances where the ratification or failure is oppressive or unfairly prejudicial or unfairly discriminatory to one or more members.

In Re Spagos Mining NL (1990) 8 ACLC 1218 , Murray J ordered that two directors of the company be replaced by a newly constituted board. The new board was ordered to investigate certain transactions entered into by the company and cause the company to commence proceedings against the former directors if that was appropriate.

It is therefore possible for Alpha and Bravo to be removed as director and for the new board to investigate transactions with Immunity Ltd and bring proceedings against them.

QUESTION 2

Duty of Loyalty and Good Faith

XYZ Ltd is a public company of under s.436A. As the XYZ Ltd is listed on the Australian Stock Exchange, which engages in a range of commercial including the manufacture of herbal remedies.

As above, we discuss the fact that directors stand in a fiduciary relationship with respect to the company. One consequence of this is that they are not entitled to receive any remuneration from the company unless specifically sanctioned by the members, the replaceable rules or the company’s constitution: Re George Newman & Co [1895] 1 Ch 674 . The private school fees and HECS charges were not part of a remuneration package for the directors, given that it could be taking the debts from the company while the company may be insolvent. Under s. 588G, forbids the directors to take the debts when they reasonably know or ought to have known that the company is insolvent. The directors held the meeting to appoint the administrator the company had experienced financial difficulty in paying debts when they were due. According to that he administrator knowing the company almost insolvent so they paying the school fees from company debts and they have agree with the schools to pay the annual fees.

Duty of Care and Diligence

The director has breached of duty of care, skill and diligence in the general law under s.180. The directors of XYZ Ltd notify that some of the process that was using in the manufacturing of its herbal remembers did not meet Australian standards. The most important case dealing with Daniels v AWA Ltd (1995) the Duty of Care falls under Section 180. So the board of directors delegated the evaluation of the manufacturing process to The Risk Management Committee. They are also performed their role in advised that XYZ Ltd licence would be suspended these products already in the stores would have to be recall the company cash flow would diminish and its would face legal claims from customer and creditors. To overcome these potential problems XYZ Ltd set up a subsidiary company to take the resulting liabilities with the same board of directors as XYZ Ltd (the holding company). Given that any claims from customers, creditors and secured priority creditors. They did not exercise care in remedying the faulty manufacturing process in the future. According to that XYZ Ltd seems to ignore it and plan for winding up of the liabilities by transferring them to a subsidiary company of XYZ (Herbal) Ltd. According to the directors of duty of care where the directors did not take appropriate to ensure compliance of the manufacturing process after warning. Under section 206B ASIC has the power to disqualify the directors for period of within 5 years or to pay fine up to $200,000. Also it can be proved that the board took no action to remedy the problems.

Using confidential information

Directors are also not permitted to use for their own benefit property or information entrusted to them for use on behalf of the company. This principle includes the misuse of trade secrets, and lists of customers for the use of competitors and other confidential information. This was considered in Commr for Corporate Affairs v Green V.R. 505. In that case Green had been charged with breaches of the U.C.A.s124 which is similar to s232 of the Corporation Law. The directors of Ron acquired information that the shares in XYZ Ltd would have dropped in value. On the basis of this information he sold a significant portion of the company shares. The director of Ron has breached of the practice of insider trading. Ron was one of the directors of XYZ Company, so he knew the floating tendency of shares. Ron must sell his share to the ASX. As the above Ron has breached of criminal penalty for an individual who is found guilty of insider trading is a $200,000 fine or five years goal under s 1311.

Ron also advised his friend not to buy the shares. Ron has breached of tipping offence within the practice of inside trading under section 1002G. In s 1002G requires that when an insider commits the tipping offence if they communicate the insider information to someone else and the insider knows or should know who is likely to buy or sell the shares or some one produce to buy or sell the shares for them. Ron was telling to his friend the value of the shares has dropped from around $4.75 a share to around $2.50 and with information Ron friend did not apply any shares and did not sell any shares from XYZ Ltd. Also Ron friend could sell the shares with short term based on the director of Ron information. So Ron has breached of the tipping offence under s.1043A (2). In the Part 7.10 of the Corporations Act Ron has prohibited that such market conduct.

Statutory Law

Payments and other benefits to directors

The annual private school fees were part of a remuneration package for the director, it seems feasible that they wish to complete of their payments before likely creditors or other members of the company. The director has breach of duty to at good faith in the best interest of the company under section 181(2). This section requires that remunerating the directors and other officers can consider their own interest but where there a conflict between it and the interest of the company, the company must always come first. Which is also under in section 191 of statutory duties to avoid there a conflict of interest.

Lifting the veil of incorporation

The recognition that a company is a separate legal entity distinct from its shareholders is often expressed as the “veil of incorporation”. This is doctrine of separate legal personality and the reason for that it setting up the subsidiary company was need to be overcome their problem from outsider such as creditors and other unsecured creditor where the veil of corporation can be lifted. Since the House of Lords handed down its decision in Salamon v Salamon & Co Ltd v Morely , it has been recognized that an inflexible application of the concepts of separate entity and limited liability, with all that they imply, can result in undesirable consequences. There are various statutory provisions that have the effect of lifting the corporate veil. In addition, the courts have sometimes sought ways to look behind the company form. XYZ Ltd transferred the license, existing and contingent liabilities to XYZ (Herbal) Ltd .The subsidiary company did not continue manufacturing of all the herbal until license had been suspended and products had been recalled. XYZ Ltd formed wholly owned subsidiary company XYZ (Herbal) Ltd with the same board of director as XYZ Ltd (the holding company. in this case the court will not allow XYZ Ltd setting up of XYZ (Herbal) Ltd and being a separate person from its members and those who manage its operations. According to the case it for company itself not for them. So this is not breach of any duty by law.

The company secretary

Under s 1002G Ron has breached the practice of insider trading. According to this section the trading offence occurs when some one with share price information is not generally available to the public nut likely to have an affect to the company on share price by sellers or buyers those shares.

Remedies

Civil Remedies

As discussed above, where there has been a contravention of ss 180-184, the ASIC may seek a pecuniary penalty order, a disqualification order or a compensation order.

XYZ Ltd may also be able to obtain a compensation order as a civil remedy for breaches of statutory duties. In addition, XYZ Ltd may seek civil remedies for breaches of general law for example, an injunction, a compensation order, an account of profits, or rescission of contract. If the court finds John in contravention of a civil penalty provision it may make a declaration and order him to pay the Commonwealth a pecuniary penalty of up to $200,000 under s1317G or disqualify them from acting as director.

Criminal Penalties

If ASIC believes that a breach of the statutory duty is so serious that a criminal penalty should be imposed it can bring criminal proceedings under s 184. A director or other officer who commits an offence and can be subject to criminal penalties if they are reckless or intentionally dishonest or fail to act in good faith in the best interests of the company or for a proper purpose.

General Law Remedies

If a company has suffered a loss, then compensation can be sought for damages for negligence or deceit. As discussed above, where director has enriched himself at the company’s expense the company may take action for account of profits for breach of fiduciary duty.

S 588V of Corporation Act 2001, provides that a company will be insolvent of s 95A when it is unable to pay all of it’s’ as and when they fall due. In this case XYZ Ltd to be placed in administrator and the board of director know it the company might be insolvent if the subsidiary company winding up, the parent company was still liable for the debts, even if the directors of parent company ranked themselves as a secured priority creditor before. In other words, not only the repayment to the priority secured creditor (Parent company) was avoidable, the parent company had to indemnify all the debts incurred by the subsidiary company.

Reference

1. Phillip Lipton and Abe Herzberg, Understanding Company Law (10th ed 2001), Lawbook
2. Paula Hanrahan, Ian Ramsay and Geof Stapeledom, Commercial Applicantions of Company Law (5th ed 2004), North Ryde
3. Susan Woodward, Helen Brid and Sally Sievers, Corporations Law in Principle (6th ed 2003), Lawbook
4. Central Queensland University 2004, LAWS19032 Company and Association Law:StudyGuide, Central Queensland University, Rockhampton.
5. Bent Pettet Company law (2001), Longman
6. Simon Fisher, Leanne Wiseman and Colin Anderson, Corporations law (2001), Butterworths

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