Commercial Applications of Company Law by Pamela Hanrahan - Ian Ramsay

Question: Anthony, Ben, Catherine and Daniel are directors of Chaser Ltd., a company whose business is wine bottling. Given the downturn in the economy and entry of new countries into the "New World" wine market, competition especially in Asia is becoming increasingly stiff. The directors of Chaser Ltd. feel that it would be prudent to diversify and invest in other business opportunities. During the Easter vacation, Anthony caught up with his old friend from university, Wayne, who works for a green energy company in Norway that predominantly specialises in Tidal energy. Tidal energy is a very new form of energy that is picking up momentum in Europe and the Atlantic coast of the USA. The power created through tidal generators is generally more environmentally friendly and causes less impact on established ecosystems. Although not yet widely used, tidal power has a potential for future electricity generation. None of the energy companies in Australia currently use this form of energy. At the nex t board meeting Anthony mentions tidal energy as a possible business venture for Chaser Ltd. Anthony invites Wayne who has just formed a company, Westpool Pty. Ltd. that makes tidal stream generators, to come and speak to all the directors of Chaser Ltd., at their next meeting about tidal energy for thirty minutes. Wayne is a very convincing speaker who showed them great 3D underwater pictures of the tidal stream generators his company makes. After Wayne leaves, the directors are all very excited at the prospect of being pioneers in the field of tidal energy in Australia and believe that this will be a profitable business. Without much further discussion they decided to invest $20 million into this venture and to give the sole contract to supply tidal steam generators to Westpool Pty. Ltd. Three months later Chaser Ltd.'s tidal energy business is a disaster. They discovered that the Australian waters is not suitable for tidal energy. While it may be suitable in Europe and the USA, A ustralia is not a suitable site for tidal energy, mainly because of the Great Barrier Reef. The directors later discovered that although Wayne had been very convincing in his speech to them he really was not an expert in tidal energy and actually held an insignificant position in his company in Norway. Much to the directors' surprise, they discovered that Anthony is a major shareholder of Westpool Pty Ltd. Advise the directors of Chaser Ltd whether they have breached their directors duties under both the Corporations Act 2001(Cth) and general law. Answer: Directors are formally appointed by the company and as they accept this position they carry with them various statutory, common law and equitable obligations to be obliged by the members of the board of directors to the company/corporation that has employed them (ICAEW, 2015). There are certain duties owed by the directors of the company which they are required to follow. They fall under two categories namely, general duties which states them to act in the interest of the company, to exercise the powers given as a director in the right direction and purpose and not for any other inappropriate use. The second is the fiduciary duty in which they should not take advantage for themselves and cause harm to the company (Redchip Lawyers). The directors of the company are liable to the company in case they make any gain by conducting breach of their duties. The directors are required to be faithful to the company and should avoid conflict of interest. The directors are also required to work with high degree of skill, diligence and care and are expected to act in good faith, with utmost honesty and prevent the company to get into trading when it is incurring debts. In the present case of Chaser Ltd. the directors of the company wanted to diversify their business in an area where they can earn more profits and which has not been fully explored. With a similar proposal in hand proposed by Wayne, friend of Anthony they got into the business of tidal energy after being fully convinced by Wayne. In this the director who is majorly in default is Anthony. He has not revealed all the facts to the other directors about the proposal. He did not tell other directors that he was a major shareholder in Westpool Pty Ltd. As per Section 181 of the Corporation Act 2001 the directors are required to act in good faith, in the best interest of the company and for proper use. They are required to make the best judgement for the company where they decide of what decision to take and what not to take in matters of business operations of the company. The directors should not make any gain by making improper use of their position in the company. Also they are not supp osed to make any gain by using the information in an improper manner. It is also important for the directors to make full disclosures (Spear D, 2013). Similar was the case of CMS Dolphin Ltd V Simonet , CMS, the claimant in the case had said that the Mr. Simonet, the defendant earlier was the creative director with the company and after he left the company, he established his own new company . After his resignation from CMS many employees also left the organisation and major clients of the company also diverted that side. There was also conflict with regard to the introduction of capital in the business. The claimant said that the defendant had made profits by using the resources and sources of the first company. This is a breach of duty done by the defendant being the director of the company. He has done breach of duty of loyalty to the company. To this the defendant claimed that he had no duty to be obliged with the company as he was no more associated with the company in any way. It was held that the power to resign is not itself a fiduciary duty. The director who has resigned from the company cannot take the business opportunities of old company and yield advantage out of it. The defendant has done wrong and hence he is personally liable for the wrong done by him. The judge said that the retiring director who has taken advantage out of maturing business opportunity of the company is to be treated in a way where the opportunity is to be treated as the property of the company and as a director he has fiduciary duties with the prior company. His relationship with the old company is just like a trustee who is retiring without properly accounting for the trust property. In this case the director has become the constructive trustee of the company in which there exists conflict of interest and he has used his position in the company by not acting in faithful manner. He has cheated the company and has taken advantage of the good faith position as a director he hel d in the old company (Swarbrick ,2014). This case illustrates how Anthony who is a director in Chaser Ltd took advantage by being a major shareholder in Westpool Pty Ltd. A director is not allowed to take interest from the third party in lieu of his position in the company (CLSC). He knew that the directors of the company are interested in diversification of their existing business and so taking advantage of this information he approached his friend who was also the director of Westpool Pty Ltd. to convince other shareholders to get into the same business by investing in this venture. Anthony knew that his friend was very good at convincing others but was not an expert in the tidal energy area and also that he holds an insignificant position in the company in Norway. Anthony having all the information has cheated the company and its members. Being a director of the company the other three directors trusted him and his friend of getting a business opportunity which is profitable for the company. By taking out money from Cha ster Ltd he has earned money being a major shareholder of Westpool Pvt Ltd. This was not in the best interest of the company as ultimately the Australian water was not suitable for tidal energy and the project was a big failure. He has violated various sections of the Corporation Act 2001. As per Section 182 of the Corporation Act, 2001 the directors must not make improper use of their position to gain an advantage for themselves or cause harm for the corporation (Corporation Act, 2001). Contravention to this section leads to civil penalty (CCA). Anthony made use of his position where he made full effort to take the advantage of the present situation of diversification of business and getting investment in a company where he would earn profit by causing loss to the corporation where he is a director. Knowing all the facts he still continued with the transaction and made an investment of $ 20 million and gives the sole contract to supply tidal steam generators to Westpool Pty. Ltd. Similar circumstances occurred in the case of ASIC v Adler . On June 2000, HIH Casualty and General Insurance Ltd (HIHC) gave an unsecured payment of $ 10 million which also not documented anywhere to Pacific Eagle Equity Pty Ltd (PEE). PEE was controlled by Adler which is the trustee of Aust ralian Equities Unit Trust (AEUT). Adler was also the non-executive director and a major shareholder of HIH. In the whole process of procuring loan PEE became the trustee of AEUT. PEE bought $ 4 million shares of HIH and ultimately sold it at a loss for $ 2 million. This was a gross loss investment done by the company. Because of the trust relationship held by Adler he was given $2 million by AEUT. All these transactions were carried in the company without any information been given to the directors of the company or by taking the shareholders approval. Moreover as far the disclosures were concerned; no disclosure was made to the board or the HIHs investment committee. The loan was not given under proper terms as there was no security taken for the loan granted nor any document was there to support it. The whole process was carried on to get the attention of HIH directors. Adler was held guilty as an officer of both HIH and HIHC. The court held that Adler did not comply by the direc tor's duties as stated in the Corporation Act, 2001. He has contravened section 180 (duty to act with care and diligence), section 181 (duty to act in good faith and for proper purpose), section 182 (duty not to improperly use position) and also section 183 (duty not to improperly use information). The director have acted in such a manner so as to benefit his interest and gain advantage (Silberberg A. Hammerschlag G.). The court held that Adler shall be banned to act as a director of the company for a period of 20 years and another director, Williams was given a ban to act as a director for a period of 10 years. The court also imposed monetary penalties on Adler - $450,000, Adler Corporation - $450,000, Williams - $250,000 and Fodera - $5000. This was not all the court also ordered Adler, Adler Corporation and Williams to pay compensation of $7,986,402 to HIHC. This case involved various breach of duty under the Corporation Act 2001. The reason for losses of HIH was bad governance in the company. (Law Teacher, 2015) The duties under Companies Act are applied in the same manner as the common law (The National Archives, 2006).The Companies Act 2006 also states certain duties that the directors are required to follow: Acting within the powers they have been given Promoting the success of the company Independent judgement Care and skill Loyalty and conflict of interest In the present case there is also violation of various duties under the Companies Act 2006. Under Section 172 of Companies Act 2006, the directors are required to promote the success of the company and its members. He should take those decisions which he assumes would bring success to the company in the long run keeping in mind the interest of employees, relationship with suppliers, customers and others and what impacts will it have on the operations of the company, community and the environment. The director is required to act in a fair manner with its members. Anthony has not obliged by any of these duties. Other than the fact that he did not take any step to promote the success of the business he rather took the company into downfall by making it invest such a huge amount in a venture which is not feasible or profitable. He has just kept his motive in mind of earning out of the investment made by Chaser Ltd in Westpool Pty Ltd. of which he is major shareholder. He has not been fai r to the members and company. Also under section 174 of Companies Act 2006 the directors are required to do acts with care and greater degree of skill. There are both objective and subjective standards to it (Mansons P.) Anthony has not taken care of companys assets and capital and rather than taking a decision to diversify the business in a project which is feasible and profitable he made the company invest in area in which he is a major shareholder. Considering the other three directors, Ben, Catherine and Daniel, they have also not taken the decision of diversification of business in new area with due care and diligence. They just believed on Anthony and the claims made by his friend, Wayne. They did not do much research and discussion before investing an amount of $20 million in the tidal energy venture which came as a big failure to them. If they would have acted diligently this loss would not have taken place. All the decisions which the directors take for the company are judged by analysing as to what could be done to benefit the company to the utmost. Under the Common Law the directors are under the duty to exercise discretion. This means that the directors should use their knowledge, information and experience in making a decision. They can discrete the same but with utmost care (LSCSA, 2012). In this case all the directors have just believed on the claims made by Wayne and did not use their knowledge to know the market and understand as to why not this project has ever been explored in Australia. Had this been done there would had been no question of repenting on the basis that the water in Australia is not suitable for tidal energy projects and that the company has made a wrong decision by investing in Westpool Pty Ltd. The next duty under Common law is to exercise powers for proper purpose. Here Anthony being the director of the company has not used his position in the right manner (LSCSA, 2012). He got the company invest in such a project which cannot be pursued at all. He has a wrong purpose to earn as a shareholder in Westpool Pty Ltd. from the investment made by Chaser Ltd. This is breach of duty by Anthony. Another duty under Common law which the directors of Chaser Ltd did not oblige by is conflict of interest. The directors are in fiduciary duties with the company and its shareholders (Korbel A Delaney S., 2014). The directors cannot use an opportunity of the business for its own personal goal where ultimately the sufferer would be the company (LSCSA, 2012). The directors owe duties to the company and hence no conflict of interest can come in between the same. They have to forego all their personal gains. Anthony was not loyal to the company and its members as he did not tell them about his shareholding in Westpool Pty Ltd. while getting the investment done from Chaser Ltd. to Westpool Pty Ltd. He had a personal interest of earning from the investment made. This is a clear example of conflict of interest. His duty is to promote the interest of the company. He has ignored this and made personal gains for himself. No director is allowed to get into a transaction where there is a confli ct of interest between the interest of director and his duty towards the company in order to ensure that the company can make gain to the maximum. Anthony was involved in conflict of interest where he made personal gains from the investment made in Westpool Pty Ltd. The duties of directors in Australia are made in order to promote good governance and work for the benefit of the company (PWC, 2011). The directors are required to use the information for proper purpose (Barker D., 2014). The director when makes use of companys information in a dishonest manner in order to gain advantage for himself directly or indirectly shall be illegal (AUDA). Utmost care in decision making is required. Law gives various remedies to the company in case the directors of the company breach their duty like opting for injunction, claiming compensation, restoration of companys property, rescission of contract, accounting for profits and summary dismissal. The directors are the agents of the company and they should work towards the promotion of business of the company. Directors are the ones who manage the affairs of the company on behalf of its shareholders who are the owners of the company. Therefore, it is very necessary that the activities of directors should be re gularly monitored and proper action be taken time to time. It needs to be kept in mind that there are watchers for the various activities the directors perform. A wise decision taken by a director helps in better performance and profits of the company. Therefore, being an agent of the company they are duty bound and accountable for their actions and decisions. 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