Liabilities on officers and directors of an Australian company under Corporations Act 2001
A company is a business structure that works with the minds of its directors and officers. Directors and officers of a company do act on behalf of the company and therefore considered as agents of the same. This is the reason that these people have a fiduciary relationship with the company. They are required to act in the best interest of the company. In every nation, a separate legislation is there to regulate the affairs of the company. Corporations Act 2001s is the federal level legislation of Australia. This act imposes liabilities on officers and directors of an Australian company under various sections.
However, in the recent times, many of the cases have been reported the cause of which the scope of this act has been questioned. Many of the section such as 180, 181, 182, 183, 674, 1043 and so on are there in which a director/officers of corporations are required to perform their duties. Most of these sections are there to protect the interest of shareholders only. This is a major issue in the field of corporate governance. According to the principles of corporate governance, a company must act in a manner keeping the interest of all stakeholders in view but not only the shareholders. The report presented hereby consist a snap of current scenery, the expectations of stakeholder from the act and conclusion thereof.
This act provides a set of duties and obligations for the directors and officers of the company. The reason behind the imposition of duties is that these people are liable to manage the affairs of the company. A company is an artificial person, which depends on its directors. Although in addition to being an artificial person, a company is also a separate legal personality. The same can enter into a contract with a third party. Further, the same can also run the business in it is own name. Law gives birth to a company. A person who deals with a company actually deals with the directors of the same. A company can sue and can be sued by a person. As directors have huge powers to take decisions on behalf of a company, the same is liable to perform their duties in a manner that brings the best positive results to the same.
Some general duties of a director and officer of a company are defined under the Division 1 of Part 2D of the act. Section 180 (1) of the act says that a director and officer of a company that they must discharge their obligation and duties with due care and diligence. The section ultimately demands such people to act like a reasonable person. Section 181 of the act is also an important one in the area of director duties. This section says that it is expected from every director and officer of a company to do the acts in the good faith of the company and for an appropriate purpose. On the other side, section 182 of the act states that no director, secretary, employee, or an officer of a company must ever misuse their position in the company to earn personal benefits.
Expectations of stakeholders from the act
Where section 182 prohibits the improper use of position, similarly section 183 of the act prohibits the improper use of available information and provides that an officer, an employee, a director, or the secretary of the company must not use the business information for their personal benefits.
The duties mentioned under section 180 to 183 are the general duties. There are many other sections, which describes the duties of directors and officers. These sections included 191, 195, 209, 588G and many others. Directors and officers of every Australian company are required to follow the provisions of discussed section, elsewhere they will be held liable for the breach of duty.
Duties of directors are not limited upto the scope of Corporations Act 2001, but they are also required to keep the principles of corporate governance in minds. Corporate governance is a subject that is closely connected to ethics. This subject focuses on the factor that being a director of the company, a person should work for the betterment of all the stakeholders. No there is a need to understand the term stakeholder.
Stakeholder: – This is a wider term then the shareholder. Every person who has some interest in the affairs of a company will be treated as a stakeholder of the company, For instance, employees, government, suppliers, consumers, and investors of a company. A shareholder is one of the most important stakeholders of a company. The reason for that they have their interest in the profits of the company and therefore it becomes the liability of directors to consider their interest while taking business decisions.
However, according to the principles of corporate governance, the directors should consider the interest of every stakeholder and not only shareholders. In the year 2003, Australian Stock Exchanges has published these principles on the subject of corporate governance. These principles require a director to do following tasks.
- Recognising and managing risks
- Structuring the board
- Providing responsible and fair remuneration to directors
- Laying down a strong foundation for effective management and oversight
- Acting responsibly and ethically
- Making balanced and timely disclosures
- Safeguarding integrity in corporate reporting
According to the rules and principles of corporate governance, every stakeholder is important for the company in some of the manners. The corporate governance principles motivate the directors of the company for using a stakeholder approach while taking decisions of the company.
Stakeholder Theory: – As the name implies, this theory focuses on the fact that a company should not only consider the interest of the shareholder but the same is required to work for the betterment of it is every stakeholder. The theory says that no doubt a company works for the profits and shareholders are the most valuable stakeholder of every company as the same invest money to the business, yet they are not the only stakeholder. A company needs to understand that as capital is important to run a business, similarly other factors such as the supply of goods and purchase of raw material are also important. A company cannot run it is business depending upon shareholder and hence it becomes the responsibility of directors of a company to take their decision wisely adopting a broader approach.
Many of the cases have been reported in past few years in which it has been noted that directors of a company breached their duties and further stated that they were liable towards the shareholders and not the customers or any other stakeholders. Some of the cases where directors of a company considered only the interest of shareholders is mentioned hereunder.
Separate legal personality of a company
ASIC v Cassimatis:- In this case, two persons Mr. and Mrs. Cassimatis Were directors of the company named Storm Financial Limited. The company was engaged in the business of providing financial advisory services to the company. Mr. Cassimatis has prepared and suggested a financial model to it is customers, which have been, approved a big failure later on. When the proceedings have initiated against him, he has stated that he is not liable for any kind of breach under Corporations Act, 2001. In the arguments, he said that Corporations Act 2001 only requires a director to act in the interest of the shareholder but not in the interest of customers. In the decision, the court held that director was liable under the act as act provided that being a director one must perform the duties in the best inters of the company and company refers to all stakeholder and not only shareholders.
Commonwealth Bank of Australia v Royal Commission case:- In the recent findings of Royal commission, it has been noted that one of the most popular banks of Australia has committed a serious breach of corporate governance principles. As the bank is a listed entity, the corporate governance principles prescribed by ASX are applicable to the company. Royal Commission made an allegation to the bank stating that directors of the same failed to provide some important disclosure regarding 54000 accounts. They have focused to maximize the profits and kept the interest of shareholders in mind. Director and officers of this bank were required to perform their duties for the betterment of all the stakeholders but they did not consider the interest of society and government.
In addition to above two cases, many of the other cases are also there where directors only considered the interest of shareholder or have argued that they are only liable for the stakeholders of the company and not for the stakeholders. This is the reason that amendments in the current law seem to be required.
In order to grant the recommendations, this can be stated that there is no need to make any amendment in current Law. The present sections say that a director and officer of a company must perform his/her obligation for the good faith and best interest of the company. Nowhere the term shareholder is mentioned. These are the directors and officers who are misinterpreting this term “Company”. Furthermore, to ensure the good corporate governance in an origination the authorities can develops plans and programmes. In addition to authorities, this is also the individual responsibility of every director to check that whether they are breaching any of the duties while taking a decision or doing any business.
In conjunction with aforesaid, the government can bring some clarification rules in order to clarify the terms and scope of the act. Authorities can initiate some new actions similar to ASX principles to notify the directors and officers that the corporate governance is just another aspect and to follow at each step of working.
Conclusion:
As stated above, this is to conclude that many of the directors are not aware of the requirement of the act and in those cases where they are aware, the same has some misunderstandings. These misunderstandings are majorly related to scope and applicability of the act. In many of the cases, directors of a company did something that they have not considered as a breach of duty. People think that shareholders are the most valuable stakeholder as they invest the money in a company. However, this is not true. In every case where such officers and directors failed to perform their duties with respect to other stakeholders, the court has held them liable. The procedure of amendment in an act is a long procedure and therefore the government can initiate something more in this area. No doubt that every officer and director of the company must consider the interest of stakeholders equally. Hence, this is to be stated that amendments in the act is a later stage and firstly government and other authorities should take necessary steps to ensure the use of the stakeholder approach rather than a shareholder.
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