Common Law Obligations of Directors
As stated by Hanrahan et al., Corporations acting within the ambit of the Australian Commonwealth’s jurisdiction are governed and regulated by the provisions of the Corporations Act, 2001. This act in effect defines the rights of all parties involved in transacting with companies and also goes on to ensure that these parties would have their interests safeguarded. The Corporations Act, 2001 is a legislation that also defines the formation of a company and all the requirements to be complied with. In case of documentation procedures however the Companies Regulation, 2001 would be the guiding legislation. In addition to this the duties prescribed under common law must also be considered as Australia is a common law country and incorporates common law into its legislative framework. Thus the obligation prescribed under these positions of law must be adhered to with utmost strictness. The following paragraphs will elaborate on the mandates prescribed by the laws and the degree of adherence to be observed by corporations for each.
An employee who is also a shareholder/director would be subject to all fiduciary duties prescribed under common law. In the same way the individual occupying such a position would also subject to all statutory obligations prescribed under the Corporations Act, 2001. Thus for a negligent act the company would be able to attribute responsibility to the individual directly. According to Sealy and Worthington, the directors of a corporation are placed at the apex of the organizational structure and thus are responsible for protecting the rights of the shareholders and the company as the first priority. Thus in such a case the directors of the organization would have a good faith obligation to observe due diligence, avoid conflicts of interest and safeguard the interests of the company as prescribed under common law and reiterated in the case of Chan v Zacharia. A failure to observe these duties would mean that the director would be liable to pursued under civil liabilities which may lead to payment of damages and compensation this has been clarified in the case ASIC v Citigroup Global Markets Australia Pty Ltd (No 4). Thus under common law for the negligent act of an employee and a shareholder/director the individual would be subject to civil penalties and this action can be brought by an aggrieved party or by the company itself.
In the same way these duties are statutorily embodied in the Corporations Act, 2001. Sections 180-184 of the Corporations Act, 2001 deals with director’s duties. The first duty prescribed here is that of good faith and due diligence. This implies that when acting on behalf of the company the directors of a company must observe due diligence and thus must be well-acquainted with the implications of all documentary mechanism involved with such an action. This diligence must be observed with utmost good faith and if the directors comprehend that such a step may adversely affect the corporation they must refrain from acting in such a manner. Section 181 of the Corporations Act, 2001 involves a duty to ensure all conflicts of interest, especially financial self-interests are avoided. The following sections, namely Section 182 and 183 of the act, deal with the misuse of position and information obtained from such a position. These provisions thus ensure that the directors of an organization do not misuse the powers vested in them in any way. Section 184 of the Corporations Act, 2001 is an especially important provision as it imposes criminal liabilities on directors for failing to observe the duties prescribed under the act. Thus under statutory law, for a breach of these duties or for a negligent act by an employee who is also a director the individual can be pursued with criminal liabilities under the provisions of this act. Thus general law prescribes for a civil remedy whereas the statutory law deals with imposing criminal liabilities.
Statutory Obligations of Directors under the Corporations Act, 2001
A company is administrated by the Board of Directors, thus they are involved with approving all steps taken by the company. Thus as opined by Hannigan, this is the basis for attributing these duties placed on directors to ensure that they avoid causing detriment to the company. This means that the company would thus be protected from acting against its own interests. Thus in case where the administration of the company acts in such a way that the interests of the company are infringed then the shareholders would ideally be able to initiate actions against the company and in such a case the corporate veil may be pierced in order to attribute liability to the parties actually involved in causing such detrimental effects. This position of law has been reiterated in the landmark case relating to the HIH insurance fraud ASIC v Adler and 4 Ors.
The concept of the corporate veil is created though legal fiction. This is due to the separate legal entity attributed to companies. As observed by Hannigan, the concept separate legal entity originated from the time of Pope Innocent IV who propounded that corporations could be ex-communicated by the Church. Thus this gave corporations the status of a separate juristic person distinguished from its owners. This meant that in law a corporation was a person on its own able to exercise rights of a natural person under this distinction. Thus a company could sue and be sued in its own name and the owners of the corporation would not be implicated in disputed against the company. As opined by McLaughlin, this situation also meant that the company was liable for its own debts and the owners would not have to meet the debts of the company by a liquidation of regular processes. This means that the owners of the entities could themselves be a creditor of the company and would be able to recover their debts from the company at the time of winding up or in case of insolvency of the company. This was observed in the landmark judgment Salomon v A Salomon and Co Ltd. Thus, this protection offered to the ownership and the administration of the company relating to the debts and liabilities of the company is known as the corporate veil. This veil or curtain thus safeguards the interests of these individuals. However, in practicality the corporate veil may be a constructive protection by these safeguards can be misused to cause detriment to the company and its owners. This is because the decision making process of the company is in the hands of the administration of the company which is the Board of Directors. Thus any action that the company takes would be approved and scrutinized by the board. This in effect means that for any action where the company seems to act against its own interests it would be because there are conflicts of interest that are being acted on. For this reason the fiduciary duties and statutory duties prescribed under general law and the Corporations Act, 2001 must be followed. Thus in such a case the court would determine that the administration of the venture failed to observe its obligations. In these cases the court would be able to pierce the corporate veil and attribute liability to the individuals personally responsible for the detrimental acts. In order to do so a breach of duties under common law or a breach of duties under the statutory obligations provided for at Section 180-183 of the Corporations Act, 2001 must be established before the court. The court has observed such a lifting of the corporate veil in case of ASIC v Adler and 4 Ors. This is why Section 184 has been codified and given the force of law, to attribute criminal liabilities in cases where the duties of the administration of the organization have been breached. Thus the Australian commonwealth adequately covers the situations where the corporate veil has been misused by the administration of company to benefit itself.
The Corporations Act, 2001 also provides for a defense in case such a breach of duties by the administration was accidental. This is known as the business judgment defense. This defense, embodied in Section 180 (2) of the Corporations Act, 2001, states that when the administration of a company acts in good faith and avoids conflicts of interest and the acts of the administration have a detrimental effect nonetheless then the administration may be absolved of all responsibilities for the same. This defense thus ensures that in case that the administration observes good faith and due diligence but market conditions cause a failure in profitability or productivity then the administration of the company would not be held liable.
To conclude, company law in the Australian Commonwealth has evolved into a massive regulatory framework which ensures that all aspects of corporate responsibility are considered and adhered to. Thus, the interests of corporations and their stakeholders are adequately protected through this regulatory framework and thus are a safe investment within the jurisdiction of the same.
Corporations Act, 2001 (Cth)
Chan v Zacharia [1984] HCA 36
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963
Salomon v A Salomon and Co Ltd [1897] AC 22
ASIC v Adler and 4 Ors [2002] NSWSC 171
Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University Press, 2014.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. “Commercial applications of company law.” (2013).
McLaughlin, Susan. Unlocking company law. Routledge, 2018.
Sealy, Len, and Sarah Worthington. Sealy & Worthington’s Cases and Materials in Company Law. Oxford University Press, 2013.
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