Background
Discuss about the Department Of The Premier And Cabinet Corporations.
A corporation is a statutory body which work with the minds and bodies of it is directors and officers, yet it is a separate entity from such directors. These directors are expected to work in a reasonable manner which must bring positive results to corporation as discussed and decided in case of Solomon V. A Solomon & CO. (1897) AC 22. Such Corporation can be incorporate with different agendas and objectives and can also be in form of trust. As soon as such forms of business started to expand and cherish in environment, many of the cases has come into light where directors performed their duties in a disproportionate manner
To discipline such cases, provisions have been made under Section 180 to 182 of Corporations Act, 2001 (Cth) which defines the way in which directors are required to meet out their responsibilities and whenever a director or officer of a corporation contravened to the provision of aforementioned sections, necessary actions can be taken against them under the purview of cited law. This report is based upon study of case Fodare Pty Ltd v Shearn (2011) NSWSC 479 and would cover director’s duties, the way in which they have been violated and court’s decision related to this case.
In the conferred case, Fodare Pty Limited, a corporation incorporated in year 1989 with the object to work as trustee of the family trust named “The Alexandria Trust for Fodare Pty Ltd” and Ms. Shearn, an individual, were parties of the case. The said trust was a trust of settlement which was constituted for the benefits of Ms. Shearn and her family Members; whereas, Ms. Shearn was director of the said corporation from 18 May 2011 to 22 August, 2006. Corporation here refer as “fodare” has sold one of it is property titled “Menangle Park property”. Out of the sale amount Ms. Shearn has kept and used amount consisting more than half of sale value for her personal benefits. At the time of this transaction, Fodare had some payable and by reason of this activity, the same could not pay off it is debts. Solicitor named Mr. Bruce Dennis made an application for winding up of the corporation. Further, in the winding up proceedings, when demand of books of accounts was made from the side of liquidator, Ms. Shearn did not presented anything in response, whereas it was her duty (Commonwealth Consolidated Acts, 2018).
Director’s Duties and Violations in the Case
Being the Director of the company, Ms. Shearn was expected to perform her charge for the best interest of corporation. (William Roberts, 2018). But in the said transaction, Ms. Shearn has neglected her duty to effort in good faith and the prime interest of the company. As a matter of fact it seemed to be fraud. So, Fodare Pty Limited initiated a case against Ms. Shearn.
As per the requirement of section 180(1) of Corporations Act, 2011, a director of a corporation requires to perform his/her duties and skills with due care and alertness. On 1st December, 2003, Fodare sold it is property to an independent third person for $1,200,000 and received 3 cheques against the payment of the forenamed sale. One of the received cheques worth $634,957.79 was in the name of “Alexandria Trust”. Being the director of corporation, Ms. Shearn had enough abundant control over the affairs of the corporation; So Ms. Shearn has deposited this cheque in her bank account opened in the name and style of “Doris Shearn – The Alexandria Trust for Fodare Pty Limited”.
A director of the company shall liable to act in good faith of company (Legalvision, 2015), without any fraud, mala-fide intention and for personal advantage but here; Mr. Shearn treated the sale value extent of $634,957.7 as her own Property and has contravened to the provision of Corporations Act, 2001.
By the merit of this act of Mr. Shearn, Fodare became unable to pay off it is debts and Mr. Bruce, Dennis who was a solicitor, has applied for winding up of the corporation.
As being the director of the corporation, it was also duty of Mr. Shearn to act in a responsible manner for the company and to keep proper financial records and books of accounts of the corporation for every necessary transaction (Addisons, 2018). Ms. Shearn became failed to do so and as in this manner her duties as director were breached.
Section 180(1) of Corporation Act, 2001 provides that a director or any officer of a corporation must play their role in the organization with responsibility alike a reasonable person. It is to assume that a person who holds position of a director in a corporation shall think, act and take decision with due care and understanding keeping in head all effects of a particulars decision (Australian Institute of Company Directors, 2018).
As per Section 181 (1) of Corporations Act, 2001, every officer of a corporation is pre-suppose to discharge their functions and responsibility in good faith and finest concern of the corporation and also for an appropriate purpose.
Consequences and Court’s Decision
It was held in the case Cassegrain v Gerard Cassegrain & Co Pty Ltd (2012) HCA 2, that the liability to act in the proper manner for the corporation cannot be overturn by personal benefits. Irrespective of the fact that a corporation does not involve public interest, a director shall be subject to litigation if he/she to use given powers in a manner which is against corporation’s interest. While incorporation of a company, it is natural to expect that a director and every officer of it shall play their roles in a positive aspect. Although, sometimes company and it is management is the same person, yet they both are separate entities in belief of law and interest of both cannot be considered as one.
It was sentenced in the case Diakyne Pty Ltd v Ralph (2009) FCA 721; 72 ACSR 450, that even if director acts genuinely but if his/her act put an adverse impact on company, thus far such person shall be liable to carry all the applicable penal provisions and civil prosecution as applicable and announce by the court.
Relationship between director and a corporation is of fiduciary nature (Moores, 2014). It is well known and expected from directors and officers of a corporation that they will always place their personal interest at side and essentially work for corporation’s benefits (Department of the premier and cabinet, 2016). As per the requirement of Section 182(1) of Corporations Act, 2011, it is statutory duty of a director to understand and visualize every business transaction of a corporation, effect of the same to corporation and to take best decision for it is benefit. It is pursuing in general business practice that if director receive any payment in the ordinary or in the extra-ordinary course of business then he/she must use such money for corporation. A director is always expected to keep his/her corporation in a sound financial condition and must not use corporation’s fund either for self-benefit or for the benefits of his/her family members.
Section 286 of Corporations Act, 2011 determines duty of a director of a corporation in respect of book of accounts and financial records (Australian Securities and Investments Commission, 2018). This section requires a director to keep records of every financial transaction and to prepare and to ensure that they reflect true and fair view of corporation’s financial position (Rodgers Reidy, 2016).
In the referred case, Ms. Shearn, director of fodare has used some funds for her personal ambition, which was the part of sale value of Fodare’s property. Admitting the fact that fodare has some indebtedness to pay, still she has deposited one of the cheque to her personal account due to that fodare has no more remained in a condition to pay it is other pending debts and proceedings of liquidation has entertained against fodare.
In this direction, Ms. Shearn conflicted with the provisions of section 180(1) of Corporations Act, 2001, as she did not paid off her duty with sufficient responsibility and not followed required ethics in the course of her job.
Section 181(1) of Corporations Act, 2001 demands from a director that the same shall perform his/her duties in the best manner and favor of the corporation and for the legitimate purpose (Baxt, 2005), but here in this case, Ms. Shearn’s act, has not left fodare with adequate funds to pay out it is outstanding debts and by this reason, solicitor commenced liquidation process against it.
Further, It is to believe that a director held reputed designation in a corporation and has access to all the financial and value sensitive information. So section 182(1) of Corporations Act, 2001 mention that a director or an officer of a corporation must not use their position to get advantage for them or in a manner which cause damage to corporation. In the referred case, Ms. Shearn has deposited the cheque in her personal account and by the reason of her this act, fodare became unable to pay out it is debts and went into procedure of winding up.
In this case, Ms. Shearn has improperly used her position as in conjunction being a director of fodare she was also the member of the trust of which fodare was a trustee, so she made a statement that she was expecting the sold property belongs to her family trust and she thought that fodare has kept this property from years for Ms. Shearn and her family members. She also claimed that she was not informed about the outstanding debts of Fodare. but as per the decision given in case Diakyne Pty Ltd v Ralph, here it may state that although Ms. Shearn was not aware with the name of real owner of the property, yet due to her deed, fodare move into liquidation procedure.
In the present case, when liquidator asked to Ms. Shearn to present financial statement of fodare, she only presented a statements of liability and assets, according to which fodare had neither any assets nor any liability. Here, repeatedly Ms. Shearn had contravened with the provision of Section 286 of Corporations Act, 2001.
In the studied case, it was held that Ms. Shearn is responsible for breach of her duties and is liable to pay compensation to fodare along with interest amount.
Together with above decisions, court also ordered to Ms. Shearn to pay expenditure related to proceedings to Fodare (Wolters Kluwer, 2018).
Ms. Shearn did not perform her duty with required care and also misused her position in fodare. Being the director of the company, she was supposed to play her role according to requirement mentioned under Section 180(1), 181(1) and 182(1) of Corporations Act, 2001. As per section 286 of Corporations Act, 2001, it was the duty of Ms. Shearn to maintain proper financial statement of fodare and to produce the same before liquidator, but she contravened also with these provisions.
In the cited case, director of the company did not perform her duties as per the requirement of law and court has given decision in against her, by the reason she had to pay compensation along with interest and cost of proceedings to the company. Decision of this case made directors of other companies of Australia aware about their duties.
Directors of Australian companies now become more responsible towards their duties and responsibilities after the decision of this case as court levied heavy monetary penalties in this case in the form of compensation. By the virtue of this decision, operation of companies in Australia has become regulate up to a level, as now directors of such companies understand their duties and are also aware with the consequences of non-compilation with those duties.
Conclusion
This case was related to duties of directors of a corporation. In the mentioned case, Ms. Shearn, director of corporation did not perform her duty in a manner she must to, and also created benefit for herself and her family members out of the funds of the company. Thus case attracts Provisions of Section 180(1), 181(1), 182(1) and 286 of Corporations Act, 2001. These sections define the manner in which a director and officer should pay off their duties. Here, due to the acts of director, corporation became unable to pay it is outstanding dues and went into liquidation process and After necessary hearings and proceedings Court found Mr. Shearn liable and ordered her to pay compensation to company.
References
Addisons. (2018) Failure to Keep Adequate book and Records Renders Directors Liable for Compensation? – Bad Record Keeping Equals Big Claims Against Directors? [online] available from:https://www.addisonslawyers.com.au/knowledge/Failure_to_Keep_Adequate_book_and_Records_Renders_Directors_Liable_for_Compensation__-_Bad_Record_Keeping_Equals_Big_Claims_Against_Directors184.aspx [accessed on 12/05/18]
Australian Institute of Company Directors. (2018)What are the duties of Directors?[online] available from https://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf [accessed on 11/05/18]
Australian Securities and Investments Commission. (2018) Your Company and the law.[online] available from: https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/your-company-and-the-law/#dishonest-directors [accessed on 12/05/18]
Baxt,R. (2005) Duties and Responsibilities of Directors and Officers.18th ed. [online] available from: https://books.google.co.in/books?id=dadgvj2nq10C&pg=PP1&dq=duties+and+responsibilities+of+directors+and+officers+18th+edition&hl=en&sa=X&ved=0ahUKEwja0aDQsP_aAhWMO48KHS2dAZ0Q6AEIKDAA#v=onepage&q=duties%20and%20responsibilities%20of%20directors%20and%20officers%2018th%20edition&f=false [accessed on 12/05/18]
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2011] NSWSC 1156
Commonwealth Consolidated Acts. (2018) Corporations Act 2001-Sect 286 obligation to keep financial records.[online] available from:https://www.austlii.edu.au/cgibin/viewdoc/au/legis/cth/consol_act/ca2001172/s286.html[accessed on 11/05/18]
Corporations Act, 2001 (Cth)
Department of the premier and cabinet. (2016) Corporations Act 2001 (Cth) (the Corporations Act.[online] available from: https://www.premiers.qld.gov.au/publications/categories/policies-andcodes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [accessed on 12/05/18]
Diakyne Pty Ltd v Ralph [2009] FCA 721
Legal Services Commission of south Australia.(2018) General Duties of Directors-Corporations Act 2001 (Cth).[online] available from: https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php[accessed on11/05/18]
Legalvision. (2015).Directors’ duty of care and diligence.[online] available from: https://legalvision.com.au/directors-duty-of-care-and-diligence[accessed on 12/05/18]
Moores.(2014).The Directors Series: Part 2 – Fiduciary Duties.[online] available from: https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties[accessed 11/05/18]
Rodgers Reidy.(2016) The Role of a Director: Duty to maintain books and records.[online] available from: https://www.rodgersreidy.com.au/articles/articles/the-role-of-a-director-duty-to-maintain-books-and-records[accessed on 11/05/18]
Solomon V. A Solomon & CO. (1897) AC 22
William Roberts. (2018).Director’s Duties.[online] available from: https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors–Duties[accessed on 11/05/18]
Wolters Kluwer. (2018).Fodare Pty Ltd v Shearn, Supreme Court of New South Wales, 25 May 2011.[online] available from: https://iknow.cch.com.au/document/atagUio1908378sl305332445/fodare-pty-ltd-v-shearn-supreme-court-of-new-south-wales-25-may-2011[accessed on 12/05/18]
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