Directors’ Duties And Members’ Rights: Analysis And Course Of Action

Question 1

Directors’ Duties

Is there a potential breach of fiduciary duties in this scenario?

The Corporation Act 2001 (CA) states that the directors of the company are bound to the duties of directors are provided by Section 180-183 of the Act.  The directors also have fiduciary duty of trust and confidence towards the company as they are its employees.  The directors of a company must exercise care and diligence towards their responsibilities. They must not act in bad faith and restrain themselves from actions which are against the best interest of the company. The directors must not exercise their powers in order to gain personally on the cost of the company. The directors are also not allowed to use the position and information gained by them in the company to benefit a third person or themselves.  Thus in the given scenario if the directors accept the contract of cleaning from his friends he is liable to breach the statutory and fiduciary duties provided by the Corporation Act and Common law as the contract would bring detriment to the company  (Cuyler, 2014).

Is there any course of action that you as a Director could take to avoid a potential breach of director’s duties?

In order to protect himself from the potential breach of director’s duties, the director has to make a full disclosure to the board about his interest in the contract with

Further the director must avoid this situation leading rise to the conflict of interest between the interest of the company and personal interest of the director as far as possible any must give priority to the company’s interest of his personal benefit according  to Section 182 of the CA.

In the case of Aberdeen Railway Co v Blaikie Brothers [1843-1860] All ER 249: it was provided by the court that no person as a rule of universal application who has duties to be discharged may enter into situation in which he has or may have a personal interest which is conflicting or may conflict with the interest of those person who are bound to be protected by him.

Under the provisions of section 191(1) of the CA it is the strict duties of the directors to inform the other directors about any material personal interest in situations where a potential conflict arises unless the interest is exempted to be disclosed under Section 191(2)

Further section 195 of the CA rules that the directors who have a personal interest in any matter should not have a vote in relation to the matter. Moreover the directors must also avoid attending any meetings where such matter having a potential personal interest are to be discussed.

Directors’ Duties

In addition a mere declaration that there is a conflict of interest between the company and the direct does not make him abide by the duty under the CA. the directors must also take all possible steps to prevent any transactions which takes place against the best interest of the company.

Conflicts can be further avoided by formulating and imposing a conflict of interest policy within the organization.

Members’ Rights and Remedies

With reference to the Corporations Act 2001, explain whether the two sons can claim ‘oppression’ and if so, what orders may a court make in their favor?

The issue in this case is to determine whether oppressive conduct of affairs have taken place or not and what orders can the court make against such affairs.

Section 232 of the CA provides grounds in which a court can make an order against oppressive conduct.  According to the section the court can make an order in relation to section 233 of the CA in case the affairs of the company or any act done on behalf of the company or any resolution in relation to the company is not in the best interest of its members and is discriminatory and oppressive to other members in that or any other capacity. Any person who has been transferred the share of the company willfully is regarded as a member in relation to this section (Ben, 1998).

The court may under section 233 of the CA make any order it thinks fit such as winding up of the company, modification of constitution, regulation of affairs, reduction in capital, prevent the continuation of specific proceedings, appoint a manager or receiver, require to act specifically. In case the court orders for a winding up than the provisions of section 461 have to be followed and if courts amends the constitution thee constitution cannot be altered under section 136 of the CA without taking a leave from the court.

Section 234 of the CA further provides the person who can apply for an order under section 233 of the CA.  The section provides that any member of the company even in case the event is related to omissions and actions against member in capacity except as a member, a person removed from the position of member for the purpose of the selected reduction or a person who has been transmitted the shares of the company willfully.

Is there a potential breach of fiduciary duties in this scenario?

In case the order is made the application of the order has to be submitted to the ASIC with 14 days as per section 235 of the CA.

Applying the above discussed rules in this case it can be analyzed that the conduct of Mr. Gang had indulged in oppressive behavior. He is using his position to make personal gains at the cost of the benefits of the company’s shareholders. He is concealing the profits of the company which is bringing a detriment to its members. He is not consulting anything with his sons who are also the members and shareholders of the company.

The sons are eligible to apply for an order under section 233 as they have been willfully provided the shares of the company and have become its members.

In this case the court may make any order it thinks fit with respect to section 233 of the CA. The court may ask the company to be wound up or may provide limitation and restriction on the function of Mr. Gang in relation to the company. The court may also appoint a manager or a receiver in this case and is also liable to impose criminal penalties under 6.2 of the criminal code.

Meetings and Resolution

Whether David is correct in his assertions regarding existence of Quorum in the meeting.

In the referred case a meeting wa noticed by the West Ham Limited. Two people arrived before the start of the meeting. Both members were proxies for the single member of Lotus Limited. Just before the meeting begins David Shining another member arrived and objects that the meeting cannot commence as there is no proper quorum and the proxies are not members. The chair person overruled the objection and started the meeting. During the meeting one of the proxies left. Again David Shining object that the meeting cannot vote as there is no proper quorum. To this the chair person again overruled the objection.

The Corporations Act 2001 Part 2G deals in the procedure of a meeting to be held in a company. Many cases are pending before the courts regarding invalid meetings or non-compliance of valid meeting procedure. The CA 2001 deals with this procedures of the meetings held in a company. As per the CA, companies must hold meeting or rather AGM at least once in a year and such other general meetings as may be required as stated in Section 250N of the Act. The directors of the company are responsible to call for meeting. The Company constitution can put the power of calling of the meeting into upon any member of the company as stated in 249C and 249CA of the Act. Directors are obliged to call meeting and shall give a notice of at least 21 days which may extend to two months. As per Section 249T of the Act the quorum of the meeting shall be at least 2 members of the company. The quorum may consist the proxies or representatives of the body corporate. However, if a member has more than 1 representative, it will considered as 1 representative and vote of both the representatives shall be counted as one. The members must be present within 30 minutes from the time of commencing of the meeting or else the meeting will be adjourned to any other date and time as the directors may specify and if no quorum is present within 30 minutes of commencement of the meeting the meeting is dissolved for absent of proper quorum.

Is there any course of action that you as a Director could take to avoid a potential breach of director’s duties?

As per the facts of the case two proxies or the representatives of the body corporate namely Lotus Limited was present in the meeting. Thus as per the provision of the CA 2001 Section 249T the proxies or representatives of a body corporate is considered to be members or quorum in a meeting. David Shining also entered the meeting within 30minutes of the commencement of the meeting. Therefore, as per the provision of the Act, at least two members must be present to commence a meeting, which has been fulfilled here in the case. The vote of the proxies or representatives of Lotus Limited shall be considered one as per the provisions of the Act and so if any one of the proxy left the meeting it will not affect the quorum of the meeting.  In Chalet Nominees Pty Ltd. v Murray, it was declared in the meeting by the chair person that the quorum were fulfilled as the two proxies constitute two members of the company even though they are the proxies of the same member. Therefore, the Supreme Court held that the meeting was valid on the ground that the chair person of the meeting believed that there was sufficient quorum to commence the meeting.

Thus, it concluded that both the objections raised by David Shining were incorrect as the proper quorum exists in the meeting as per the provisions of CA 2001.

Accounts and Reporting

The company’s obligation to keep financial records

Section 286 of the CA provides that a company is liable to keep financial records which are recorded correctly and explain the financial position and transactions of the company which could be used to prepare fair and true financial statements. The records have to be kept in place for a period of seven years after the completion of the transactions (Ramsey & McGrew, 2005). The records could be kept in any language but an English version is needed to be made available to persons authorized to inspect the record. The place where the records would be kept can be decided by the company (Chris, 2007).

Thus jasmine is the director of a large proprietary company she has the obligation of maintaining financial records as provided by the above discussed section in accordance with the specified time period.

Whether the company is required to prepare and audit a financial report.

Acccording to Section 292 of the CA for each financial year a directors reprota nd a financial report has to be prepared by all disclosing entities, all registered schemes, all public companies and all large proprietary comapanies (Mathew, 2000).

Question 2

Section 298 of the CA provides that an annual directors report has to be prepared by a compnayexept where the company is limited by guarantee. The report must have information in relation to section 299 and 299A, specific information through section 300 and 300A  and auditors declaration in reation to section 307C . the report has to be made accorrding to the directors resolution, having he date on which it was ade and has to be signed by the director.

Section 302 further proveds that a compnay has to prepare an half yearly financial reprot and directors report and lodge it with ASIC agter it has been audited (Beckett, 2008).

According to section 307 of the CA the financial reports of the compnay has to be audited and a report of the auditor has to be obtained. 

Jasmine’s liability as a director of the company if the company fails to comply with any financial reporting obligations.

A failure to comply with the rules and regulations of financial reporting is most of the cases make a director strictly liable under section 6.1 of the Criminal Code. In addition section 344 of the CA specifically provides punishments for the breach of financial obligations. According to the section a director of the company breaches this section if they fail to take all possible steps with respect to compliance of and securing compliance with the financial obligations provided in part 2M.2 and 2M.3 of the act. The section is only applicable in relation to a civil penalty provision as per section 1317 of the CA. an offence is committed if the section is breached dishonestly by a director (Steglitz and Peter, 2007).

According to section 1317E if the court analyses that a civil penalty provision has been breached it makes a declaration of contravention. The ASIC can the seek orders under section 1317G (pecuniary penalties) and section 206C (disqualification of a director) (Preston, 2010).

Securities Regulation

Advise James and Paul as to whether they have breached the Corporations Act 2001 and identify the possible penalties that may be imposed against them if found guilty by a court.

Whether James and Paul have breached the provisions of the Corporation Act 2001.

James is the principal of Quick Loans Pty Ltd. And holds an AFSL license and Paul is an Investment banker who advices listed companies called Abracadabra developments Limited. Paul talking with James discloses the fact that Abracadabra Developments Limited has received government planning approval to develop high rising building and a formal announcement will be made on the next business day. James returning to his office made an order to buy a parcel of shares of the Abracadabra Developments Limited and as a result of the formal announcement of the company the shares in the market increase for which James made a substantial profit (David, 2001).

Members’ Rights and Remedies

As per the Section 1317AE of the CA 2001, a person is said to be the offender under the section for an offence of making disclosure of information and the qualifying disclosure has been made by a company or an officer or employee of the company. The offender of such disclosure may be the company’s auditor or a director, or senior manager or any person to whom the company has authorized to receive such information. The offender may disclose the information as per the qualifying discloser, the identity of the discloser, or any information that is likely to lead to the identification of the discloser. For such discloser the court may order the offender to pay a pecuniary penalty amounting to $ 200,000 under section 1317G of the CA 2001(MacIntyre, 2008).

As per the provisions of the Act, Paul is a person who is authorized by the company to receive such information. Therefore, he is an offender under the Act. Paul has breached Section 1317Ae of the Act and is liable to pay penalty. The court may order him a penalty up to $ 200,000. James is also liable for offence of receiving confidential information and contravenes the provision of the Act (Branch Ramsay & Barker,2008).

Thus, Both James and Paul have breached the provisions of the Corporation Act and is liable to pay penalty up to $ 200,000.

Administration of companies in financial difficulties

What is your advice to Graeme in regards to recovering the $2,550?

Whether Graeme can recover the debt that the Dodgy Auto Pty Ltd owes to him.

Graeme was a trader in cleaning business. He has a contract with the Dodgy Auto Pty Ltd for cleaning its office premises and toilets and for that he will be paid $ 850 per month. However, for last three months he has not received any amount from the Dodgy Auto in spite of sending bills and reminders (Sievers, 1966).

Under such circumstances Graeme is advised to file a recovery suit before the court for the arrears that is due for 3 months from the Dodgy Autos Pty Ltd. Graeme may file a debt recovery suit and bring a legal proceeding against the director/directors of the company (Gill, 1996).

Explain the debt recovery process available under the Corporations Act 2001 including an explanation as to what ‘proper service’ is in regards to serving court documents on Dodgy Autos Pty Ltd.

With reference to the Corporations Act 2001, explain whether the two sons can claim ‘oppression’ and if so, what orders may a court make in their favor?

If a creditor owes money by a company there are several ways they can seek to recover it from the company. As per the case Graeme can send a letter of demand which sets out the debt which the company shall pay to Graeme and demand payment of such money. Next, Graeme will send a letter of demand and informs him that for non-payment of the dues he shall sue them before the court. Once the statement of claim has been filed, the defendant is entitled to file a defense within 28 days and if the defendant does not file any defense then the plaintiff can seek a default judgment against the defendant. As the debt is not more than $10,000 the claim shall be filed before the Small Claims Division of the Local Court which has a jurisdiction of hearing claims up to $ 10,000. Once the Plaintiff gets a judgment debt, he can enforce in various forms. After obtaining a judgment debt, a creditor must take action against the company and the can seek to wound up by a statutory demand. Section 459 of the CA 2001 states that, if a company does not pay the debt, the creditor will apply before the court to wind up the company considering the company as insolvent (Cioe, 2012).

Would your answer be any different if the debt was $1,750?

 However, if the amount of debt would have been $1,750, the answer would not change because debt is a debt of whatever amount may be. When a company is liable to pay its debt and the creditor or as the case here is Graeme a cleaner has a debt with Dodgy Auto Pty Ltd for an amount of $ 2,550 and if the amount would have been $1,750, my advice to Graeme would have been the same. In Demir Pty Ltd v Graf plumbing Pty Ltd, it is indicated that the respondent will have to face difficulty in arising dispute to the debt cited in the statutory demand where the debt has been certified as a judgment debt by a court.

References

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Question 3

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Preston, R. (2010). Observations in acute care: Evidence based approach to patient safety. British Journal of Nursing 19, 442-447. Retrieved from https://www.britishjournalofnursing.com

Ramsey, J. K., & McGrew, W. C. (2005). Object play in great apes: Studies in nature and captivity. In A. D. Pellegrini& P. K. Smith (Eds.), The nature of play: Great apes and humans (pp. 89-112). New York, NY: Guilford Press.

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Tranquilli, A. L., Lorenzi, S., Buscicchio, G., Di Tommaso, M., Mazzanti, L. &Emanuelli, M. (2014). Female fetuses are more reactive when mother eats chocolate. The Journal of Maternal-Fetal & Neonatal Medicine, 27(1), 72-74. doi:10.3109/14767058.2013.804053

Winter, J., Hunter, S., Sim, J., &Crome, P. (2011). Hands-on therapy interventions for upper limb motor dysfunction following stroke. Cochrane Database of Systematic Reviews, 2011(6). doi:10.1002/14651858.CD006609.pub.2

Wolchik, S. A., West, S. G., Sandler, I. N., Tein, J., Coatsworth, D., Lengua, L., …Griffin, W. A. (2000). An experimental evaluation of theory-based mother and mother-child programs for children of divorce. Journal of Consulting and Clinical Psychology, 68(5), 843–856. doi:10.1037//0022-006X.68.5.843

Corporations Act 2001 (Cth). Available from https://www.austlii.edu.au

Department of Health and Ageing. (2012). Aboriginal and Torres Strait Islander health performance framework 2012 report. Retrieved from https://www.health.gov.au/internet/publications/publishing.nsf/Content/oatsih-hpf-2012-toc

MacIntyre, S. (2008, August). Participation in the classroom, productivity in the workforce: Unfulfilled expectations. Paper presented at the 13th Australian Council for Educational Research Conference, Brisbane Qld. Retrieved from research.acer.edu.au/research_conference_2008/8

Preston, R. (2010). Observations in acute care: Evidence based approach to patient safety. British Journal of Nursing 19, 442-447. Retrieved from https://www.britishjournalofnursing.com

Ramsey, J. K., & McGrew, W. C. (2005). Object play in great apes: Studies in nature and captivity. In A. D. Pellegrini& P. K. Smith (Eds.), The nature of play: Great apes and humans (pp. 89-112). New York, NY: Guilford Press.

Sievers, W. (1966). Monash University [Photograph]. Retrieved from https://trove.nla.gov.au/work/15565401?q=monash&c=picture&versionId=18284000

Tranquilli, A. L., Lorenzi, S., Buscicchio, G., Di Tommaso, M., Mazzanti, L. &Emanuelli, M. (2014). Female fetuses are more reactive when mother eats chocolate. The Journal of Maternal-Fetal & Neonatal Medicine, 27(1), 72-74. doi:10.3109/14767058.2013.804053

Winter, J., Hunter, S., Sim, J., &Crome, P. (2011). Hands-on therapy interventions for upper limb motor dysfunction following stroke. Cochrane Database of Systematic Reviews, 2011(6). doi:10.1002/14651858.CD006609.pub.2

Wolchik, S. A., West, S. G., Sandler, I. N., Tein, J., Coatsworth, D., Lengua, L., …Griffin, W. A. (2000). An experimental evaluation of theory-based mother and mother-child programs for children of divorce. Journal of Consulting and Clinical Psychology, 68(5), 843–856. doi:10.1037//0022-006X.68.5.843