Director’s duties under the Corporation Act 2001
Discuss About The Strengthening Moral Judgment Identity Based.
The present case is based on the decision making power of the director. Corporation Act 2001 has implemented certain provisions regarding the duties of the director. Those principles are acting as a guideline for the directors so that they can do their duties in good faith and for the interest of the company and for the shareholders. It can further be stated that the directors are acting as the mind of the company and therefore, they take all the important decisions. They should have to take proper care and act diligently while performing such act or taking any decision for the betterment of the company (Fox, 2016). A requirement has been made in this regard that no director should perform their duties in such a manner to secure their personal interest. Further, the directors should have to use their position appropriately. They should not use their position for the additional gain for them. Corporation Act 2001 acts as a regulating provision for the directors of the corporation in Australia. In case, any director has failed to act according to the provisions of the Act, he should have to face penalties. The nature of the penalty will depend on the scope of the acts. However, it is obvious to state that the directors have to take many important liabilities for the interest of the company and therefore, the scope of their work is quite wide and risky in nature. Therefore, certain defense provisions have also been discussed under the Act so that the directors can prove their innocence. In this regard, one of the most well known defenses is business judgment rule. However, before taking the plea under the rule, the director has to show that they have fulfilled all the duties required by this Act (Harris & Hargovan, 2017).
In this case, it has been observed that there are two directors in the company namely Rik and Patel. They have shares in the company. Further, it has been seen that Lana is manage the account related problems in the company and she could attend the board meeting of the company. There are certain other shareholders in the company. From the very inception, it has been observed that the company was quite profitable and then the market has been crushed. In the mean time, Rik has contracted one lease agreement for shifting the address of the company, he took the decision without informing other Board members, and he has told about the decision at the board meeting when he has already signed the contract. However, it has been observed that the newly addressed company has faced huge loss and lost the customer satisfaction. The demand for their products were no longer been retained and a dilemma has been made in between Rik and other directors and shareholders.
Liabilities of directors under the Corporation Act 2001
According to the Corporation Act 2001, a director has certain duties that should be maintained with highest priorities. According to section 180 (1) of the Act, a director is required to perform his duties with due care and diligence (Tosato, 2016). They should act as a prudent man and should have certain responsibilities to the office according to their position. Further, certain decision making rules have been mentioned under section 180 (2) of the Act. According to this section, a director should have to comply with all the rules mentioned in the common law and law of equity as well. They must make all the relevant decisions for the interest of the company and in this case, they have to inform other Board members while making the decision. Further, they have to act for the best interest of the company and they are not allowed to make any decision for their personal interest. In ASIC v Adler [2002] NSWSC 171, it has been pointed out by the Court that every director should have to perform all their duties in good faith and they should be rational in this regard. Further, they are restricted to make their own profit. In Adler’s case, it has been observed that the directors of the company has procured certain loan for the company and it has been observed by court that the directors had failed to act in good faith and they have procured the loan for the company for gaining much profit as a shareholder in the company. It has been observed by the court that the directors are not allowed to take a plea under section 180 (2) of the Act for business judgment rule, as they have failed to perform their duties properly and according to section 180 (1) of the Corporation Act 2001. Further, they have made a breach under section 182 of the Act and failed to act prudently. Therefore, it can be stated in this case that Rik was the director of the company and he had certain shares in the company. When the company was running in loss, he had made a decision to change the address of the company and without informing other directors and shareholders, he has signed a lease agreement. Further, it has been observed in ASIC v Cassimatis (2012) FCA 111; it has been observed by the court that the directors of the company have failed to act for the best interest of the company and for the shareholders. They have failed to inform the shareholders about the risks and the shareholders had to face lots of trouble for the same. According to the court, the directors have failed to act prudently and they could not take the plea under business judgment rule. Further, they had used the company to gain profit for their own interest. Similar situation has been observed in this case when Rik had decided to take another shop as lease so that the condition of the company can be regained. This could be an act for the best interest of the company if he had informed other directors about the lease before put signature on the instrument and informed the shareholders regarding the relevant risks regarding the shifting. However, he had failed to take such steps and can be stated that he had made a breach regarding his duties and could not take the plea under business judgment rule. Further, according to ASIC v Rich (2009) 236 FLR 1, it can be stated that the directors of the present case have failed to prove their innocence and could not take the plea of business judgment rule successfully, as the director of the company has failed to act in good faith. Further, Rik had not informed other director while making the lease agreement.
Legalities of contracts signed on behalf of the company
Here it has been observed that Rik has failed to make the decision prudently. He had not informed Patel and other shareholders regarding his decision and he had not discussed about the same in the Board meeting. According to section 180(2) of the Act, it is his duty to make inform other Board members about his decisions. Further, when he saw that the company is running in loss, he has thought about his interest as a shareholder in the company. It can be assumed that this is the main reason behind changing the address of the office. Therefore, it can be stated that he had failed to act in good faith and for the best interest of the company. Therefore, he has failed to meet the requirements stated in section 180(1) of the Act. Further, Rik has misused his position, signed all the lease documents in his name, and made the final decision alone. Therefore, it can be stated that he has failed to act in accordance with section 182 of the Corporation Act 2001. Thus, it can be stated that Rik has failed to meet the requirements stated under section 180 (1) of the Act. However, Lana has no saying in the case, as she is not a board member.
In the second part of the case, it has been observed that Lana has made a claim that the lease agreement signed between Rik and Watel Ltd is not enforceable, as in this agreement, Rik had not use the name of the company, but use his own name. Therefore, Lana that the company will not held liable for the lease agreement has made a plea and the agreement is not enforceable.
The subject matter of the case is based on the common principle of agency and attracts the provision of section 126 and section 127 of the Corporation Act 2001. According to section 126 of the Corporation Act 2001, any person can use the power of the company by verifying, rectifying or discharging a contractual agreement if the company to this effect has given certain express or implied authority to the person. Further, it has been stated that the person can do all the acts without using the common seal of the company. Additional observation has been made in section 127 of the Corporation Act 2001. According to this section, an individual can make an agreement without using the common seal of the company and in that case, the same instrument will be termed as valid and legal in the light of law of agency. Further, it has been observed by the section that the executed documents can be used validly if the director of the company has signed the same. It will then assume that the director has act on behalf of the company and he has all the powers to this effect (Neesham & Gu, 2015). On the other hand, in case of any contract or agreement signing, if the other party shall have all the power to assume the fact that the director is acting on behalf of the company and in case of any adverse situation, he can claim compensation from the company. The provision mentioned under section 127(1) has been extended in section 127(2), where it has been observed that common seal of the company is not necessary for all the documents where the directors of the company have put their signature on the same. Further, there is no strict rule for using the common seal of the company at the time of signing a document or agreement.
Case analysis
It has been observed in Mahony v East Holyford Mining Co. that if any person has been acted on behalf of the company in consonant way and all the matters have been done perfectly, the nature of the act will be held as legitimate and effective. This rule has been entrenched in the case of Royal British Bank v Turquand (1856) 6 E&B 327, where it has been observed that when the director of a company is signing a document, it can be assumed that the director is acting as an agent for the company. It can be assumed that he is maintaining all the rules and procedures of the company. However, a difference in between the application of section 126 and section 127 of the Act has been made in Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103. According to the court, it is required under section 127 of the Act that two directors or a director should sign any contracted agreement and secretary of the company if there is more than one director. It has been mentioned under section 129(5) and section 129(6) of the Act, in case a company wants to show that the company has signed an instrument, it is required to show that the signing part of the instrument has been met the provision of section 127 of the Act. In Knight Frank’s case, the court has demonstrated the matter as follows:
“If an agent purports to enter into a contract on behalf of a principal, purportedly within the scope of the agent’s authority, and the other party relies upon the agent’s representation of authority to enter into the purported contract with the principal, the agent warrants that the agent has authority to enter into the contract. The agent is liable for damages to the other party for any breach of that warranty of authority.”
In the present case, it has been observed that a lease agreement has been made in between Rik and Watel Pty Ltd with a term of three years. In that agreement, Rik has not put the name of the company rather he has signed the document in his name. The principle of law of agency will be applied in this case. It can be presumed that Rik has signed the agreement on behalf of the company. However, considering the base of the case study, it can be stated that section 127 has not been applied in this case. The reason is that Rik alone has signed the agreement and further, no common seal of the company has been used in any of the documents. Therefore, it can be stated that the acts of Rik in this case has not attracted the provision of section 127 of the Corporation Act 2001. Rather, the subject matter of the case has attracted the provision of section 126 of the Act. According to this section, an individual has a right to act on behalf of the company and enter into the contract with another party if the company has provided an express or implied authority. In this case, it has been observed that the usage of common seal of the company is not mandatory in this case. in the light of this provision it can be stated that Rik has signed in the lease agreement without using the name of the company or even do not use the common seal of the company. Therefore, it can be stated that the elements of the case have attracted the provision of section 126 of the Act. Further, it has been observed that Rik is one of the directors of the company and it can be assumed that he has certain implied authorities to act on behalf of the company. The present case can be analyzed in the light of Royal British Bank’s case. A similar situation has been taken place in this case. It has been held by the Court that if a director has signed any document or agreement, it can be assumed that he has all such power and he is acting on behalf of the company. Further, it can be stated that Watel Pty Ltd has all the options to assume that Rik can sign on the documents legitimately and he has maintained all the norms of the company. Watel Ltd has no chance to know about any core news of Rik’s company. Therefore, it can be stated that the lease agreement made in between Rik and Watel Pty Ltd is valid and it could not be stated that the agreement is unenforceable as no common seal has been used in the agreement or Rik has used his name in the agreement.
Reference:
ASIC v Adler [2002] NSWSC 171
ASIC v Cassimatis (2012) FCA 111
ASIC v Rich (2009) 236 FLR 1
Eggers, P.M. & Picken, S., (2017). Other contracts of the utmost good faith. In Good Faith & Insurance Contracts (pp. 113-130). Informa Law from Routledge.
Fox, J., (2016). Acting for you. Governance Directions, 68(2), p.122.
Harris, J. & Hargovan, A., (2017). Still a sleepy hollow? Directors’ liability & the business judgment rule. Australian Journal of Corporate Law.
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103.
Mahony v East Holyford Mining Co. [1875] LR 7 HL 869
Neesham, C. & Gu, J., (2015). Strengthening moral judgment: A moral identity-based leverage strategy in business ethics education. Journal of business ethics, 131(3), pp.527-534.
Royal British Bank v Turqu& (1856) 6 E&B 327
Smith, D.G., 2015. The Modern Business Judgment Rule.
Tosato, A., (2016). Commercial agency & the duty to act in good faith. Oxford Journal of Legal Studies, 36(3), pp.661-695.
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