The Role of Directors in Australian Companies

Discuss about the Directors Duties.

The directors have the responsibility of governing the organization in an ethical and legal manner. There are various duties imposed on them through parliamentary legislations as well as precedent common law. They have to comply with such duties and responsibilities while they discharge their power towards the organization. However if they are not able to comply with such duties they are imposed with financial sanctions as well as suspension from management. They may also be subjected to criminal penalties under section 6.1 of the Criminal Code. The primary legislation which deals with such duties in Australian companies is the Corporation Act 2001 (Cth) (the Act). These duties include duty to act in best interest, observing diligence and care like a reasonable person, not misusing information or position in company, making proper disclosure and not indulging in insolvent trading.

In the case of Fodare Pty Ltd v Shearn (2011) claims have been brought by Fodare Pty Ltd against its director Ms Shearn along with her Husband, Son and Daughter in Law. The claims were brought by the company upon the instigation of the liquidator. The company was in possession of a property at Menangle Park which was purchased at $195000 in March 1989. The property had been sold for a sum of $1,200,000 on 22^nd July 2003.  The organization was supposed to receive settlement money which accounted to 1,081,736.41. However the defendant who was the sole director of the company during that time misdirected such funds in a way which were not in compliance with her duties in form of a director.  The court in this case held that the director was liable to the breach of her duties in relation to misappropriating the funds.

In this case it has been alleged that the directors of the company have violated section 180-183 of the CA.

Section 180 of the CA prohibited her from indulging in an activity which does not have proper diligence and care applied by the director within it. The section appoints a reasonable director (imaginary) in the position of the original director. The imaginary director is then subjected to the same situation in which the original director was and than his actions is compared with that of the original director. If it is found that the imaginary director would not have indulged in similar action than it is deemed that the original director have violated the provisions of section 180(1)

Legal Responsibilities of Directors

Through section 181 the Act imposes a duty on the directors of the company to discharge their powers in the best interest of the company and for a proper purpose. This means that the interest of the company has to be given priority by the directors and their actions must be in compliance with the overall purpose of the company. However it had been alleged that the sole director in this case has violated the provisions provided by section 181.

Through section 182 of the Act the duty to avoid conflict of interest is addressed. The section states that the directors of a company must not in an inappropriate manner use their position to initiate personal interest and subject the company to detriment. They must not use the position to cause a benefit to themselves or to any other their party which is not in the primary interest of the company. In case there is any situation which suggest a conflict of interest between personal and third party interest and the interest of the company it is the duty of the directors in relation to their fiduciary duty to select the interest of the company over personal or third party interest. The duty has been violated by her by directing the funds which were owned by the company towards herself and her family members. It has been also alleged that the sole director of the company filed to make proper disclosures in relation to her activities towards the organization.

In this case it had been held by the judges that the sole director of the company had violated the duties imposed on her through Common law and the Act.  It was stated by the judges that she filed to act in best interest of the company, in good faith and for a proper purpose. In addition she did not depict any care and diligence in relation to her actions towards the organization and also misused her position to cause personal benefit to herself and third party benefits to her family. The court in this case ordered the defendant to pay compensation to the company in relation to the misappropriated funds as well as the directors of the cost incurred by the plaintiff in relation to the proceedings.

In this case evidence had been provided by liquidator Mr Rowley who was involved in relation to the administration along with Mr Bruce who had recommended the winding up orders of the company.  The evidence had been provided in form of cross examination and affidavits.  t

Case Study: Fodare Pty Ltd v Shearn (2011)

The court held that the duty provided under section 180(1) of the Act have been breached as when an imaginary director is then subjected to the same situation in which the Ms Shearn was and than his actions is compared with that of the Ms Shearn it is found that the imaginary director would not have indulged in similar action which had been done by Ms Shearn (Misappropriation of funds) and thus it is deemed that the original director have violated the provisions. 

It was alleged that Ms Shearn was also aware of the fact that the misappropriation of funds would lead the company short of funds to pay its creditors. However the court in this case did not give much importance to this allegation as the misappropriation of funds for improper purpose was enough to make Ms Shearn liable. The court cited the case of Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 at 479 where it had been stated that “in the court the company’s money is like a trust fund as it is only applicable to special purposes of the company in relation to the hands of its agents and in that sense it is a trust fund applicable on the special purposes by them”.  In the given case there were chances that the funds of the company were trust funds in a real sense, however it was certainly trust funds in metaphorical sense as provided by the above discussed cases. Either way, as the sole director of the company it was her duty to protect the funds of the company and to use such funds in towards discharging liabilities which had been properly incurred by the company while in pursuit of corporate purposes.  Thus in this respect due and proper discharge does not allow the sole director to direct the funds to her family members and herself through a process of gifting. (NSWSC 479 at 26)

It was also stated by the court that there is no question in relation to the fiduciary nature of the relationship which directors have towards the company. The personal interest of the director should therefore always be subordinate to the interest of the company as per pellson v George (1987) 11 NSWLR 300. The directors must be held accountable for any gain or profit made by them through the use of their fiduciary positions. The evidence provided in this case does not leave a chance for a second opinion over the fact that the director failed to comply with such duties in relation to the organization. (NSWSC 479 at 27)

The court also cited the case of steam Navigation Co v Johnson [1938] HCA 16; (1938) 60 CLR 189 at 218 where it had been held that any person who is control of has disposition of the property or money of the company can be order bring in an account.  In addition it has been stated in the case of Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, that there must be a charge on the receipt of property by a person.

Conclusion

It can be concluded from the above discussion that the decision provided b y the court in this case was appropriate. The actions of Ms Shearn were actually in the breach of the duties imposed on her as director of the company. She was not able to prove that the actions which she had indulged into in any way were beneficial to the organization. The reference provided by the director that she director the money towards the payment of debt was vague. Her actions have clearly violated the provisions set out through section 180(1), 181 (1) and 182 (1) of the Act.  Thus the case make it clear that the directors who are in control over the assets of the company must direct the assets to the benefits of the organization only, these assets case be used to meet debts which have been appropriately incurred by the organization.

References

Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230

Corporation Act 2001 (Cth)

Fodare Pty Ltd v Shearn (2011)  NSWSC 479

Navigation Co v Johnson [1938] HCA 16; (1938) 60 CLR

pellson v George (1987) 11 NSWLR 300

Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 at 479