Definition of Directors under the Corporations Act of 2001

Questions:

You are required to write a research essay addressing all of following points: 

• Who are directors of company? W hat are their duties of directors under Australia Corporation Law? 

• Give a short history of the evolution of director’s duties and responsibilities. Please enumerate their duties and responsibilities today. Are their duties the same in proprietary companies and public companies? 

• Explain the consequences should directors contravene the law and the remedies available. 

• What do you see in the future direction of director’s duties in Australia?

• Please cite relevant case law and the statutes in your answer and provide proper references. 
 

The term director may be defined under section 9 of the Corporations Act of 2001. Under that section the directors mean any person who has been appointed validly as director or alternate director. In accordance to that section, any person who is not validly appointed as a director but acts in that position of any director shall be deemed as a director. The section also states that any person who is not appointed validly as director but the nominated directors’ work in accordance to the wishes and instruction of that person, then such person should be deemed the director (Aier, Chen & Pevzner, 2014). The director governs a company on the behalf of the shareholders of such company. The Corporations Act of 2001 under section 198A (1) states that business of any company is managed under or by the direction of its directors. All the directors in any corporation have certain primary legal responsibilities and duties. The responsibilities and the duties that are imposed on the directors under the Corporations Act of 2001 makes the application to several structures of organization. Such structures are proprietary companies and public companies (Chan, Daniel & Young, 2014). 

• Diligence and Care: The directors are under the duty to act with such degree of diligence and care that any reasonable person is expected to deliver if given that role. This duty is stated in Section 180 of the Corporations Act of 2001. The common law also imposes the similar level of duty on the directors. The rule of business judgment makes the provision of “safe harbor” for any director that is in relation with any claim at the common law or in Section 180 (Fairfax, 2013).
• Acting in Good Faith: The Directors under the duty of acting in the good faith that serves the best interest of any company and for any purpose that is proper. This duty of a director is stated in Section 181 of the Corporations Act of 2001. The managers are also of the duty to avoid the conflict of interest, manage, and reveal any conflicts in case they arise (Gerner-Beuerle & Schuster, 2014). This duty is considered as both the duty of trust and fidelity that is also known as the fiduciary duty, which is imposed by the law, that is general and that duty is a duty that is required in the legislation (Aier, Chen & Pevzner, 2014).
• Proper use of the Position: The Corporations Act of 2001 through the Section 182 makes the clear stipulation that the directors shall not indulge themselves in making the improper use of their position as director (Gerner-Beuerle, Paech & Schuster, 2013). The improper use refers that the directors should not act to gain any advantage for either themselves or anyone else or makes the performance of any action that proves detriment to the company (Gibbs, 2014).
• Improper and Unethical use of information: It has been provided under Section 183 of the Corporations Act of 2001 that the directors should not make the improper use of any information, which they gain in their course as directors for gaining any advantage for themselves or for some people. The directors should also not use any information in such manner that may prove as detrimental to the company (Aier, Chen & Pevzner, 2014).

There are several other laws that regulate the activities of every company. Such activities include firing, hiring, renting office and marketing. There are approximately 600 such laws through which the directors could be held liable personally. The examples for such laws make the inclusion of the law of taxation, competition law, occupational safety and health and environmental law. There are also the specific industries that have their specialized law (Grove, 2013).

There is the requirement of the Corporations Act of 2001 that demands the public companies to have minimum three directors and two of such directors must reside in the territory of Australia. In the proprietary companies, there has to be minimum one director and that person must reside ordinarily in the territory of Australia (Hazen & Hazen, 2012). This is stated in Section 201A of the Corporations Act of 2001.  In case if there is a proprietary company having only one director and who is also the shareholder, the second director is entitled to be appointed by the director who is original by recording such appointment and by signing that record. This is provided in section 201F of the Corporations Act of 2001.

The directors are charged strictly for the exercise of their powers for any purpose that is proper. For example, where the director is under the obligation of making the issue of new shares for not the purpose of raising the capital but for the purpose of defeating any takeover bid that is potential, then such act would be regarded as a purpose that is not proper (Iida, 2015). However, there are several jurisdictions where the members of any company are granted the permission to make the ratification of the transactions that would fall foul for the said principle. In several jurisdictions, it is accepted largely that the said principle should have the capability of getting abrogated in the constitution of the company (Hudson, 2012). 

Legal Responsibilities and Duties of Directors

It is of immense importance that the directors use the powers for any proper purpose. There are several instances where the improper use of the power by the directors is evident. Such improper use involves the diverting of any opportunities of investment to any relative. Such breaches of the duties of the directors are termed as the failure of the directors to act in good faith. There are greater difficulties that arise in those situations while performing the duty of acting in good faith, the director serves any purpose that is under law is considered as proper.

In the case of Howard Smith Ltd v. Ampol Ltd [1974] AC 832, the Privy Council made the decision regarding the seminal authority that determines the proper purpose. The said case is concerned with the powers of the directors for the making the issue of the new shares. There was the allegation that the directors made the issue of the shares in order to make the deprivation of the voting majority of a particular shareholder (Gerner-Beuerle, Paech & Schuster, 2013). The argument was rejected by the court by stating that the power of issuing of the share could only be exercised only for the purpose of raising new capital (Keay, 2012). The Court also held that it would be considered as the proper exercise of the powers of the directors for making the issue of the shares for the purpose of ensuring the financial stability of the company.

The duties of the directors also make the inclusion of making the promotion of the success of the company. It is considered as the duty of the director to make the promotion of the goodwill and success of any company its members benefit as a whole. This sets out six factors that are to fulfilled by the directors while making the performance of their duties. Such factors are potential consequences of any decision of the director in the long-term, the employee’s interests, and the requirement of making the fostering the relationship of the business with the customers and suppliers and others. The other factors are the impact of the decision of the directors in the operations of the company on the environment and community (Knepper et al., 2015). The other factor is that the desirability of the decision of the director in maintaining the goodwill and reputation regarding the maintenance of the high standards of conduct of business in any company. The last factor is that the need of the decision of the directors to act in fair terms between the employees of any company (Gerner-Beuerle, Paech & Schuster, 2013).

The discussion of the above facts makes the establishment of the diversion of from the traditional notion that the duties of the directors are owed simply to the company. In the case of Mills v Mills (1938) 60 CLR 150, difficult questions arose regarding treating of any company by the directors too abstractly. It was held by the Court in that case that it is not required under law that the directors would live in “an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts, which must be present to the mind of any honest and intelligent man when he exercises his powers as a director.”  

In the case of Hutton v. West Cork Railway Co (1883) 23 Ch D 654, it was held by the Court that the directors without the consent of the company, cannot fetter their sole discretion relating to the entering of any contract that makes the binding of the company with certain course. It cannot be done even if that course requires the wide approval in the future (Laster & Zeberkiewicz, 2015). It is the company that remains bound but the directors retains the discretion to make the use of their right of voting against the factor of taking the decisions or actions of the future of the company.  

In the case of Re City Equitable Fire Insurance Co [1925] Ch 407, the Court held that any director is required to make the exhibition of his duties in a greater degree that involves that amount of skill that is expected from that experience and knowledge of any reasonable person (Pearce, 2016).

In the case of Hogg v. Cramphorn Ltd. [1967] Ch 254, it has been held by the Court, that the directors could not compete clearly without having a conflict of interest arising with any company. The Court also held that the director of any particular company cannot act as director of any company that is the competitor of that company. It is because if that happens then each of the company would start conflicting with one another (Strine, 2014).

The company is under law regarded as the separate person and hence could bring the claim against its director who is erring with the company. The company can bring the claim against its director if it can prove that it has sustained some kind of loss from the wrongful action of the director. In case the director makes some personal profit that is undue, then that director may be required to make the surrender of that gain in the favor of the company. In case any contract is entered into by, any director of any company by making the breach of his duty should be considered as void. Such contract should be considered as void even if that contract is open for ratification by the company in the future terms. 

• Injunction: Any company may file the suit of injunction in case its director has made the breach of his or her duties. The suit of injunction would act in stopping the director from continuing with or carrying out with that breach of his duty (Xu, Zeng & Shi,2013).
• Damages: Any company may file a suit for damages against its directors in case he has made the breach of his or her duty by the action of negligence.
• Restoration of Property: Any company is entitled to sue its directors for restoring the property of the company from the director. There may rise those situations where the directors of any company may have wrongfully acquired any property of the company or may have made the selling of any property of the company without the proper consent (Tillman, 2013). In that, circumstance the company may bring any suit against that direction for making the restoration of those properties.
• Rescinding of contract: Any company have the right to rescind any contract with its director, in the event that the director breaching his duty. 

Reference List

Aier, J. K., Chen, L., & Pevzner, M. (2014). Debtholders’ demand for conservatism: Evidence from changes in directors’ fiduciary duties. Journal of Accounting Research, 52(5), 993-1027.

Chan, R. S. Y., Daniel, H. O., & Young, A. (2014). Rethinking the Relevance or Irrelevance of Directors’ Duties in China: The Intersection between Culture and Laws. Asian Journal of Law and Society, 1(1), 183.

Fairfax, L. M. (2013). Sue on Pay: Say on Pay’s Impact on Directors’ Fiduciary Duties. Ariz. L. Rev., 55, 1.

Gerner-Beuerle, C., & Schuster, E. P. (2014). The evolving structure of directors’ duties in Europe. European Business Organization Law Review,15(02), 191-233.

Gerner-Beuerle, C., Paech, P., & Schuster, E. P. (2013). Study on directors’ duties and liability.