General duties of directors, promoters, and partners

The directors, promoters, and partners play very important role in corporate governance system. The directors, promoters, and partners in Australia are subject to same duties and obligations found in other jurisdiction. Their general duties are based upon some rules of common law and reasonable principles. Sometimes director is defined as agent, sometimes as trustee and sometimes as the managing partner. It is required by them to perform in best interest of corporations.

The promoter of the company gives the idea for the creation of the corporation. It is a duty of promoter to provide the shape to that idea and formulate the schemes for the creation of company. They are also required to prepare memorandum of company. The partners are also required to inform the partnership of all information and data relevant to partnership. It is an obligation of partners to use reasonable care in carrying the business of partnership. The success of the company depends upon the completion of obligations and duties by the directors, promoters and the partners.

In this essay, the various obligations and fiduciary duties of directors, promoters, and partners are discussed and critically examined.

Generally, the fiduciary relationship arises in the situation, where an individual undertakes to perform in the best interest of others or is obliged so to perform and other reclines assurance in the person to do so. It is very important to recognise the existence of fiduciary relationship. It is arise in several contexts between numerous classes of people. In the case of Hospital products ltd v United States surgical corporation (1984) 156 CLR 41, it was held by the court that the fiduciary relationships can co-exist between the similar parties. The basic contractual relationship provides the foundation for the creation of fiduciary relationship. It is required that the fiduciary relationship should accommodate itself to the terms of contract so that it is consistent with and confirms to them. The fiduciary relationship cannot be imposed to change the operations. It was held that the fiduciary duty should accommodate itself to the relationship between parties formed by contractual agreement (Char, Shah and Magnus, 2018). Similarly in case of White City Tennis Club v John Alexander’s club (2010) 241 CLR 1, same terms are used. The fiduciary duties of directors, promoters and partners are described as below-

Pre-registration contract is a contract, which is made by the promoter on behalf of company, and it is yet to be registered. It will be registered later. The common law defines that company is not capable to enter a mandatory contract until the registration. However, the promoters want to make the agreement for the corporation before the incorporation of company. If the corporation is not registered, then company cannot sign the contract. It cannot select the agent to sign the contract.

As per the common law, the company cannot ratify the pre-corporation contract after the registration. The reason is that as per the law of agency, the ratification has retrospective effect and the contract was considered as being made at time, when it was made by agent in the absence of existence of the company. In the case of Kelner v Baxter (1866) LR 2 CP 174, the lawyer was ready to sign the contract on behalf of unregistered corporation. Since the time advocate was not be appointed by the company. It was held by the court that lawyer was responsible personally. Here, the lawyer had the knowledge that about the registration status of company (Johnston and Too, 2018).

Fiduciary relationship

Section 131 to 133 of the Corporation Act solves the complexities of common law. These sections of corporation Act deal with contract before the registration of the company. The section 131 of the Corporation Act makes able the outsider to make a contract before the registration of company, if it endorses the contract after the registration. The person, who made this contract, will be liable to pay damages to other party in the case where company does not ratify the contract.

For performing the functions, the duty of care has been imposed on directors to run the business affairs of the company with reasonable care and diligence. They are required to attend the meetings of board on regular basis.

Section 131(1) of the Corporation Act states that if a person made the contract on behalf of corporation before its registration, then company will be liable. In this way, if that person fails to fulfil the requirements of section 131 (1), then the lawyer will be responsible to pay the damages under section 131(4) of the Corporation Act. Section 131 and section 132 make focus on the rights and duties of the advocate. It is stated in the section 131 (2), that if discharge agreement is signed by other party, then the person will not be liable to pay the damages. Section 131(2) of the Corporation Act also specifies that the promoter of the company may be accountable for the damages that corporation was responsible during ratification contract but not success to perform the duties as whole. Section 133 of the Corporation Act makes the replacement of any rights or obligations anyone would otherwise have on the pre-registration contract (French, Mayson, Mayson and Ryan, 2014).

In this way, the promoter of the company is significantly accountable on primary basis in above-mentioned situations. The corporation does not have secondary accountability. However, court had powers to give the order to the corporation to pay the damages to other party.

The partners stand in a fiduciary relationship to one another in all matters relating to partnership. This relationship of partners is a relationship of integrity, good faith, justice and the reliability. These fiduciary duties include-

As per section 28 (1) of the Partnership Act, the partner of firm other than incorporated limited partnership are compulsory required to render true and fair accounts. They are also required to give complete data and information, which influences the partnership or legal representative of partners. The section 28 (2) of the Partnership Act states that partners as per the incorporated limited partnership, are compulsory required to render true and fair accounts. They are also required to give complete data and information, which influences the partnership or legal representative of partners (Zhang, 2018).

Section 29 (1) of the Partnership Act states that if any partner derived the profits from any operation or for any use by partner of partnership property without any consent of other partners, then in this situation that partner will be liable towards the firm. Section 29 (2) of the Partnership Act applies over transactions, which take place after the dissolvent of partnership due to death of a partner and prior to the winding up of  business affairs either by the living partner or any representative of dead partner.

Pre-registration contract

Section 30(1) of the Partnership Act states that if any partner conducts any business of similar nature, then that partner will be liable to pay the profits to the partnership firm. In this way, it is a fiduciary duty of partners to not to conduct any other similar business without the consent of other partners of partnership firm otherwise they will be liable towards the firm. Section 30 (2) of the Partnership Act is not applicable to the incorporated limited partnership. In the case of Holloway v Skinner, 898 S. W. 2d 793, 795 (Te. 1995), it was held by the court that a representative of the party cannot tortuously interfere in respect of contract of party (Nowell, Cohen and LoCoco, 2015).

The Corporations Act 2001 has constituted many fiduciary duties of the directors of company. These fiduciary duties establish legal connection between corporation and director. The fiduciary duties put restrictions for the directors from taking some decisions, which are not in the best interest of the company. Following are the duties of directors-

As per section 180(1) of The Corporation Act, director is necessarily required to use his powers and release the obligations due to care and carefulness, which a practical person will perform if-

1. That individual was a director of the organisation in similar situations (Nietsch, 2018).
2. Person occupied the similar office and possessed the same liabilities in the organisation as the director (Liang, 2018).

The behaviour and actions are required to complete duty depends on situations of organisation and specific positions and the liabilities of the company. The executive directors and other directors are apprehended to high standards (Hobbs, Lynch and Williams, 2018). For an example, if the finance director of the company, who is diligent in respect of the financial matters, can breach duty by the undistinguishable behaviour of the non-executive director cannot create the breach. (McGreal, 2018).

In the case of ASIC v Healey &Ors (Centro) 196 FCR 291, it is found that the Centro was a substantial public listed company. The directors of the company had breached the duties in trusting on general guidance or the instruction from the accounting managers and the auditors before approving the financial report of the company, which stated that the company has short-term liability in the place of non-current liabilities. Here, the directors failed to apply common sense to the financial statement (Brown, 2018). They failed to make the doubt on the non-disclosure. It was the duty of director to read and take the knowledge about the financial statements of corporation. The directors were required to conduct the inquiry in proper manner. They are also required to have proper information of the accounts and the relevant standards. The declarations had been made that the directors had ruptured the duty of care and carefulness under section 180 of the Corporations Act (Zimmermann, 2016).   

Section 181(1) of the Corporations Act specifies that directors of a corporation are required to use the powers and release the obligations in the good faith in the interest of corporation and for the specific object. It is required by the directors to use the powers and release their obligations in the good faith in the interest of the company wholly. It is required by the duty of good faith that directors should act in what they fairly think to be the interest of the company (Van, 2015).

Duty of care of directors

Further, it is essential for the directors to use the powers and discharge the obligations for specific purpose. In the absence of the specifications explained by the constitution of the company, the specific purposes should be defined on the basis of the specific situations and roles of the powers. For example, one specific purpose of the power is to issue the shares of the company is to raise the capital. On the other hand, the issue of shares for specific purpose of reducing the powers of the directors to vote is likely to be an inappropriate exercise of the power (Neylam, Mir and Sato, 2017).

In the case of Howard-Smith v Ampol Petroleum Ltd [1974] AC 821, the directors of an organisation abused the powers when they performed for the objective overcoming the powers of the voting of the current shareholders by forming the fresh, majority, the share issue should be implemented in the interest of company wholly (Hill and Conaglen, 2018).

In case of Mills v Mills (1938) 60 CLR 15, it was held by the court that the transaction can be answerable on the question whether ‘but for’ aim, the directors of the company will have acted being challenged. Purpose of the performance would not be proper if director did not act for pre-determined purpose of corporation or not for the promotion of the interest of the company (Rauterberg and Talley, 2017).

The section 182 of the Corporations Act specifies that the directors and the employees of the corporation should not use position in improper way-

1. To take the benefits for themselves or for the others (Bac, 2017), or
2. To cause disadvantage to an organisation (LaFrance, Lange and Myers, 2018).

The case of ASIC v Adler (2002) is unique case. It was held by the court that Adler, who was the representative of AEUT, broke his duty as the officer of HIH and officer of HIHC because of some dealings. It was found that the Alder had breached the duties of director in the Corporations Act 2001. Adler breached duty of care and carefulness as per section 180, duty of act in good faith and for the specific object as per section 181, and duty not to make improper use of position as per section 182 and duty not to use information improperly as per section 183. It is found that Adler had breached the duty of good faith (Scally, Sandhu, Magas, Gauger and Minter, 2015). This is because the transaction in the HIH, HIHC and PEE has not utilised properly for the personal interest. Adler also breached the duty of proper use of position because Adler misused the position as the director of HIH, director of PEE and the officer of HIHC to attain the profit for Adler corporations (Mayor, 2017).

Section 183 of the Corporations Act states that the person who attains information in the capacity of a director or an employee or an officer, should not use these information in the improper manner to make a profit for themselves or others. They should not use the information to cause detriment to the company. This duty will be imposed even after the termination from the corporation (Yong, 2018).  

Rights and duties of the advocate

Section 191 of the Corporations Act states that if any director has material personal interest, then it is a duty of that director to disclose interest to other directors of the company. For the offence of section 191(1) of the Corporations Act, the strict liability will be applicable to the circumstances, in which the director of a company has material personal interest, which links to business affairs. Section 192 of the Corporation Act states that the director of company, who has material personal interest in any matter, can give other directors standing notice of nature and scope of interest. The case of Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513 is a good example to define the term material personal interest (Hawes, 2017).

Conclusion:

As per above discussion, it can be concluded that as per the fiduciary duty, the partners, promoters and directors should act in good faith and fairness. They should fulfil obligations in best possible effective way. This obligation underlies the actions of all other fiduciary duties in the company or partnership firms. It is essential for the directors of the company to perform with due care and diligence. A director should perform his powers and discharge his obligations with honesty. The directors should make business judgement in the good faith and for the specific object. The promoters should act honestly and in good faith. They should not misuse their position or harm to company. Further, partners are also required to act with reasonable care. In general, operating, or limited partnership, the partners should be able to trust on other partners, who manage partnership to encourage best interest.

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