Given the diversity of shareholders who are the owners of limited companies and their large numbers, it is prudential that few people are given the mandate of running the day-to-day affairs of these corporations. Shareholders, therefore, employ managers and choose directors who are responsible for decisions about how the corporation would be managed for the common interest of all shareholders. Given the power and authority to make decision without being made responsible for the same decisions is poisonous, and one may put his or her own interests before the interests of shareholders. The state has therefore come up with guidelines to restrict the actions of these directors so that the interests of the owners of the corporation, who might not have a chance of even knowing these directors, are safeguarded. These guidelines are contained in the corporate law and the corporations Act of 2001.
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In Australia, the duties of the directors can be divided into two large groups: the common law and the statutory law duties. The statutory laws are contained in the Corporations Act of 2001 and besides explaining what is expected from the directors, it details which law leads to a criminal offence when breached and which one has civil suit (Austin & Ramsay, 2013). On top of this, the directors are also expected to act in accordance with the stipulations of the constitution of the company, which they are supposed to read and internalize before they sign the contracts with the company (Fu 2010). As far as the common law is concerned, the directors are expected to act in good faith and in the best interest of the corporation. This requires that the director execute their powers in what they believe will benefit the corporation (Tan, 1999).
Duty to Report Material Personal Interest
Directors who have interest in any proposed transaction by the company should declare their interest to the board of directors (Walker, 2005). Section 191 states that adirector can disclose the same during a directors meeting by fully explaining the relation of the interest to the affairs of the company (Wild, Weinstein & Smith, 2009). Moreover, it is the duty of the director who has any interest in a company’s affairs to disclose the nature of the interest as well as the extent of the interest. However, this is not necessary when the interest arises because the director is a guarantor and has given security or the interest relates to a company where the director is a member (Mancuso, 2009). Furthermore, all the exceptions set out in section 191 hold. Therefore, the director should inform other directors about the truth of the matter so that the best decision can be made (Walker, 2005). In the case of Aberdeen RY v Blaikie (1854), the court held that directors should avoid conflict of interest since they are agents of the company (Keay, 2007). The same was the ruling in Cook v Deeks (1916) and O’Donnell v Shanahan (1942).
Under certain circumstances, a director can also disclose the interest through a standing order whether or not the matter is related to the interest at the time of giving the notice (Horrigan, 2010). The notice can be given individually to all directors through writing or be issued during a directors’ meeting. Section 192 states that the standing order should be tabled in directors meeting and its contents recorded in the minutes. Disclosure should be done when the director is also a director of another company which has interest in the main company’s affairs. In the case of the Duke Group Ltd v Pilmer, it was held that directors ought to disclose any information related to the firm that is in their position. It is important to note here that this does not apply to a company which has only one director.
Directions on use of Position and Information
In section 183 of the Corporations Act 2001, it is stated that directors have a duty not to use a company’s inside information for their benefit. It stipulates that the directors should not use any information gained by them for inside trading. In the line of duty, a director can come across information about the probability of a rise in the price of future shares when the year results are about to be announced (Griffin, 2006). The director can then buy or advise a third party to buy shares at the current lower price and sell them later when prices have gone up, hence making huge profits for the director (Wells & Fisse, 2011). It is important to note that this is a breach of duty for the information was received solely because the person was a director of the company. In the case of ASIC v Stephen William Vizard (2005) and Regal (Hastings) Ltd v Gulliver (1942), it was held that directors should not use private information to benefit themselves. In section 184, the Act states that a director of a company should not use the information dishonestly or recklessly. As a result, directors are supposed to avoid any actions that may lead to direct or indirect benefit to them or any third party whenever they are acting in their capacity as directors (Austin & Ramsay, 2013). Similarly, it is illegal for directors to be involved in any reckless behavior that may cause harm to the corporation, either material or otherwise. Therefore, directors will have to exercise their powers in good faith and in the best interest of the firm (Tuunanen, 2011). On the same note, all directors are required to discharge their powers for proper purposes only. Discharge of duties in a manner that any reasonable director will classify as being not in the best interest of the firm will lead to breach of duty. It is important to note that failure to observe the above requirements is a criminal offence.
Duty to Apply Due Diligence
Moreover, directors are expected to apply due diligence, care and skill in execution of their duties. In this regard, directors are to apply enough care that they, or any other person, would have applied if they were acting in their own interest (Adams, 2005). Furthermore, this requires that the director acts in a way that any other person with the same level of knowledge would have acted given the prevailing conditions. Precedence of this can be taken from the case of Dorchester finance Co. Ltd V Stabbing (1989). For a case where a director has sufficient evidence that the other director is well experienced and has proper knowledge concerning a certain matter then he or she is allowed to rely on the information given by the said director (Phang, Chan & Chiu, 2004).
In section 189 of the Corporations Act, it is elucidated that a director is allowed to rely on professional advice from both a fellow director and an expert in the field in question provided the director believes that the person is competent (Tomasic, Bottomley & McQueen, 2002). The reliance is also supposed to be made in good faith and after making personal investigation about the information. On the same note, the director should put into consideration the complexities of the company and the economic situation. As far as delegation of duties is concerned, the director is expected to make inquiries if necessary to proof that the person the duties are delegated to is qualified for this and has the interests of the company in focus (Adams, 2005). It is the duty of the directors to also make the delegate aware of the requirements of the act and the stipulations of the company constitution in accordance with the duties delegated.
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Ordinarily, any director should not be present in a meeting or be allowed to vote on matters in which he or she has material interest (Bouchoux, 2009). However, section 195 of the Corporations Act states that this can be overlooked if other directors consider the nature and extent of the interest and agree that the same cannot disqualify a director from voting. Furthermore, in case of lack of quorum, any director may call for a general meeting where a resolution may be passed for the general meeting to deal with the matter. Nevertheless, according to section 194, if a director discloses the nature and extent of his or her material interest to other directors according to section 191 and 192, then he or she can vote (Keay, 2007). The exception includes interests that do not require disclose as directed in section 191. Besides being allowed to vote, section 194 also states that the director may keep the benefits gained and the company cannot avoid the transaction because an interest exists.
Protection of Company Information
In the course of their duties, the directors of the corporations come across confidential information of the company which if used by somebody who does not have the interests in the company at heart can lead to a lot of loss to the company. It is the duty of the directors therefore to ensure that this information remains within the company or it is shared with the right people only (Tabalujan & Toit-Low, 2009). It is an offence if the directors fail to give all the information within their knowledge to their shareholders for them to make informed decisions and will consequently be held responsible for any loss arising. This means that other than being expected to keep this information secret to protect the company from possible harm, they are not supposed to use this information for their personal or collective gain or the gain of a third party (Fu, 2010). Moreover, it is the duty of directors to ensure that when information is released to authorized people, only the necessary information is given and nothing more than that.
In the course of their duties, directors are expected to solve almost every issue that the company is facing. Sometimes, this includes making decisions that require knowledge that the directors might not be possessing (Austin & Ramsay, 2013). In cases like these, directors may need to seek advice from other people especially professionals. In section 189 of the Corporations Act, it is depicted that a director is allowed to rely on professional advice from both a fellow director and an expert in the field in question provided that the director believes that the person is competent in the issues in question (Tomasic et al., 2002). The reliance is also supposed to be made in good faith and after making personal investigation about the information and putting into consideration the complexities of the company and the economic situation. It is crucial to note that directors are supposed to make enquiries concerning the qualifications of any professional before they make a decision based on his or her advice.
Duty to Act in Good Faith
Arguably, the most important duty of directors is to carry out their activities without any agenda other than to benefit the company. Directors are expected to act in good faith and in the best interest of the corporation. This requires that the director should execute their powers in what they believe will benefit the corporation. This duty is therefore subjective in that it allows the directors to make their own choice of what is in the best interest of the corporation and their decision may not be necessarily similar to another person (Lyon & Du, 2005). However, the courts have powers to intervene if the actions taken by any director may not be such that a responsible director will deem it in the best interest of the corporation. Nonetheless, directors should always ensure that whatever they do, the company’s interests come first.
Duty not to Misuse Their Position
It is required that directors should not do anything, using their capacity as directors of the company, that will benefit them individually or any third party. In this regard, directors are advised not to engage or plan to engage in any activity that will cause the firm to suffer a loss either monetary or otherwise (Fu, 2010). It is important to note that directors will be deemed to have breached this duty not only when their activities cause harm to the firm, but also when their activities can lead to harm. Therefore, if in the course of duty a director comes across an opportunity that is profitable to the company, the director is expected to exploit the opportunity for the benefit of the company and not for a personal gain (Horrigan, 2010). According to the case of Mills v Mills (1938), collaboration with a third party to take advantage of any opportunity present or upcoming that is supposed to benefit the company is illegal.
Duty not to Trade while Insolvent
According to this duty, directors are supposed to be aware of the financial position of the firm. In this regard, directors are expected to know when the company is about to be insolvent (Davies, 2008). Consequently, directors should prevent the firm from incurring debts if they have sufficient reasons to believe that by incurring the debt, the company will become insolvent. Mostly, this duty is breached when directors allow a firm to incur a debt while they are aware that the firm is either insolvent or will be insolvent by incurring the debt (Fisher S. & Fisher D., 1998). In the case of ASIC v Edwards (2006), a director was disqualified for allowing the company to incur a debt of $ 3.3 million knowing that the company was unable to pay the debt back.
It is important to note that the duty to act in the best interest of the firm is very subjective. Directors can easily defend themselves on any action that they take by giving a convincing explanation (Degenhardt, 2010). It is not quite clear of what can be considered to be in the best interest of the firm. Moreover, this duty is highly dependent on prevailing circumstances. What is considered to be in the best interest of a firm in a given situation may comprise breach of duty in different circumstances. As a result, directors should critically evaluate all actions they need to take.
All the duties of a director must be performed diligently and by exercising maximum care. It is an obligation that every director should understand what the common law and the statutory law expect of him or her by the virtue of holding the position. Ignorance is not an excuse for failure to execute one’s duties according to the corporation’s act as the law expects one to know what should or should not be done. Directors need to be held responsible for their actions so that they may take care of whatever they do. It should be noted that shareholders trust directors to execute all duties of the company and if the directors make mistakes, it is the shareholders who suffer. Consequently, the law should safeguard shareholders’ interests.
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