Corporate Law - Case Study 1

Issue (s)

  • If Joe Johnson can take the defence of business judgement rule in the case.

  • If Joe Johnson failed to fulfil the duty to take care and diligence while entering into the lease in a new building for the company.

  • If Joe Johnson has breached his duty as director and committed the offence by not expressing his former bankruptcy.

Rule (s)

Business judgement rule

Corporation Act (Cth)

Common Law

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.

ASIC v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229.

Woodgate v Davis (2002) 55 NSWLR 222.

Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.

Analysis

As per the common law, Joey Johnson has acted bona fide in the interest of the company when he decided of allowing the client to have the event without the general business practice of getting the 50% deposit. As provided in the case of Walker v Wimborne[1], the director can be held when he breached the duty without giving proper consideration to the interest of the company which is not the situation in the present case of Johnson. In this particular case, the act of Joe Johnson can be questioned concerning the business judgement which he took and diverted from the general business practice of obtaining the personal guarantee from the client with the 50% deposit in statutory law as well. As provided in section 180 (2) of the Act, the director must make business judgement where the judgement is in respect of good faith for the proper purpose and does not involve any material personal interest of the director. In this case, there was no personal interest of Joe Johnson in the wedding plan of the daughter of Jerome Best. The business decision which he took was based on the rational belief that this judgement is likely to provide a better reputation to the company and will establish the company as the best event management company in Australia. As provided in the case of ASIC v Rich[2], the court interpreted the term reasonable belief concerning the business judgement rule and provided that the reasonable belief is such a belief which is based on reasoning even it is not reasonable in an objective sense.

Similarly, the act of Joe Johnson of not getting the deposit from the client it was based on the national belief of providing a better position to the company. He also fulfils all the requirements of section 180(2) of the Act[3]. On the other hand. Joe Johnson has also leased one of the most expensive office building despite the financial position of the company currently. It has been provided that to get business judgement defence, the director is not supposed to fail to oversee the affairs of the company can send the business judgement[4] which is going to make a negative impact. Joe Johnson was not aware of the financial impact on the company with the wedding plan event and this lease. While taking the decision of entering into a lease which involves a great investment, Joey Johnson failed to fulfil the duty of care and diligence as provided in the common law. It is the duty on the directed to be informed of the financial affairs which are persisting in the company in the current situation[5]. And similarly, Joy Johnson cannot take the defence of ignorance to the affairs of the company particularly when the ignorance is his concern only[6].

Directors of the company are responsible to avoid any insolvent trading or other related consequences and defences of breach[7]. In this case, the wife of Joe Johnson has claimed that he has not expressed his former bankruptcy and committed the breach of his duty towards the company. It is notable that the director has breached his duty when he has grounds to believe that company was either insolvent or may become insolvent[8] and still, fail to prevent the company from incurring such debt[9]. In this case, Joey Johnson was acting on the reasonable belief that such activities will help in developing a better reputation and market for the company. As provided in the case of Woodgate v Davis[10], this particular duty of the directors is based basically to enhance the responsibility of the director towards the protection of the welfare of the stakeholders of the company[11]. This is the reason his wife is claiming the breach of his duty towards the company concerning the event plan and his act of allowing no deposition and investing from the company only. His act has affected the welfare of other stakeholders including his wife. Joe Johnson has acted here on the fact that on the time of the debt, he has the reasonable grounds to believe that the company is solvent and would remain so even if the debt is incurred[12]. On the other hand, the act of Joe Johnson when entering into a lease for expensive building for the company. He was unaware of the financial situation of the company after the wedding plan event. Although it is significant to consider here that while entering into this lease, he had not provided the written concern to which has to be provided considering his appointment as a director of the company. The defence has been provided considering this act of Joe Johnson in the Act. It has been given that if the director does not take part in the management of the company particularly in that situation due to any illness or other reason, the director will have a defence over the inability to prevent the company from incurring a particular debt[13]. Joe Johnson can claim this defence as he was not the part of the management as he has not signed the appointment of himself as director of the company.

Conclusion

It can be concluded from the facts of the case that the act of Johnson can take the defence of business judgement rule as he was acting on the reasonable belief that the act will help in the better establishment of the reputation of the company and will provide business opportunities for the company in the coming future. He has failed in his duty to take care and diligence when entering into the lease but it is also significant that during this deal he was not appointed as the director of the company and can take the difference of the not part of the management of the company because of any reason. Since he was a former bankrupt and the whole facts of the case was based on the reasonable grounds of Joe Johnson that he will not lead to the company into insolvency status with even incurring such debt, he can take the defence of reasonable grounds of being accountable to the welfare of the stakeholders of the company.

Corporate Law - Case Study 2

Issue (s)

 If Brian, Rakesh and Michael have breached any of the duties of the director.

If Brian, Rakesh and Michael can be penalised in this case.

If there is a remedy available against the acts of Brian, Rakesh and Michael.

Rule (s)

Corporation Act (Cth)

Common Law

Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614.

Pine Vale Investments Ltd v East Ltd & East Ltd & Anor (1983) 8 ACLR 199.

Daniels v Anderson (1995) 37 NSWLR 438.

ASIC v Rich (2003) 44 ACSR 341; [2003] NSWSC 85

ASIC v Adler & Ors [2002] NSWSC 171.

Ibid.

Analysis

In this case, Brian, who is a non-executive director of the company, has convinced the other director Rakesh and Michael provide a loan of $10 million to other companies which have been controlled by him. The business turns out to be a major loss because of the various inefficient decisions taken by the other company called Dithery private limited in which the investment was done and even have acquired the shares of OTC Ltd and its subsidiary company. Under the common law, it has been provided that the director must not act for any purpose where he will be obtaining an advantage for themselves. As provided in the case of Comptroller of Stamps v Howard,[14] the power which has been given to the director to issue shares must exercise in the interest of the company as a whole which has not been exercised in this particular case by the directors of the company. Also in the case of Pine Vale Investments Ltd v East Ltd & East Ltd & Anor[15], it was provided by the court that an improper purpose includes the act of taking advantage from a genuinely commercially favourable opportunity as well.

Brian has breached the duty provided under the provisions of section 182 where it has been given that the director must not take an advantage which may cause the failure to the Corporation by engaging into conduct with an intention to obtain some personal advantage[16]. Brian had also committed the act of criminal offence[17] as he has used of position with an intention of dishonesty in order to directly or indirectly gain some advantage out of the whole transaction with the corporation only for himself.

The standard of duty which has been owned by the director actually depends on their role in the company and if it is provided that the status of being a non-executive director is not sufficient to have a defence for the poor management of the company. As provided in the case of Daniel v Anderson[18], it was concluded that both executive as well as non-executive directors have the same standard of care required for making any decisions concerning the functioning of the company and its management. The same has been reaffirmed with the case of ASIC v Rich[19] where the interpretation of the standard of care concerning the role of non-executive and executive director was discussed by the court. It was stated that the standard of care has been objective the assessed for both the non-executive as well as executive directors and it is required for the director and non-directors to apply their knowledge and skills up to a reasonable standard in making any decisions concerning the management of the company

Similarly, in the case of ASIC v Adler and Ors[20] where there was an issue concerning the payment of a big amount to the subsidiary of the company where Rodney Adler what's the sole director. In this case, which is similar to the facts of the present case of Rakesh Michele and Brian, one of the directors Adler has used the mechanism of trust in order to acquire the shares of the subsidiary company and to make loans which were associated with Adler[21]. Although in this case the whole transaction was occurred without the approval and disclosure to other members of board director and also there was no proper documentation of security to ensure that it did not come to the attention of the HIH directors. It is found that the director in such cases owes the duties of a director to act in good faith and for the proper purpose[22] along with their duty do not use their position improperly[23]. The duties which have been contravened may include the improper use of the information[24] and duty act with due care and diligence by the director[25]. The Court in this case found that the other directors of the company were aware of the whole contravention of the duties of the director by Adler.

As Michael who was the director as well as the financial controller of the OTC Limited, he also has breached the duty of care and diligence along with the proper management of the company. As provided in the case of ASIC v Rich[26], the director was having the commercial experience, as well as qualification and his role within the company, has been of such dignity, when such director will be held responsible within the Corporation for the breach of the statutory duty to take care and can be held liable for the same by ASIC.

Brian can be facing criminal proceeding under section 184 of the act and ASIC can file a suit against him for the offence where the maximum penalty can be a fine of $200,00 or he can have imprisonment of 5 years for the Act[27]. All these directors can be e disqualified from the management of the company under the provisions[28] of the Corporation Act as a penalty for such poor management of OTC Limited Pvt.

Conclusion

It can be concluded from the facts of the case and the concerning common law as well as the statutory law the act of the directors whether they are executive and non-executive directors make them responsible for all the activities of the corporation concerning the decisions which have been taken against the interest of the corporation

The directors of the company including Brian, Rakesh and Michael can be held liable for the poor management of the company and working against the interest of the company. They can be penalized under the statutory laws of the Corporation Act. Brian can be held even for the criminal act of improper use of his position against the interest of the company and breaching his duty to take care and diligence while taking the decisions for the company. The other two will also be held liable for letting such management by one of the directors of the company and consenting over all the transactions.

Bibliography for Corporations Act

Legislation/ Acts

Part 5.7B Division 3.A of the Corporations Act.

s 180 of Corporation Act (Cth).

s 181 of Corporation Act (Cth).

s 182 of Corporation Act (Cth).

s 183 of Corporation Act (Cth).

s 184 of Corporation Act (Cth).

s 206B of the Corporations Act (Cth).

s 588G of Corporations Act 2001 (Cth).

s 588G(1) and 588G(2) of Corporations Act.

Schedule 3 of the Corporations Act.

Case

ASIC v Adler & Ors [2002] NSWSC 171.

ASIC v Rich (2003) 44 ACSR 341; [2003] NSWSC 85

Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614.

Daniels v Anderson (1995) 37 NSWLR 438.

Pine Vale Investments Ltd v East Ltd & East Ltd & Anor (1983) 8 ACLR 199.

Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.

Woodgate v Davis (2002) 55 NSWLR 222.

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