LAWS11-310 Mystical Items Pty Ltd Analysis Assignment Sample

• Subject Code : LAWS11-310
• University : Bond University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Law

Corporate Law

1. Issue:

• Whether Hagrid can be held liable for the breach of the general law duty to avoid conflict of interest and other statutory obligations?
• Whether the directors hold the share in Hagrid’s individually purchased mystical item’s collection?

Rule:

Section 180 – 183, section 191 and section 194 of the Corporations Act, 2001.

Application:

The directors of a company are under a duty to exercise precautions which avoid conflict of interest and not utilise the position in any way for personal benefits against that of the company. In this case, Hagrid committed a breach of his duty to avoid conflict of interests after seeing the flyer with the advertisement about the mystical item’s collection of Mr Dumbledoor and the unique items in the collection. The directors of a company are under a civil obligation as per the provisions provided under section 180 of the Corporations Act 2001, which provides that the director must exercise due care and diligence as provided under subsection 1 of section 180. Subsection 2 of section 180 provides the credibility and the directions on the business decision taken by the director while exercising his powers or performing his duties as a director of the company. Mr Hagrid also presented the idea of buying Mr Dumbledoor’s mystical collection (the collection) before the other directors as a deal which was beneficial for the company but on the other hand, he failed to avoid the conflict between his interests and the company’s interest since he was influenced by the items for his interests and thus committed the breach of the duty to avoid conflict of interests.

The business judgement rule under the subsection 2 clause (a) provides that the judgement should be made for a specific purpose which was not so specific in the decision taken by Hagrid. However, under clause (b), the director shall not have any personal interest in the outcomes of the business decision taken by him which he considers to be taken in the best interest of the company which, lies breached here as the decision taken by Hagrid to purchase the collection was not for the interests of the company but the personal interests of Mr Hagrid. Additionally, Hagrid improperly used his position of director to gain an advantage out of the business decision of buying the collection which is a clear violation of section 182(1), thus holding him liable under section 182(2) as involved in the contravention of the act. Hagrid also used the information he had to gain an advantage for himself, thus causing detriment to the company hence, stands liable under section 183(1) for the said act. Although he gained approval from all the directors of the company by showing the flyer, he hid the fact about the Golden Snitch and its market value thus presenting the fact that he was not working in good faith as the director and thus also stands liable under section 181(1).

The issue that the other directors hold a share in the collection purchased by Hagrid stands eligible to be considered because Hagrid could have easily retained the benefits arising out of the business decision if he had disclosed his interests before the other directors before the transaction which made by him which he didn’t disclose. The eligibility to retain benefits out of the business transaction has been mentioned under section 191 and section 194(e) and thus making it easy for Hagrid to enjoy the benefits arising out of the Golden snitch as a part of the transaction. Thus, by just mere non-disclosure of the personal interests by Hagrid, the demand of the directors asking for a share in the collection stands valid and thus would be entertained. However, Hagrid can only be charged with civil liabilities and not strict liabilities as defined under section 191 (1A) despite his intention of non-disclosure of the material benefits to the other directors.

Conclusion:

It can be concluded from the analysis of the mentioned facts and the legal provisions that Hagrid can be held liable for committing the breach of duty to avoid the conflict of interest since he entertained his interest and did not exercise his powers for the best interest of the company. Also, he did not disclose his interest in the business transaction of buying Mr Dumbledoor’s collection thus, making the other directors eligible to claim the benefits and the share in the collection. Hagrid can be charged with civil obligations imposed upon him as a result of the acts committed by him. He can’t be charged under strict liability.

2. Issue:

• Whether the new lease was taken by the directors of Mystical Items Pty Ltd make them eligible to make claims for insolvent trading?
• Whether the directors of Mystical Items Pty Ltd. can be held liable for disqualification of any other penalties for being at fault?

Rule:

Section 180 – 184, 588G of the Corporations Act, 2001.

Application:

The issue regarding the claim for insolvent trading by Mystical Items Pty Ltd against the new lease taken by the directors on a double cost than the current lease incurred the company with additional debt and that too when the company had already suffered huge losses against the damages incurred due to the storm on the previous store of the company. The financial status of the company was not good already and then the decision of taking a property on lease with a little additional area than the previous store and that too on double the cost of the original lease caused an additional financial debt on the company and thus, the decisions taken by them can hold them liable to be tried under section 588G of the Corporations Act. The law holds the directors liable for the transactions which they continued during the insolvency and no claim could be made against the same. It was the responsibility of the directors to ensure that the business was at a halt, to prevent the company from further occurring losses if any, but the same was ignored by the directors again committing an additional breach in the duty to act with due care and diligence (s 180), along with the breach in the duty to act in good faith (s 181) and the breach in the duty to act in the best interest of the company (s 184) and the breach of the duty against improper use of the position or information (s 183).

Although there are various defences available for the directors against the claim for insolvent trading and the defences being the availability of reasonable grounds which could be used to expect solvency, and the reasonability of the reliability of the information provided by a reliable and competent manager who in this case is Mr Malfoy who advised the directors to take the leave on double cost and continue the business thus reducing the losses incurred by the company, and all reasonable steps with due care and diligence was taken by the director to prevent the company incurring the debt on the company thus making the directors free from the proceedings on the ground of civil liabilities made against them. An additional defence which can be taken by the directors is the non-availability of the directors because of illness or due to any other valid reason which becomes void here, since, all the four directors of the company were in good health and performed their duties in sound mind thus, making them unable to use this ground as a defence.

The issue of deciding the director’s liability against any disqualification or penalties against the actions committed by them can be understood from the penalties imposed upon the directors that include disqualification from the company, and fine to be imposed on the directors amounting up to $200,000, followed by the order to pay compensation to the company equivalent to the losses suffered by the creditors due to the actions of the directors and at last the criminal proceedings against the directors if required. The deciding factor is the liquidator’s report that holds the liability of the directors against the acts committed regarding the business transactions performed by them while the company was already in losses and the directors committed the act of insolvent trading against the company.

Conclusion:

The directors cannot claim for any relief against the insolvent trading done by the directors of the company in terms of the lease taken on double cost than the previous one for almost the same area of the property. Also, the directors can be surely held liable for disqualification and also eligible for penalties against the actions committed by the directors of the company. Thus, affirming the fact that the insolvent companies are always at fault. Although the directors acted in the best interest of the business growth, they should also have acted with the duty to due care and diligence and thus could be exempted from criminal proceedings and shall be held against the civil liabilities.

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