Research Essay Directors Duties - Click To Get Solution

Question: Discuss about the Research Essay for Directors Duties. Answer: Inroduction: The definition of the term director is present in section 9, Corporations Act, 2001. This definition provides that a person can be described as a director of a company if that person has been validly appointed as the director or as an alternative director. At the same time, this definition also includes a persons, who are not violate the appointed to this position but such person has been acting as a director. In this way, de facto directors are also included in this definition. In the same way, the Corporations Act provides that a person will be considered as a director even if such a person has not been duly appointed to this position if the other directors of the corporation have been accustomed to act in accordance with instructions given by such a person. In this assignment, an examination has been made of the duties that have been imposed on the directors. Along with this research, the evolution of these duties and the role played by the directors in this regard has also been c onsidered. There are resources in Australia under which, duties have been prescribed for the directors. Therefore, the common law, statute law and the constitution of a corporation provides for certain duties for the directors. The aim of introducing these duties for the directors is to support good corporate governance in Australia. According to these duties, the directors have an obligation to prefer the interests of their corporation in comparison to their own interests (Sweeney, OReilly and Coleman, 2013). In this context, certain obligations have been prescribed for the directors by the common law, like the obligation of the directors to act bona fide and in the interests of their corporation. According to the duties that have been prescribed for the directors, the directors must act in good faith. While deciding if the directors have fulfilled this duty, the courts may use the subjective test of scrupulousness. Therefore, the law will consider a director to be in breach of these obligations if the director had not properly considered the interests of corporation properly (Vermeesch and Lindgren, 2011). For instance, there can be a situation where the director comes to know that the interests of his corporation resemble the directors individual interest and consequently, he had not considered the interests of the company as a distinct body. In this context, a duty has been mentioned under the common law according to which, the directors have been restrained from performing for an improper purpose. The duty has been enacted on the directors for the purpose of making sure that the powers given to the directors are not used by them for any inappropriate purpose. In this context, a purpose can be described as inappropriate for example where a personal advantage has been achieved by the director or where the director was trying to overthrow the voting power of the company's shareholders by forming a new majority. In case of such a situation, it has been provided by the common law that raising capital or making efforts to achieve an advantage from a genuine commercial prospect that is accessible to the company can be described as a proper purpose. In the same way, the law also allows the directors to promote their own interests when doing so, they are involved in promoting the interests of their company. An objective test has to be used for the purpose of determining if the powers given to the directors, have been used for proper purpose. An example can be given a situation where the company is going to borrow money and it needs to be considered if the need for borrowing the money is real or not. In the same way, if the inappropriate purpose of the directors was the main reason or one of the main reasons for taking such a decision, the court will consider the decision as unacceptable when except the improper purpose, such decision would not be taken. For deciding such cases, the law provides that when the powers given to the directors have been used for an improper purpose, such acts can be avoided by the company. Under the common law, the duty of care and diligence is also applicable for the directors. The duty requires that the directors should stay mindful regarding the monetary position of the corporation, which includes the solvency of the corporation. In this context, it has been provided by the law that it is a very important obligation and is applicable even if the responsibility to keep an eye on the financial position of the corporation has been given to another person. It is also been mentioned in this context that the directors cannot use their unawareness concerning the affairs, mainly when the unawareness is of their own making. In view of this responsibility, it becomes the obligation of the directors to ask questions related with the information that has been provided to them regarding the company. This is necessary for the purpose of making sure that the information dealing with the company is capable of revealing the correct financial position. The effect of this obligation is that the directors should not simply agree to whatever material has been provided to them. In order to discharge this duty, the directors have to make independent/informed conclusion about the matters that have been put before them in board meetings. In this way, the director has to play a role of a guide and monitor. The common law also requires that the directors are under obligation to use their own discretion (Lipton, Herzberg and Welsh, 2016). This duty requires t he directors to refrain from putting themselves in such a situation where they find it difficult to make favorable decisions for their company. For example, such a situation will arise when during a commercial transaction; a director finds it difficult to take decisions on behalf of company. Consequently, in view of this obligation, the directors should not enter into the transactions where they may have to give preference to be interests of a third-party instead of the interests of their company. It is also an obligation based on the directors to avoid any conflicts of interest (Harris, Hargovan andAdams, 2015). Apart from the common law duties, the obligations levied on the directors have also been included in the Corporations Act, 2001. The reason behind the introduction of these duties is to encourage good governance and also to safeguard the business and investors. For example, section 180(1) describes the duty of the directors to exercise due care and diligence. As stated by this section, the directors of a company should use their powers and discharge their duties with the same care and diligence that can be expected from any other reasonable person if the person was a director or an officer of the corporation under comparable situations and held the same position and had similar responsibilities in the company as the director. For this purpose, it is required that independent and informed judgments are made by the directors (AWA Ltd v Daniels, 1992). Apart from it, the law also states that the directors cannot claim ignorance concerning the affairs of the company, in case the ignoranc e regarding the affairs of the companies of their own making (Statewide Tobacco Services Ltd v Morley, 1990). Simultaneously, section 181(1) of the Act has imposed the duty of good faith and proper purpose on the directors of corporations. According to this section, it has been provided that a director is under an obligation to use their powers and discharge their duties in good faith and in the best interests of the company. Similarly it is also required that these powers and should be exercised by the directors/officers for a proper purpose. It can be said that the duty of good faith is breached by the directors if it can be said that the directors have subjectively failed to give proper consideration to the interests of the company like the shareholders of the company as a collective group (Walker v Wimborne, 1976). Apart from it, an objective standard can also be applied, according to which it has to be seen if any other honest and intelligent person, acting in the same position and keeping in view the relevant circumstances would have reasonably believe that such a transaction was in fact beneficial for the corporation (Kinsela v Russell 1986). On the other hand, taking advantage of a real commercially favorable opportunity can be described as a proper purpose (Pine Vale Investments Ltd v East Ltd East Ltd., 1983) or to raise investment for the corporation (Comptroller of Stamps v Howard-Smith, 1936). But it cannot be described as a proper purpose is the directors are going to achieve an advantage for themselves (Mills v Mills, 1938) or if they are going to create new majority in order to defeat the voting power of the minority shareholders of the corporation. One more noteworthy duty has been imposed on the directors by s 182. Therefore, this section states that it is the obligation of the directors not use their position improperly. This obligation will be pleased by the directors if it is found that the directors involving conduct with an intention and the purpose of attaining an advantage or for producing a loss to the company, and in such cases, the outcome of such conduct is not relevant (R v Byrnes, 1995). Section 182 also provides that a breach of this section will take place if the director is involved in conduct for gaining an advantage or producing a loss to the corporation, irrespective of the fact if such conduct has achieved such a benefit or caused the loss. Section 191 provides for the obligation of the directors according to which in case the directors have a material personal interest regarding a transaction, it is the duty of the director to notify other directors of the company regarding the presence of such a conflict of interest. It is said that such a conflict of interest is present if the director has a material personal interest related with any method that is concerned with the companys affairs and in such a case, the director is required to give a notice to the other directors unless the notice is not required under subsection 2. Another important duty is present in section 588G of the Act. The provision states the duty of the directors to prevent insolvent trading. This section provides that it will be considered that the director has broken the obligation to prevent insolvent trading if a person is a director at the relevant time when a debt has been incurred by the company and either the company is insolvent or it may become insolvent after incurring the debt and practical grounds were present for such a person to doubt that either the corporation is insolvent or may become so and the person is aware of these grounds or any other reasonable person should be aware of these grounds under comparable conditions (Woodgate v Davis, 2002). References Harris, J. Hargovan, A. and Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th edition Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson Reuters Sweeney, OReilly Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis Vermeesch,R B, Lindgren, K E, 2011, Business Law of Australia Butterworths, 12th Edition AWA Ltd v Daniels (1992) 7 ACSR 759 Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 Mills v Mills (1938) 60 CLR 150 at 185 Pine Vale Investments Ltd v East Ltd East Ltd Anor (1983) 8 ACLR 199 R v Byrnes (1995) 130 ALR 529 Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 Walker v Wimborne (1976) 137 CLR 1 Woodgate v Davis (2002) 55 NSWLR 222.