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 the 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.
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 laws leads to a criminal offence when breached and which one have civil suit. 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. These requires that the director should execute their powers in what they believe will benefit the corporation. The 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 necessary similar to another person (Baxt B. and Baxt R. 2005). Thought the courts have powers to intervene if the actions taken by directors or director may not be such that a responsible director will deem is in the best interest of the corporation.
In addition, the directors are also expected to exercise their powers within the stipulated in their mandate and not to use their powers in order to gain personally or as a group from any activities that they take. It is therefore, expected that the directors will only act within the powers that are conferred unto them and not anything outside that even though they believe that doing so would be in the best interest of the corporation.
Furthermore, the directors are also expected to avoid conflict of personal and corporations’ interest in the course of their duties. This means that the directors are expected to perform the function of the corporation first notwithstanding what they would have wanted to gain (Horrigan 2010). On top of that, the requirement also implies that the directors are not supposed to perform their duties or apply the powers of their position in a manner that may benefit them or third parties. On the same note, it implies that the directors will not have vested interests in actions that are within the scope of their duties as the directors of the corporation. It is also expected that in avoiding conflict of interests, the directors will safeguard the assets of the corporation and not use them for their personal gain or that of the third party. It is important to note here that, some of the above expectations can be contravened if and only if the corporation gives a fully informed consent (Keay 2007).
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 of 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. 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 thereof. These means that, other than being expected to keep this information a 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).
In conjunction with that, directors are expected to apply due diligence, care and skill in execution of their duties. This does not mean that the director is expected to apply all profession care that is available, but he or she should apply that skill that any other person of his or her knowledge and experience would have applied. Here, the directors are to exhibit that care that they or any other person would have applied if they were acting on their own interest (Adams 2005). For a case where the director has sufficient evidence that the other director is well experienced and has proper knowledge concerning a certain matter, then he or she is right to rely on the information given by the said director.
In any action taken by the directors, it is done so on behalf of the company and not on their personal capacity as long as they are acting in their position as the directors of the company. Therefore, if in the course of their duty the directors come across an opportunity which is profitable or otherwise concerns the company, then they are expected to exploit the opportunity for the benefit of the company and not for their private gain (Horrigan 2010). Collaboration with a thirds party to take advantage of any opportunity present or upcoming that is supposed to benefit the company is therefore illegal and the directors should be held accountable for that.
In performance of their functions the directors are restricted to do so for the benefit of the company as a whole. They are therefore not expected to tie the repercussions of their action to the future without proper consultation and whatever that they do should be within the constitution of the corporation (Keay 2007). They however, can bind or delegate their actions to the future if the actions are honestly for the benefit of the whole organization.
Section 183 of the corporations acts 2001 states that, the directors have a duty not to use the inside information of the company to gain advantage or to benefit themselves. It stipulates that, the directors should not use any information gained by them to insider trading. This implies that, if for example there is a probability of a rise in the price of shares of the company in future, due to the good end year results about to be announced, then the directors can buy a lot of shares or advice third parties to buy shares at the current lower price. These shares will then be sold when the prices have gone up hence making quick profit for the directors or third parties therefore taking advantage of the information. This is against the duties requirement of the directors and has a penalty according to the law (Wells and Fisse 2011).
In section 184, the act states that the officer of a company should not use the information dishonestly or recklessly in a manner that is aimed at being advantageous to the director or a third party or cause damage to the company. In committing the above offence, it is implied that the director will not have executed his or her duties in good faith, for proper purposes within their mandate or in the best interest of the company.
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 the purpose and has the interests of the company in focus (Adams 2005). It is the duty of the directors also to make the delegate aware of the requirements of the act and the stipulations of the company constitution in accordance to the duties delegated otherwise the director will be responsible of the actions of the delegate as if they were performed by the director personally.
In section 189 of the corporation’s 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.
In relation to what is expected of the directors, Michael is not executing his duties in good faith as he wants to buy the commercial property against the advice of Margret a fellow director just because the property in question belongs to his father. On top of that, there is conflict of interest since Michael puts family interests first instead of the company interests (Walker 2005). The point Michael gives that he had consulted peter was not in good faith despite the fact that peter was a renowned business advisor. The managing director Michael, also fail to apply due diligence in evaluating the economics conditions of the two towns before making a decision.
What Michael does is against the corporations’ act 2001 and therefore, has legal consequences which Margret can choose to follow. Margret can also call for an urgent board meeting to help in the matter. Margaret can choose to go to court and seek an injunction on any move that will be made by Michael until there is common agreement among the directors.
Margret will therefore sue Michael for failure to act in good faith and in the best interest of the company by proofing that what Michael is about to do is in his own interest and he has not put affairs of the company in focus. Margret can also proof to the court that the property in question is situated in a place which was hard hit by the economic uncertainty due to its dependency on one industry only, the tourism industry. She can also proof that the investment will not be the best one by providing the other alternative which she has and convince the court that hers is the best option.
The proof of conflict of interest is also worthy to proof Margret’s case that Michael should be stopped from doing what he is about to do. Conflict of interest is manifested where Mr. Michael knows that he is buying the property because it belongs to his father but does not tell the other directors that the property belongs to his family member (Walker 2005). At this point, Margret can show the court that given the economic downturn of events in cairns- the tourist Mecca, Mr. Michael’s father wants to dispose the property since may be it is not making any returns; therefore, Michael has his father’s interests in heart and not the company’s interests. Michael is supposed to have done individual assessment on all matters concerning any investment about to be made and not to rely on the advice of peter blindly, and this is another strong point for Margret’s case.
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 expects 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 corporations act as the law expects one to know what should or should not be done. Michael being the managing director of the company, him more than anybody else is supposed to help put the interests of the company first and not to use his powers for his own benefit. Margret tries to advice Michael, but since he thinks that he is the only one who is right, he chooses to ignore her advice and goes ahead with his plans. He is therefore culpable of his actions.
Adams, M. 2005. Australian Essential Corporate Law 2/E. London: Routledge.
Baxt, B. and Baxt, R. 2005. Duties and Responsibilities of Directors and Officers. Sydney: AICD.
Fu, J. 2010. Corporate Disclosure and Corporate Governance in china. Alphen Aan Den Rijn: Kluwer Law International.
Horrigan, B. 2010. Corporate Social Responsibility in the 21st Century: Debates, Models and Practices Across government, Law and Business. Northampton: Edward Elgar Publishing.
Keay, A. 2007. Company Directors’ Responsibilities to Creditors. London: Routledge.
Tomasic, R., Bottomley, S. and McQueen, R. 2002. Corporations Law in Australia. Annandale: Federation Press.
Walker, G. 2005. Commercial Applicants of Company Law in New Zealand. Auckland: CCH New Zealand Limited.
Wells, C. and Fisse, B. 2011. Australian Cartel Regulation: Law, Policy and practice in an International Context. Cambridge: Cambridge University Press.