Oct 02, 2017 term paper 2

Law Assignment: Companies And Securities Law

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Question:

 Law assignment Casestudy: Advisory on breach of director’s duty under Corporation act 2001 and General Law.

Answer:

Facts:

  • Chaser Ltd is a company which deals in the business of wine bottling.
  • Anthony, Ben, Catherine and Daniel are the directors of Chaser Ltd.
  • Competition for the Chaser Ltd has become stiff, especially in Asia due to downturn in economy and the entry of new countries in the wine market.
  • Directors of Chaser Ltd feel a need to invest in other business opportunities.
  • Anthony meets Wayne, his old friend who works for a Green Energy Company in Norway which specializes in Tidal Energy.
  • Tidal energy is a new form of energy which is becoming popular in Europe and Atlantic coast of the USA.
  • None of the Energy companies in Australia used this form of Energy.
  • Anthony invites Wayne, who has formed a company Westpool Pty. Ltd. That makes tidal stream generators come and speak to all the Directors of Chaser Ltd at their next meeting for thirty minutes.
  • Wayne at the meeting shows the directors of Chaser Ltd the 3D pictures of steam generators that his company makes.
  • After Wayne leaves all the Directors feel that it can be a profitable business for the company and without much discussion they all agree to invest $20 Million into this venture and give the sole contract to supply Tidal steam generators to Westpool Pty. Ltd.
  • Three months later the new business of Chaser Ltd is a disaster as they discovered that Australian Waters is not suitable for Tidal energy mainly due to the Great Barrier Reef.
  • The Directors of Chaser Ltd later discovered that Wayne was not an expert in tidal energy and held an insignificant position in company in Norway.
  • Directors of Chaser Ltd were surprised to know that Anthony was the major shareholder of Westpool Pty.
  • Relevant Laws:

    Duties of Directors under Corporations Act 2001:

    Section 180 of the Corporations Act 2001 requires that a Director of the company shall exercise his powers and discharge his duties with care and diligence. (Harding, D. 2001)

    This duty is subject to a Business judgment rule under section 180(2) of the Corporations Act 2001 by which it is required that a director should make a business judgment to (a) makes the judgment in good faith and a reasonable purpose (b) that the director himself has no personal interest in the subject matter of the judgment (c) he shall believe the judgment to be in interest of the company (d) the director will inform themselves about the subject matter to the extent, which reasonably is believed to be appropriate.  (Bostock, 2012)

    General Duties:

    The duties of the Directors often fall into the following categories

    • The duty of the Director to act Bonafide in the interests of the company as a whole.
    • Director to exercise his powers for the purpose for which they are conferred and not for any other purpose which is improper.
    • Not to restrict the existence of powers of director in the future.
    • The director is to avoid being in a position of conflict or interest. (Sealy, L. 1987).
    • Fiduciary Duties:

      The Directors also have some fiduciary Duties. The Fiduciary duties of the Directors of the company are

      • That the directors shall not improperly use their position to
      • Gain an undue advantage for either themselves or someone else.
      • Do an act which shall cause detriment to the company (Emerson, n.d.)
      • That the Director must not use the information which he has got due to their position to gain an advantage for someone or for himself. (Warburton, A.J. 2011)
      • The director must notify other directors or officials of the company of a material personal interest if and when a conflict takes place. A material personal interest is a matter which relates to the affairs of the company. (Day, 2009)

      If a director of the company breaches any of the duties conferred on him as a director then he shall be liable for the civil penalties.

      It is the general rule of Equity that the director must not let his personal interests and company duties conflict with each other.

      Section 191 (1) provides that a director is under a duty to notify other directors where he has a personal material interest in any conflict. In every case where a director has a personal material interest in a transaction he has a duty to declare that at a meeting of directors. A notice must be given by the director to the board of directors, which shall declare and include

      • About the nature and extent of the interest of the director and
      • The relation of the interest to the business of the company.

      This notice is to be given by the director as soon as it is possible after he has the knowledge of his interest involved.

    • Material or Personal interest:

      Section 195 (1) of the corporations Act 2001 provides that a director of a company who has any material or personal interest in a matter that is being discussed at a meeting of directors must not vote or take part in passing any resolution in relation to the matter and also must not be present while the matter is being discussed. (Dailey, 1955)

      The corporations Act 2001 (Cth) also provides for criminal offenses when a director has acted recklessly, or is intentionally dishonest in their omission to exercise their powers and duties in good faith and in the best interests of the company. Similarly, criminal offenses are created under section 184 where a director recklessly or with intentionally dishonest or Malafide intentions misuses their position with the company.

      Section 260 E states that a director shall not be relieved from any of his duties under this act which are included under sections 180, 181, 182, 183 and 184 or the fiduciary duties in relation to a transaction merely on the ground that the transaction is authorized by a provision under this act or the transaction was approved by the members by a resolution.

      Application of law:

      In this case where Anthony is a director of Chaser Ltd he has breached the duties of a director. Anthony being a director of the Chaser Ltd conspired with his friend Wayne about whom Anthony had the knowledge that he is not an expert in tidal energy and also that Wayne held an insignificant position in his company in Norway. Anthony breached a duty which is conferred on him being a director of Chaser Ltd under section 180 of the corporations Act 2001 and also breached the business judgment rule. As the business judgment rule provides that a director shall make a judgment in good faith and without holding an interest in the transaction. Anthony had an express interest in the transaction as he was a major shareholder in the company to whom the sole contract to supply the steam generators was given by Chaser Ltd.

    • Anthony also breached the general duties under the corporations Act 2001 as he misguided the other members and directors of the company and exercised his powers in an improper way and with the knowledge that this transaction may result in a conflict between both the companies. Anthony also breached the fiduciary duties of a director towards his company Chaser Ltd as he did not disclose his interest in the transaction with Wayne’s company Westpool Pty in which he was a major shareholder.

      Anthony was under a duty under section 191 to notify the other directors in a meeting by way of a notice about the nature and extent of his interest in the transaction. The section 191 (1) clearly provides that where a director has a personal material interest in a transaction he has a duty to declare that at a meeting of directors. A notice must be given by the director to the board of directors. Anthony never disclosed about his interest in the Westpool Pty company which was a sole contractor supplying the steam generators for the new venture of tidal energy by the Chaser Ltd.

      Further, section 195 (1) of the corporations act 2001 provides duties that the director who has an interest in a transaction cannot participate or vote in passing a resolution about that matter. Whereas, Anthony has an interest in the transaction with the Westpool Pty also participated in, the board meeting rather induced the other board members to pass the resolution.

      Anthony is also liable for criminal offenses created under section 184 of the act where a director acts dishonestly with intention. Anthony did not disclose the fact of his interest in Westpool Pty by being a major shareholder and thus his deceitful intentions are therefore clear.

      Conclusion:

      It is concluded that it is very clear from the facts of the case and the relevant laws that Anthony has breached his duties being a director of the Chaser Ltd. Anthony has used his powers and duties as a director of the company for a personal interest or personal benefit by causing a loss to the Chaser Ltd. Thus it is advised that Anthony has breached his duties as a director.

    • BIBLIOGRAPHY:

      Harding D. 2001, "Referral of powers paves way for Australia`s Corporations Act", International Financial Law Review, vol. 20, no. 4, pp. 57-58.

      Bostock, T. (2012). The Corporations Act 2001. Ac, 2002 (39).

      Sealy, L. (1987). Company–Directors` “Duties” and Exempting Articles. The Cambridge Law Journal, 46 (02), p. 217.

      Emerson, C. (N.d.). Delawarees Public Benefit Corporations: Comparative Analysis and Fiduciary Duties. SSRN Journal.

      Warburton, A.J. 2011, "Do fiduciary duties matter?", Corporate Governance, vol. 11, no. 5, pp. 541-548.

      Day, M. (2009). Fiduciary duties. Trusts & Trustees, 15(6), pp.447-457.

      Dailey, R. (1955). Corporations: "Personal Interest" of Directors in Corporate Transactions. Michigan Law Review, 53(3), p.472.


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