Directors' Duties under the Corporate Act 2001: Chaser Ltd.

Chaser Ltd. is an Australian wine bottling company. The company is faced with an economic crisis, which has hit the wine industry across the world. The problem is coupled with stiff competition in the major wine markets. As a business organization aiming at making profits and developing its directors thought it would be a good idea to venture into another potential business. One of the company’s directors, Anthony, comes up with an idea he got from a friend, Wayne, about investing in tidal energy. He later invites Wayne who gave a convincing speech that made Chaser Ltd. directors invest $20 million dollars in tidal energy, which would be the first in Australia. The company also gives the sole contract of tidal steam generators to a company Westpool Pty Ltd. owned by Wayne. The investment in tidal energy becomes a disaster. Australian water body does not support generation of tidal energy because of its Great Barrier Reefs. The worst is that Wayne who convinced them to invest in tidal energy does not have profound knowledge in tidal energy. The incident raises a question of whether or not the Chaser Ltd. directors breached directors’ duties under the Australian Corporate Act 2001.

 

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Directors’ Obligations under the Corporate Act 2001

The Australian Corporate Act 2001 (Cth) requires the company directors and other executives to exercise their authority and discharge their duties with diligence and care. The duties of company directors are subject to the business judgment based on the directors’ decisions (Allens, 2008). The law requires a company director to make decisions and judgments in good faith and for appropriate purpose. A company director should not make decisions and judgments based on his or her personal material interest in the subject matter. Any decision should be made in the best interest of business. For a profit-oriented organization, a director should make decisions and judgments under his or her mandate with the aim of benefitting the business entity. The directors should have prior knowledge and understanding of the subject matter before making judgment to an extent that they reasonably believe it is appropriate. Moreover, directors should rationally believe that their decisions and judgments are in the best interest of the business organization (Hall & Wilcox, 2012).

The law prohibits company directors from using their position improperly in order to attain personal gains and cause detriments to the company. Directors do not have the right under the law to use information obtained from someone or other sources because of their responsibility with the company to obtain personal benefits or cause detriments to the company (Lee, 2010). All provisions discussed above can result into civil responsibilities as well as civil penalties. When a court determines a penalty provision in that effect, it must declare the effect and order the person to pay a pecuniary penalty to the Commonwealth of up to $200,000 (Redchip Lawyers, 2010). The court may also order the person to compensate the company for the loss, which resulted to contravention. In addition, the court may also disqualify the person in question from managing any other corporation in Australia for a given period, as stipulated in section 206 of the Act.

The Corporations Act 2001 has also established criminal offences in situations, where one of the directors acts recklessly or with intent of dishonesty, which may lead to failures of charging their duties in good faith and in the company’s best interest (Coleman, 2012). On the other hand, the law creates criminal offences, in which a person recklessly and dishonestly misuses his or her authority within the company, as stipulated in section 184 of the Act. This includes misuse of information they have within their power. Company directors have the responsibility under section 191 of the Corporations Act 2001 to make full and frank disclosure of information within their knowledge (Ellison, 2013). This would enable the shareholders to make informed decisions prior to the directors’ judgment on the same matter.

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Common Law of Directors’ Duties

Every decision a director makes can be scrutinized against the corresponding activities in terms of his or her intent to the company’s benefits. Breaching a duty allows the company to sue the director for the losses incurred. As stipulated in the Act, there are specific duties of company directors. For instance, company directors have the duty to exercise discretion (Schweizer, 2011). This implies that they must use their independent and informed judgment to manage the company affairs. Directors can use their duty of discretion to delegate certain issues, which can only be valid if carefully done and are in the best interest of the company. They are also under a duty and have rights to deliberate on an issue. This implies that they must make positive efforts in their involvement in the company discussion and consideration. They must use their discretion duty to act in the company matters in a positive manner (Barber, 2014).

Directors of a company are under obligation to exercise power for appropriate purposes. Any power exercised for wrongful purposes is considered invalid. Actions performed for inappropriate purposes may be declared invalid. The law also gives the directors a duty to avoid conflicts of interest. A company director cannot use any opportunity arising in the course of business operation to make personal gains at the expense of the company. The law also prohibits company directors from using the company’s resources for personal gains (Legal Talk, 2014). They should not engage in a contract of supplying goods and services to the company unless they make full disclosure to the company. Directors must also avoid any action or discussion that may cause conflict or is perceived to be a potential source of conflict within the company (Allens, 2008). Should there be a conflict of interest within the company, a director must disclose such interest to the company. When a director fails to declare personal interest in a matter that affects the company, he or she commits an offence. When a director declares an interest, other directors may discuss the interest by asking more about it, and vote on the issue at the end. It is important to note that a director may commit a crime while acting on behalf of the company.

Specific Duties of Company Directors

Directors have specific obligations in circumstances, in which the company is unable to pay its debts; when the company is under external administration, receivership, liquidation, or when under official management. They also have specific responsibilities in circumstances, where a compromised arrangement has been entered into, especially with creditors. Under section 588G of the Act, directors have a duty to prevent insolvent of the company (Corporations – Court rules and related legislation, 2010). There are certain circumstances, under which criminal liability may occur. Directors become legally liable when they allow the company to incur debts or expenses that would make the company insolvent (Coleman, 2012). The same case applies to the directors who fail to prevent their companies from becoming insolvent from debts and uninformed investment.

Directors also have the duty to help external administrators by giving reports regarding affairs and documentation of the company among other relevant information requested. Failure to comply with such requirements may attract an offensive act under some provisions of Section 5.8 of the Corporations Act 2001 (Cth) (Schweizer, 2011). However, they vary depending on the circumstances, under which the failure to deliver the company information occur. Director may also face criminal offence if he or she uses his or her position within the company to fraudulently conceal the company property or debt. Under section 592 of the Corporations Act 2001, directors are legally answerable if they fraudulently incur debts or enter into a contract with the purpose of defrauding creditors (Australian Domain Administration, 2009). The court may order an individual director to be personally involved and responsible for the payment of such debts under section 593 of the Act (Barber, 2014).

Criminal Offences

Many criminal offences fall under the Australian Corporations Act 2001 (Cth). It is an offence for a company to fail to file appropriate returns ASIC (NSW Young Lawyers, 2007). When directors fail to disclose a conflict of interest prior to the transaction in question, they may face criminal offences. Inappropriate use of authority or position to have personal gains other than the company’s is illegal. It is an offence for directors to discharge their duties in a dishonest manner. It is a crime to manage a company when disqualified for such positions under the Corporations Act 2001 (PWC, 2012). Directors should not mislead or use false statements by the company promoters to potential investors. All information pertaining transactions within a company should be in accordance with the Corporations Act 2001. Directors should prevent the company from transacting businesses with unlicensed individuals or business entities. It is an offence of securities and investment advisers to act dishonestly without considering the best interests of the client and the company (Australian Domain Administration, 2009).

The above breaches under the Corporations Act 2001 often attract significant penalties. Although there are overlaps between the Corporation Act and the Criminal Law Consolidation Act 1935, prosecution can be brought either under one of the acts or both (Legal Talk, 2014). Apart from these, some contraventions, such as directors’ failures to take all reasonable steps to ensure that the company keeps property accounting records, may lead to criminal responsibility. The law requires directors to prevent their company from transactions while insolvent. Such actions can attract civil contraventions, in which the law court may impose a pecuniary penalty up to $200,000. The law may prohibit such individuals from managing a company, and even order the person to compensate the company for the losses (Coleman, 2012).

Possible Criminal Responsibilities of Chaser Ltd. Directors

Now, it is necessary to scrutinize what has transpired in Chaser Ltd. with its directors based on the provisions of Corporations Act 2001 (Cth) (Barber, 2014). The company directors have realized that their current business operations in wine industry are under threats due to economic crisis and stiff competition. It is a good idea to think of another line of business operation to save the company from becoming insolvent. The intention to venture into a new business is an honest and informed decision that would serve the best interest of Chaser Ltd. Under normal circumstances, one of the best strategies to leverage a company from collapsing is by investing in areas with potential market opportunities (Australian Domain Administration, 2009). The directors have also used their discretion as stipulated in the act to invest the company’s money in tidal energy sector with the hope that their investment in the sector will be the sole business in the entire Australia.

However, Chaser Ltd. directors have made final judgment in tidal energy under compromised situations. It is the duties of directors to make an informed judgment on any matter regarding business transactions within the company. This implies that directors should have adequate knowledge about any issue prior to making final decisions (Ellison, 2013). Even though Wayne delivered a convincing speech to the directors during their meeting, this was not enough to take any action that involves investing $20 Million in the new venture. As stipulated in the Corporations Act 2001 (Cth), the directors had the obligation to investigate further in order to establish the viability of the investment (Coleman, 2012). They had the mandate to investigate the possibility of producing tidal energy in Australia before making a decision to invest in it. They invested without conducting any research about potential of tidal energy and the risks involved. This reckless move was done without having proper knowledge or gathering enough information. Managers are responsible for the company and such decision can attract civil interventions (Legal Talk, 2014).

Another issue that could implicate Chaser Ltd. directors is the fact that Wayne does not have substantial knowledge in tidal energy. It is the duty of directors to invest new ideas and people who bring these ideas into the company in order to ensure such ideas are valid (Dibbs, 2014). It is clear that Wayne’s idea was invalid and was not in the best interest of Chaser Ltd. Instead, he came up with the idea for personal gains. When directors of a company bring an investment idea into the company, which is invalid and dishonest, this can attract attention of the Corporations Act 2001 or Criminal Law Consolidation Act 1935 (NSW Young Lawyers, 2007). The fact that Wayne does not have adequate knowledge in tidal energy is in itself invalid. It is the responsibility of directors to ensure that business ideas to be implemented are valid, viable, have potential market, and that risks involved can be sustained. Failure to do this is an offensive act that is punishable under the Corporations Act 2001 (Cth) or Criminal Law Consolation Act 1935, or both (Australian Domain Administration, 2009).

Conclusion

Because of uninformed decision, the directors invested the company’s $20 million without doing feasibility study and extensive research for tidal energy production in Australia. It raises more questions than answers when directors of Chaser Ltd. decided to provide a sole contract to Westpool Ltd., a company that was currently started by Wayne who turned out to be a fraud. It is the responsibility of directors to ensure that they protect company’s resources from fraudulent transactions. Consequently, directors of Chaser Ltd. could be forced by the court to compensate the company $20 million invested in the failed tidal energy business under civil penalty provisions in Corporations Act 2001 (Cth). They could also be barred by the court from managing any company for a period specified by the court.