The Companies Act of 2006 - Essay Example

?Answer: I will inform James the matters relating to the duties of the directors. That to restrictions imposed by statute, charter, or stockholders by –laws, the right to determine policy and conduct the business lies solely with the board of directors. Provided the directors act honestly, disapproving stockholders have no right to interfere with the management of corporate affairs" (Babb and Martin 320). The directors can bind the corporation only by action taken at a board meeting (Ibid). Directors exercise extensive powers in the management of their companies, influencing their company's conduct by virtue of their involvement in the decision making process. Resulting from this unique position of power, directors are legally considered to stand in a fiduciary relationship with their company, and are subject to specific duties stemming from that relationship (Regal (Hastings) Ltd v Guliver (1967). Where an employee or director of a company (1) takes advantage of business opportunities made known to them during the course of their relationship and diverted such opportunities to themselves, (1) receives bribes from suppliers, and/or (3) engages in unlawful competitive activity, the employee or director will not be permitted to retain that benefit, as the law treats money or corporate opportunities as belonging to the principal company. In addition to this, if the person owing the fiduciary duty earns further profits from a breach of fiduciary duties, those profits also belong to the principal. Principals are in some circumstances entitled to trace the property received through to third parties. Moreover, even if the person has spent the money or disposed of the assets in question, a fiduciary remains personally liable for the monetary equivalent of the benefit received (Gillhams). Over the time, the courts have construed company directors' fiduciary duties as being duties to: act in good faith and for proper purpose; a) avoid conflicts of interest; b) retain directors' discretion; and c) act with due care and skill; Directors also owe a duty of care to their company under the common law of negligence. In addition to these general law duties, directors owe statutory duties under the Corporations Act 2001 (Cth), (Stephens) such as duty to act in good faith in the best interest of the company and duty to prevent insolvent trading by company (Ibid). The Companies Act of 2006 provides seven general duties in the new statutory statement as follows: a)?A duty to act in accordance with the company’s constitution, and to use powers only for the purposes for which they were conferred. This replaces existing, similar duties. b) a duty to promote the success of the company for the benefit of its members. This replaces the common law duty to act in good faith in the company’s interests. c) A duty to exercise independent judgment. There is no exactly equivalent duty at common law. However, directors are currently under an obligation not to fetter their discretion to act or to take decisions – this aspect of the general duty replaces this obligation. d). A duty to exercise reasonable care, skill and diligence. This replaces the existing duty of care and skill. e). A duty to avoid conflicts of interest (except where they arise out of a proposed transaction or arrangement with the company – see below). At present, if a director allows his personal interests, or his duties to another person, to conflict with his duty to the company then, unless shareholders consent to the conflict: (i) the company can avoid any relevant contract and (ii) he must account to the company for any ‘secret profit’ he has made out of the arrangement. The new duty replaces this old rule. f)?A duty not to accept benefits from third parties. There is no express duty to this effect at common law. It appears to derive from the current duties (Freshfields 4). A director must not exploit his office for personal gain at the expense of the corporation and its stockholders, to whom he owes the utmost good faith (Babb and Martin 321). A director must fully disclose his interest in all contracts. If he cast the decisive vote in a manner in which he is interested, any action taken will be voidable (Ibid). Fiduciary duties of directors fall under two general categories: (i) duty of care; and (ii) duty of loyalty. Under the duty of care, a director’s fiduciary responsibility is to perform his/her duties with the diligence of a reasonable person in similar circumstances. Under the duty of loyalty, a director’s fiduciary duty is to act in good faith for the best interests of the corporation (Abduljaami). Other duties include: 1) Duty to act lawfully – directors have a fiduciary duty to act in a lawful manner, b) Duty of disclosure – directors have a fiduciary duty to communicate honestly with shareholders, c) Duty to inquire/monitor – directors have a fiduciary duty to ensure that they can adequately receive and report corporate information; if directors are alerted to a need to make further inquiry, they are obligated to do so (Ibid). The Company itself can bring a claim against erring director if it can show that it has suffered some loss. If the director has made some personal profit, they can be required to surrender the gain to the company. A contract of other arrangement entered into by the director in breach of a duty will be void though it may be open to the company to ratify the agreement if it wishes to do so (Webster). Shareholders have no right to claim against a director for any loss they believe they may have suffered as a result of breach of duty. However much their shares have dropped in price, they cannot recover that loss of value from the directors they hold responsible. But because few companies will bring a claim against one of their own directors, the law has, over the years, developed a mechanism that allows shareholders to force the company to seek redress. With the permission of the court, shareholders can bring a claim against a director in the name of the company. The claim is initiated and run by the stockholders but it is brought in the company's name and to recover company's loss (Ibid). Breach of fiduciary duties either by a director or the board of directors exposes the entire board or a particular director or directors to shareholder lawsuits. A shareholder(s) can sue the corporation and/or director(s) directly (e.g. Shareholder A sues Director X) or bring a shareholder derivative suit and sue on behalf of the corporation. Remedies vary, but range from the court preventing the taking of an action or ordering that transaction proceeds be handed over to the corporation (Abduljaami). The court has the following remedies available to remedy a breach of duty by a director: 1) action or declaration; 2) damages or compensation; 3) restoration of the company's property if traceable; 4) rescission of a contract; 5) account of profits; and 6) summary dismissal ( Bevan). The remedies for breach of a fiduciary duty and the extent that they apply to a given situation vary in accordance with how severe the breach in question is. Remedies include: Injunction this is a discretionary remedy awarded by the court and the test to obtain this is high. If anything has been taken away that is of commercial value then the court can also order the delivery up of the goods. Damages if the fiduciary fails to carry out his duties and this results in a loss to the beneficiaries then he will be liable to the beneficiaries for the loss. Setting aside of the transaction, restitution and account of profits in a voidable transaction may be set aside by the beneficiary and giving restitution, an account of profits or restoration of, for example, any company property held by the director. A fine can also be imposed. Disciplinary Proceedings a person that has breached his fiduciary duties can be disciplined, for example in the case of a director of a company. Criminal Sanctions can be imposed for breach of fiduciary duties where there is criminal or fraudulent intent (Ali 2010). If found in breach of a fiduciary duty, the classic remedy, is that the director, must pay to the company profits that he or she made from the breach. The company need not show that it has suffered any harm. This stems from the content of the duty itself, which is to not profit from one’s position as a fiduciary. The plaintiff may also instead elect a remedy of damages and will do so if the circumstances are favourable. This would be in a case where the company can show its lost profits from the breach were greater than the director’s gain (Carrol et al. 3). Powell J in Russell Kinsella Pty Ltd (in liq) v Kinsella  (1983) NSW said that the true duty of directors is a duty to refrain from exercising any of the powers vested in them in order to obtain for themselves, or any of them, some private advantage, or in order to achieve some object other than that for which the power was vested in them. He further held that a company in general meeting could approve a course of action, after full disclosure of all relevant facts, which would otherwise involve a breach of fiduciary duty on the part of the directors, or could ratify a course of action which involved a breach of duty on the part of its directors (Bevan). When directors propose to sell a company for cash or engage in a change of control transaction, they must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable (Paramount v QVC). 1 Anent the dilemma of James as to know whether he can do something on the state of affairs of Anglophone plc, the advice now is for him to propose during the shareholder's meeting to sue the directors civilly and criminally and that the suit be brought in name of the company to recover losses incurred by the company. In that way, the erring directors who have committed breach of their fiduciary duty will be held accountable for their actions and that the properties sold be recovered or restored by the company. According to Babb and Martin, where the officers or directors have entered or are about to enter into ultra vires contracts or transactions involving an illegal or fraudulent transfer or impairment of corporate assets, a stockholder must first endeavor to secure appropriate action by the board of directors. If his efforts to that end are futile, he may then commence an action in equity on his own behalf and on behalf of all other stockholders similarly situated, against the officers, the directors, the corporation and third persons participating in the wrongful transaction; and he may obtain such relief by way of injunction, accounting or otherwise as circumstance may warrant. The final decree in such action will require restitution or compensation to be paid to the corporation by the wrongdoers, thereby indirectly benefiting the injured stockholders (338). He can plead for damages incurred by the company when the stock or shares dropped at 30%. The action is known as stockholder's derivative suit, which is "a type of litigation brought by one or more shareholders to remedy or prevent a wrong to the corporation. In a derivative suit, the plaintiff shareholders do not sue on a cause of action belonging to themselves as individuals. Instead, they sue in a representative capacity on a cause of action that belongs to the corporation but that for some reason the corporation is unwilling to pursue. The real party in interest is the corporation, and the shareholders are suing on its behalf. Most often, the actions of the corporation's executives are at issue (Stockholder 's). This is different from direct suit brought by a shareholder to enforce a claim based on the shareholder's ownership of shares, which involves contractual or statutory rights of the shareholders, their shares, or rights relating to the ownership of shares (Ibid). Word Count: 2000. BIBLIOGRAPHY Book Hugh W. Babb and Charles Martin. Business Law. 1964. Barnes and Noble, Inc. New York. pages 320 and 338. Website Articles with Authors: Christopher John Bevan. "Effects of breaching director's duties". [Accessed: May 9, 2011]. Website: http://www.findlaw.com.au/articles/189/effects-of-breaching-directors-duties.aspx Chris Papas, CORPORATIONS LAW UPDATE: RECENT DECISIONS ABOUT DIRECTORS' DUTIES AND LIABILITIES. 2007. Available at Stephen Lawyers and Consultants Website. [Accessed on May 7, 2011].website: http://www.stephens.com.au/view/22/47 Izaz Ali. "Remedies for breach of a Fiduciary Duty." January 9, 2010. Lawdit Reading Room Website. [Accessed on May 8, 2011]. Website: http://www.lawdit.co.uk/reading_room/room/view_article.asp?name=../articles/8613-remedies-for-breach-of-a-fiduciary-duty.htm Martin Webster. " Directors Handbook on Remedies where there is a Breach of Director's Duties.". 2010 ed. Available at Pinsent Massons Website (Accessed: May 9, 2011] website: http://www.out-law.com/page-8207 Michael P. Carroll, Q.C.Jeffrey D. Horswill and Jonathan B. Ross. " Fiduciary Duties of Directors and Officers Relating to Corporate Opportunities." April 14, 2008. Canadian Mining Law and Finance 2008. Available at Davis Legal Adviso Website. [Accessed: May 7, 2011]. Website:http://www.davis.ca/publication/Fiduciary-Duties-of-Directors-and-Officers-Relating-to-Corporate-Opportunities.pdf Saboor H. AbdulJaami. "Board of Director Fiduciary Duties". [Accessed: May 10, 2011] website: http://www.shajlaw.com/media/reports/BoardofDirectorFiduciaryDuties.pdf Steven Wong. "Forgiving a Director’s Breach of Duty:A review of recent decisions". [Accessed: May 9, 2011]. Website: http://cclsr.law.unimelb.edu.au/files/stevenwong_essay_6_May_20091.pdf WEBSITE WITH NO AUTHORS An Introduction To Corporate Regulation and Standardization. http://legal.practitioner.com/regulation/standards_9_3_6.htm Claim Scenario: Directors and Officers - Breach of Fiduciary Duty - Bankruptcy. July 23, 2009.Available at Chartis Website. [Accessed: May 9, 2011]. Website:http://www.chartisinsurance.com/directors-and-officers-breach-of-fiduciary-duty-bankruptcy_295_187404.html Directors Responsibilities. [Accessed: May 7, 2011]. Website: http://www.freestyleaccounting.com/contractors/contractor_articles_and_factsheets/starting_up_in_business/directors_responsibilities Fiduciary duty Equity. Available at Gillhams Solicitors and Lawyers Website. [Accessed: May 6, 2011]. Website: http://www.gillhams.com/dictionary/497.cfm International Corporate Rescue. [Accessed: May 10, 2011]. Website: http://www.chasecambria.com/site/journal/article.php?id=83 Stockholder's Derivative Suit. Available at JRANK Organization Website, [Accessed: May 10, 2011], website: Stockholder's Derivative Suit STATUTES Companies Act 2006. Available at Gillhams, Solicitors and Lawyers Website. [Accessed: May 8, 2011]. Website: http://www.freshfields.com/publications/pdfs/2006/17062.pdf Companies Act 2006. Duties of Directors. DTI June 2007. [Accessed: May 10, 2011]. available at Website: http://www.bis.gov.uk/files/file40139.pdf Cases Cited: Regal (Hastings) Ltd v Guliver (1967) 2 AC 134. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 44 (Del.1994). [Accessed: May 9, 2011]. Available at website: http://caselaw.findlaw.com/de-court-of-chancery/1063508.html Russell Kinsella Pty Ltd (in liq) v Kinsella  (1983) NSW Cited in the article of Christopher John Bevan. "Effects of breaching director's duties". [Accessed: May 9, 2011]. Website: http://www.findlaw.com.au/articles/189/effects-of-breaching-directors-duties.aspx Read More