Have Apollo and Rocky Breached Their Directors Duties - Assignment Example

Corporation Law Name Institution Date Corporations Law Question 1 (a) Have Apollo and Rocky breached their directors' duties? Yes, Apollo and Rocky breached their director’s duties by violating the statutory and common law duties that are vested on company directors. Under common law, company directors have various duties including; contractual duties, in that, they have a duty of care which is implied during their performance of their duties. They also have equitable duties in the sense that, they have a duty to act with reasonable care, skill as well as diligence, they have a duty of loyalty that covers good faith, proper purpose, the exercise of discretion and avoidance of conflicts of interests. The directors of a company also have tortious duty under common law. They owe a duty of care as well as diligence to the company1. Under common law Apollo and Rocky did not act in good faith in the interests of the whole company. They failed to subjectively give proper consideration to the interest of the company. In the case presented between Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, the court held that, directors must always act in honesty and good faith for the interests of the company at all times2. The case between Walker v Wimborne (1976) 137 CLR 1 also confirmed that, directors must also give proper consideration to company interest when making decisions3. Under statutory duties, company directors have a duty to act in good faith, exercise reasonable care and diligence, not make improper use of the company’s information and not make improper use of their position as directors4. In our scenario, it is clear that Apollo and Rocky did not meet the duty of care and diligence when making their decision to require the mining operations to continue after being established that the mining wells are not commercial. Section 180 of the Corporations Act, defines the business judgment rule of director’s duty to exercise care as well as diligence in their decisions5. It requires that, directors of a company should exercise their powers and also discharge their duties in reference to the degree of care as well as diligence that a reasonable person would exercise if they were in their position as a director of the company and in the circumstances of the company as well as holding the responsibilities as directors of the company6. When making a business judgment, the statutory duty of care and diligence is met by directors through making their judgments in good faith and for the proper purpose, they should not have personal interest in the subject matter of the judgment, they should also inform themselves of the subject matter concerning the judgment to unreasonable doubt and rationally, they should believe that the judgments is in the best interest of the company7. The judgments made my Apollo and Rocky were not in the best interests of the company, therefore they did not act in due diligence and care in the decision making. (b) Do Apollo and Rocky have an arguable defence? Apollo and Rocky have an arguable defence which available to avoid liability in them. The defence available is the business judgement rule stipulated under the Corporations Act 2001 (Cth) s 180(2)8. It provides that, a company’s director who makes a business judgement is usually taken to have met the requirements of subsection 1 as well as their equivalent duties at common law in equity and in respect of the judgement they make under various conditions including; that they made the business judgement in good faith and for a proper purpose, they do not have a material personal interest in the subject matter of the business judgement, they informed themselves about the subject matter of the judgement to the extent that, they reasonably believe that it is appropriate and rationally, they believe that, the business judgement is in the best interests of the company. Based on their judgement, Apollo and Rocky made their decision out of good faith and for the proper purpose of the company. They understood that, the company needed to do business and the only way to continue in operation was to continue its operations. They never had any material personal interests in the subject matter of their judgement, their interests were for the best for the company, they also informed themselves of the subject matter that the business was still in its and the appropriate way to boost the business since it was still in the exploration stage and rationally, they believed that, their decision was also in the best interests of the company9. Therefore, their conduct of making their decision is a defence and should not be treated as a breach of duty. (c) Has Clubber, as the company's chair, breached any duties? Yes, Clubber as the company’s chair has breached his duties to exercise honesty and good faith for the interests of the company. He did not meet his duties as the chair of the board of directors. The chair of company directors has a primary role of ensuring the leadership of the company is effective in its work of setting as well as implementing the direction and strategy of the company10. Clubber knew very well that it is wrong for the company to continue the exploration activities and did not convince the other directors about the matter. Therefore, he breached his duty to ensure effective communication with the other directors and shareholders when it was appropriate. (d) Advise whether Drago, as the company's chief financial officer, breached any duties. As the company’s chief financial officer, Drago breached the duties of not advising and reporting to the other directors of the effects of the continuation of the exploration activities on the financial status of the company. Section 285–318 of the Corporations Act requires the responsible directors to provide financial reports to the other directors and shareholders. They have a duty to exercise their powers with care and due diligence to ensure that the company’s interest is put in front when making decisions11. As the chief financial officer, Drago had the knowledge that it was not prudent for the company to continue with the mining extraction activities and he did not use his powers to stop the operations for the best interest of the company. Question 2 (a) Have the directors of Citrus Ltd breached their directors' duties (in particular duty to act for good faith in the best interests of the company and for a proper purpose) in relation to the loan that has been advanced to Lang? Section 181 of the corporations Act 2001 (Cth) provides for duty of good faith for company directors. Directors of a company are required to act in good faith by exercising their powers as well as discharge their duties. They are said to have met this criteria under two conditions including; they must act in good faith and in the best interest of the company as well as act for a proper purpose12. This provision is clearly seen to coincide with the fiduciary duty of acting bona fide for the benefit of the company. It is also consistent with the duty of company directors to act honestly at all the times irrespective of any other duties that are conflicting13. Company directors are found to be in breach of the duty to act in good faith and for the proper purpose if they exercise their powers for improper purposes even when they believe that they are acting in an honest manner. This statement is well demonstrated in the case between Australian Metro Life Assurance v Ure, Ngurli v McCann whereby the court held that, director’s power must be exercised in good faith for the purpose of which it was convened, not randomly or at the complete will of directors, but at the honest interest of the company shareholders as a whole14. By failing to consult the shareholders, the directors did not put the interest of the company first since they have a duty to consult and act by reference to company interests. They did not recognise non-shareholder stakeholder interests15. In relation to our scenario, it is clear that, the company directors at Citrus Ltd breached their director’s duties in relation to the loan that was advanced to Lang so as to purchase shares from the company that will have an effect of pushing up the company’s share price at the time of taking over by Anglo Brit. By advancing that loan, they did not take into consideration the best interests of the since they did that for the wrong purpose16. They did not act in good faith to ensure that Anglo Brit took over the company at the fair and expected value of the business. They initiated an unfaithful way of gaining from Anglo Brit of the company will successfully be taken over. This was also done ingenuinely to discourage Anglo Brit from taking over the company. (b) Can Anglo Brit Ltd take legal action against Citrus Ltd in relation to the latter's conduct and tactics concerning the hostile takeover? Yes, Anglo Brit can take legal action against Citrus Ltd in relation to the latter’s conduct and tactics concerning the hostile takeover. Since the Citrus Company did not uphold the three elements of acting in good faith including; the duty to subjective good faith, the duty to exercise powers for a proper purpose and the duty to consult as well as act by reference to the company interests, the Anglo Brit Ltd can provide evidence for the ingenuity action of the Citrus directors17. Under statutory good faith Anglo Brit has the right to sue Citrus Ltd for a civil liability under section 181 of the corporations Act 2001 (Cth). Here Citrus Ltd will be sued for contravention of the duty of acting in good faith which is a civil penalty provision18. Anglo Brit can also sue Citrus Ltd for a criminal liability under the criminal liability as stipulated in section 184 of the corporations Act 2001 (Cth). Here, the directors will be sued for contravening the duty of acting in good faith by recklessly or intentionally acting dishonestly which is a criminal liability19. The various remedies that Anglo Brit can receive by taking a legal action against Citrus Ltd include; equitable damage, equitable injunction, rescission and restitution, civil penalty provision, criminal liability provision, injunction and oppression remedy. References Australian Institute of Company Directors, 2012, Director’s Signpost Your Guide to Directorship, National Library of Australia. Australian Institute of Company Directors, 2013, Role of a chairman, Director Resource Centre. Australian Metro Life Assurance v Ure, Ngurli v McCann Corporations ACT 2001 (CTH) Ellison, M, 2013, legal Duties and liabilities, A guide for Directors of commonwealth authorities and companies, Retrieved from http://www.minterellison.com/files/Uploads/Documents/Publications/Reports%20Guides/RG-2013_CAC-Act-guide-16_%5BSYD120349%5D.pdf, Accessed on [8-3-2015] Greenhow, A, The Statutory Business Judgment Rule: Putting the Wind into Directors’ Sails, Bond Law Review, Vol. 11, Iss.1. Retrieved from http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1158&context=blr, Accessed on [8-3-2015] Halsbury’s Laws of Australia [120-7456] Halsbury’s Laws of Australia [120-7445]. Redmond, P, 1992, ‘The Reform of Directors’ Duties, University of New South Wales Law Journal, Vol. 86. S 180 Corporations Act 2001 (Cth). Section 285–318 Corporations Act 2001 (Cth) Section 181 Corporations Act 2001 (Cth) Section 184 Corporations Act 2001 (Cth) Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Walker v Wimborne (1976) 137 CLR 1 Read More