What Is the Duty of Non-conflict of Interest - Assignment Example

Organizational Law Name: Institution: Introduction A director refers to a person who has been appointed to that position in a company. Section 9 of the Corporations Act defines directorship. A de facto director and a shadow director are also described as directors under the Act1. Directors are the agents of the company; they control and manage the affairs of the company. A director is appointed in either of two ways. One way is by shareholders in a general meeting. The other way is by directors in a Board meeting2. In the question, Mr. Tim is appointed by directors. Directorship does come with its powers, duties and responsibilities. The duties and responsibilities emanate from common law, Companies Act and at equity. In cases where a director fails in the stipulated duties, liability may accrue to the director. What is the Duty of Non - Conflict of Interest? In the question, Mr. Tim is instructed by the Board to enforce the company’s credit policy. The policy is intended to avoid losses for the company. It is a system arrived at after much consideration and experience by the directors of the company. The policy requires customers to pay for materials supplied to them fully within 60 days. Mr. Tim is distracted by his activities as managing director of Statewide Company. It is because he owns a company that is a customer to Statewide. He is not able to enforce Statewide’s credit policy to his company. His company Best Homes Pty Ltd has a debt amounting to $10,000 from Statewide. This disregards the Statewide’s credit policy that requires customers to pay any balance over $5000 before the delivery of timber is made. No customer, therefore, is allowed to have a debt of more than $5000. Directors have a duty to the company of non-conflict of interest. It means that a director has a duty not to place himself in positions where their personal interests conflict with the interests of the company. Conflict of interest arises in situations where the director has other duties that force him to take action opposed to the company. In determining conflict of interest, the courts take a practical approach. Courts require evidence showing a real sensible possibility of conflict. The law does not allow this conflict of interest to exist3. The director is personally liable for losses by the company that arises from the conflict of interest. This duty can be observed in the case of Industrial development Consultants Ltd V Cooley. The director was personally interested in a contract, and the court held that it is not proper that he had been assigned to negotiate for the company. Section 175 of the Corporations Act also provide for this duty. What are the Defenses to Conflict of Interest? The Act provides that the conflict of interest applies to the exploitation of property, information or opportunity. Under Section 175(3) the Act states that the duty does not extend to conflict of interest that arises from a transaction or agreement with the company. Mr. Tim can plead that his company Best Homes Pty Ltd only entered into an agreement with Statewide, and it does not cover the exploitation of property, information or opportunity as provided in the Act. Authorization by the Board is also a defense available to Mr. Tim. In this case, he would show that he disclosed this situation beforehand and that it had been sanctioned by the board. Section 175 (6) provides that such authorization is adequate only if quorum at the said meeting is met without counting the concerned director and his vote did not count on arriving in the decision to authorize. This defense is not likely to succeed in court based on the facts given in the question. What is the Duty of Disclosure? Every director has a duty to the company to disclose fully all information within his or her knowledge. This disclosure is to assist the company makes fully informed and credible decisions. During the interview of Mr. Tim for the position of the managing director, one director does withhold information about the candidate from the company. Mr. Tim’s former employer, Mary writes a letter to the Chairperson of Statewide warning the Board of the risks that come with the employment of Mr. Tim. Mr. Tim had been her employee, and she had worked with him previously. Lee, the Chairperson of Statewide, however, does not inform other Board members of this letter. The Board is so impressive with the interview that she dismissed the letter as nothing more than a letter of annoyance. Mr. Tim also does not adhere to the fiduciary duty of non-disclosure. This duty is provided in Section 177 of the Corporations Act. A director is expected to declare any conflict of interest that he may have a particular contract or decision of the company as soon as possible. This duty extends to existing transactions and agreements. This declaration is to be made at the very first Board meeting. When such a declaration is made, the company is to take precautionary measures. The concerned director shall not vote on the particular decision or contract, and measures to prevent conflict of interest are to be employed. Mr. Tim has a personal interest in the credit policy of the company. His company Best Home Pty Ltd is struggling due to the credit policy. Mr. Tim, however, does not disclose this to the Board. He allows this to continue and in the end is faced with a conflict of interest. What are the Defenses to Duty of Disclosure? The Corporation’s Act in Section 177(6) provides situations where disclosure of interest is not required. One is that if the interest in question cannot reasonably give rise to a conflict of interest. Another is if the director concerned is not aware of the existence of such interest. Mr. Tim, therefore, can plead the defense of non-awareness, he shall be considered to have been aware of issues that he ought reasonably to have been aware. Mr. Tim can also argue that the interest he has in Best Home Pty Ltd cannot be considered to cause a conflict of interest. The defense of business judgment rule is available to Lee, the Chairperson of the Statewide Company4. She can plead that she made the decision out of sound business judgment. For a director’s action to agree with the business judgment rule, it must be made in good faith and for a proper purpose. The Director concerned should at the time of making the decision reasonably believe that it is in the company’s best interest. Lee can plead this defense as at the point of dismissing the letter, she rationally believed that it was in the best interest of the company. This argument is likely to succeed in court. What is the Duty of Skill and Care? This obligation exists at common law and under a statute. Section 174 of the Corporation’s Act state that a director is to exercise reasonable care, skill and diligence in his duties. The Act provides that a director is to conduct his duties in a manner that is reasonably expected of a director of a company. Such a person is to have the general knowledge, skill and experience that a director has. In common law, this duty can be summarized in the case of Re City Equitable Fire Insurance CO LTD. The learned Romer, J stated that a director need only exhibit the skills that are reasonably expected from a person of his experience5. The layman’s understanding of this is that if a foolish director made foolish decisions, he would not be held liable for causing loss to the company. However, if a wise director made foolish decisions, then he would be held accountable. He would be liable for negligence for the loss suffered by the company6. Mr. Tim in the question is tasked with the job of enforcing the credit policy of the company. In addition, he performed extremely well in the interview, the Board was massively impressed. Much was expected from him. Mr. Tim falls short of this huge expectation placed on his head. One of his shortcomings is his inability or reluctance in enforcing the credit policy. He insists that the payment period should be 120 days rather than 60 days. He also places the cap on credit forwarded to customers as $10,000 rather than $5,000. When he is confronted by the Financial Controller, he threatens him with the sack. This decision results in the company ending up with a huge bad debt of $1.8 million. The second shortcoming of the managing director has to do with the treatment of timber. A problem arises in the factory that inhibits the proper treatment of timber. The Operations Manager continues with the supply of timber despite the lack of proper treatment. Timber worth $400,000 is dispatched to customers. Mr. Tim gets to know of this situation long after the timber has been supplied. He takes no action to mitigate potential losses and prefers to ignore it. This decision causes the company potentially liable for damages of up $2.5 million for termite damage to new houses. What are the Defenses to Duty of Care and Skill? Common law provides that a director is not required to give continuous attention to the conducts of the company. This is observed in the case of Re Marquis of Bute7. A director has attended only one meeting in over a period of 38 years. The director was found not liable in negligence by Sterling, J. this position was reaffirmed in the case of Re Denham Company limited. Mr. Tim is not aware of the malfunction in the factory or of the dispatch of the timber to the customers. He can plead this defense as he is not required to give continuous attention to the affairs of the company. The article of a company may provide that some duties may be performed by other officials8. A director, in the ordinary course of business, is allowed to trust that official to perform the said duties diligently. A director cannot therefore be held liable for the negligence of a delegate if the previous conduct did not merit distrust or suspicion. The Operations Manager is responsible for all aspects of processing of the timber sold by Statewide, including the treatment of timber. Under common law, Mr. Tim who is the line manager is justified in trusting the Operations Manager. The Operations manager should be held liable personally. This position is exhibited in the case of Dovey v Cory9; the court ruled that a director is not negligent for not verify false information provided by the company manager. This defense has a high chance of succeeding in court. Conclusion The defenses suggested only provide the defendants with a way out of a fix. The defenses may or may not pass in court, their effectiveness will be determined by several factors among them the good faith and honesty of the defendants in exercising their functions on behalf of the company. References Australia., & CCH Australia Limited. (2011). Australian corporations & securities legislation 2011. North Ryde, N.S.W: CCH Australia. Davies, P. L. (2010). Introduction to company law. Oxford: Oxford University Press. Dignam, A. J., Goo, S. H., & Hicks, A. (2011). Hicks & Goo's cases and materials on company law. Oxford: Oxford University Press. Corporations Act of 2001 Act No. 50 (2001). Hicks, A., & Goo, S. H. (2008). Cases and materials on company law. Oxford: Oxford University Press. Hinaggan, B. (2012). Company law. Oxford: Oxford University Press. Judge, S. (2008). Company law. Oxford: Oxford University Press. Ridley, A. (2013). Key facts: Company law. Routledge. Sealy, L. S., & Worthington, S. (2013). Sealy's cases and materials in company law. Smith, D. (1999). Company law. Oxford: Butterworth/Heinemann. Read More