Company and Securities Law - Duty to Care and Diligence - Article Example

Company and Securities Law Name Date Course Duty to care and diligence Issue The issue is whether Karen and Lucy breached their duty to care and diligence. This is after they agreed to move to they agreed to move their business to a new location. During the decision making process Lucy did not have proper understanding of the financial implications. Karen was doubtful but nevertheless agreed that they should relocate their business. The decision was made without proper consultations and information with regards to the new location. Samantha made the decision to look for a new premise before consulting Lucy and Karen. She only consulted them after finding a lager premise Rules According to section 180 of the corporations Act 2001 (Cth), the directors of a company are supposed to observe care and diligence when carrying out their duties1. Section 180(1) (a), the directors of a company are required to exercises their powers and discharge their duties with degree of care and diligence that a reasonable person would do if they were a director or officer of a corporation. The directors are therefore required to come up with reasonable decisions when it comes to all the issues affecting the company. According to section 180(2) (a), the directors are required to make business judgments in good faith and for proper purpose. Section 180(2) (c) further requires the directors to inform themselves about the subject matter of the judgment to the extent that they believe it is appropriate. The directors are required to fully understand the issues involved before making any decision. The business judgment of the directors should be made after obtaining adequate information about the matter. Application Lucy and Karen were in breach of section 180(1) (a) as they did not observe a high degree of care and diligence when making the decision. Before making the decisions, they ought to have understood all the facts behind the proposal being made to them by Samantha. A reasonable person is also required to ensure that the decision made is reasonable. In the case of ASIC v Healey, the directors were charged for failing on their duties to care and diligence2. The directors made an approval of financial statements without adequately disclosing some information and hence contravening the duty to care and diligence. Although Karen was doubtful of the decision, she did not question Samantha. However Lucy and Karen were not in breach of section 180(2) (a) as they made the decision in good faith. The profitability of the company was falling and the time and this informed their decision making process. The decision was for the purposes of ensuring that the business is able to make profits. Lucy and Karen were in breach of section 180(2) (c) as they did not inform themselves adequately about the subject matter before making the decision. As a director of the company they should have sought more information before making their business judgment. Had they obtained more information they would have been aware that the company was likely to perform poorly in the new location as more people preferred the services of a nanny. Obtaining more information about the business prospects in the new location would have cleared any doubts leading to a proper business judgment and decision. Conclusion Karen and Lucy were in breach of the duty to care as they made business decision without consulting or obtaining more information with regards to the prospects of the new location. Karen and Lucy failed to makes adequate consideration before accepting the proposal. Duty to Civil obligations Issue The issue is whether the Lucy and Karen were in breach of their civil obligations. As the directors of the company, their position required them to act in the best interest of the company and avoid any action that may cause detriment to the company. The duty to civil obligations requires the directors to put in place all the necessary measures to ensure that the company is able to meet its goals and objectives. Rules According to section 182, the directors have civil obligations to the company and this should guide them when making their decisions. The civil obligations should be considered by the directors when making any decision. According to section 182(10(a), a director must not improperly use their powers for the purposes of gaining advantage to themselves or for someone else. All the actions of the directors should be for the purposes of benefiting the organization. The directors are required to abide by all the rules and regulations when performing their duties. This includes the laws that are in places as well as the rules and regulations of the company. The directors are supposed to ensure that their decision will not benefit themselves or someone else3. All the decisions have to be made in good faith and in accordance with the laws and regulations. According to section 182(1) (b), the directors of the company should not improperly use their decision to cause detriment to the corporation. The actions of the directors should be for the purposes of developing the company and ensuring that it meets goals and objectives. Application Lucy and Karen were not in breach of their civil obligation in accordance to section 182. Karen and Lucy did not improperly use their powers for their own benefits or for the benefits of others. The decision made by Karen and Lucy was influenced by the performance of the company. The company was making losses and their decision was supposed to reverse the situation and ensure that the company is able to make profits. The decision by Lucy and Karen was not in beach of section 182(10(a). The decision made by Lucy and Karen was did not improve on the performance of the company. However, they were not in breach of section 182(1) (b). This is because the decision was not to cause any detriment to the company but it was instead aimed at ensuring that the company is able to improve on its financial position and make profits. Lucy and Karen were therefore carrying out their civil obligations by making decisions which were aimed at improving the financial position of the company. The directors were charged for breach of civil obligations in the case of ASIC v McDonalds4. This is after the director omitted their duties in order to solve the problem that facing the company. Conclusion Lucy and Karen were not in breach of their civil obligations although their decision did not lead to any improvements on the position of the company. Karen and Lucy were interested in ensuring that the company is able to meet its goals and objectives of profitability. Karen and Lucy maintained their duty of civil obligations and their actions was for the purposes of ensuring that the company is able to meet its goals and objectives. Duty to act in good faith and best interest of the company Issue The issue is whether the actions of Lucy and Karen were in good faith and in the best interest of the company. This is after they supported the decision by Samantha to relocate the company in order to improve on their financial situation. The decision was however supported reluctantly by Karen while Lucy supported the idea due to lack of skills and knowledge on the financial issues. Rules According to section 184(1) (a), a director of a corporation commits an offence if they act in a reckless manner. The failure of a director to discharge their powers can be considered as reckless. According to section 184(1) (c), a director of a company commits an offence if he fails to exercise his powers and discharge their duties in good faith and for the best interest of the corporation. Any decision made by the director of a corporation should only be for the best interest of the company and should also be made in good faith5. Acting in good faith means that the director should not be engaged in activities that are likely to harm or cause detriment to the company. Acting in the best interest of the company involves talking lawful actions that will ensure that the company is able to meet its goals and objectives. A director also commits an offence if they fail to use their powers for proper purpose as outlined in section 184(1) (d). The directors are therefore required to ensure that their actions are in good faith. According to section 184(2) (a), the director of a company commits an offence if they use their positions dishonestly. This is important in terms of ensuring that the directors of the organization are able to steer the company to success. This is also for the purposes of ensuring that the goals and objectives of the organization are met. Application Lucy and Karen acted in reckless manner which is contrary to section 184(1) (a). This is because they blindly agreed to support the proposal that had been brought up by Samantha. Lucy and Karen had the duty to ensure that they consult widely before making any decision that is likely to have huge impacts on the company. Lucy and Karen failed to question the proposal and hence acting in a reckless manner. This is considering that relocating a company is almost the same as starting the business all over again and making it a huge business decision. Karen and Lucy were not in breach of section 184(1) (c), as their decision was in good faith and best interest of the company. In the case of Links Golf Tasmania Pty Ltd v Sattler, the Federal Court of Australia held that the directors have responsibility to act in good faith and best interest of the company6. This is after the breach of duties by some of the directors and their failure to act in the best interest of the company. The relocation of the company was in the best interest of the company as it was facing a lot of competition leading to a drop in profitability. The decision was by Lucy and Karen was for the purposes of ensuring that the company is able to regain its profitability which is for the best interest of the company. Karen and Lucy were not in breach of section 184(1) (d), as they did not use their powers for improper purses. They instead used their powers to act in the best interest of the company. There was no dishonest use of position by the directors of the company which is an indication that there was no beach of section 184(2) (a). Conclusion Lucy and Karen were not in breach of their duty to act in good faith and in the best interest of the company. Although they acted recklessly, their action was in good faith and for the best interest of the company. Their actions were necessitated by the need of the organization to make profits. Their actions were also motivated by the assurance from Samantha that the problems of the company will be solved. Duty to rely on information provided by others Issue The issue is whether Lucy and Karen were in breach of their duties as directors for relying on the information provided to them by Samantha. This is after Samantha told them that the relocating the company will solve all the problems that it was facing. Lucy further told them that they needed to act quickly as there was another purchaser who was interested in purchasing the premise that she had identified. This created a sense of urgency and hence leading to the decision to relocate the company. Rules According to section 189(a) (i), a director can rely on information or professional advice that is provided to them by an employee or a person who the director believes has reasonable grounds to believe that they are competent with regards to the matter of concern. This is considering that the directors cannot purely make decisions on their own but they have to rely on the information provided by experts, employees or other directors. Section 189(a) (iii) also indicates that a director can rely on information provided by another director or officer of the corporation with regards to the matters that is within the authority of the director or officer of the corporation. Section 189(a) (iv) also gives the director the authority to rely on the information provided by a committee of directors in which the director did not serve in relation to the matter7. According to section 189(b)(i), the director can rely on the information provided by others if it was in good faith. Section 189(b)(ii), requires the directors to make independent assessments with regards to the information provided. Application Lucy and Karen were not in breach of section 189(a)(i) and 189(a)(ii) by relying on the information that was provided to them by Samantha who was also a director. This is considering that the information was reasonable as Samantha assured them it would solve all the problems of the company. The information was therefore from a reasonable person and reliable since Samantha was a director of the company. Lucy and Karen were not in breach of section 189(b)(i), as the information was provided to them in good faith. However, Lucy and Karen did not carry out any independent assessments to determine the reliability of the information provided to them and this therefore makes them in breach of section 189(b)(i). If they would have carried out independent assessments they would have obtained more accurate information that would have aided in the decision making process. In the case of Peter James Shafron v ASIC, the director was charged for approving misleading information8. The misleading information had negative impacts on the company as well as the stakeholders of the company. Conclusion Lucy and Karen were in breach of their duties as directors by relying on the information provided to them by Samantha. Although they had the powers to rely on the information provided by a director, they failed to carry out any independent assessment. An independent assessment would have proved that the information they had been provided with by Samantha was not accurate. References Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634. ASIC v Healey [2011] FCA 717 Peter James Shafron v ASIC [2012] HCA 18 ASIC v Macdonald (No 11) [2009] NSWSC 287 Corporations Act 2001 (Cth) Goulding, Simon. Principles of company law. Routledge, 2013. Cantatore, Marshall. et al. Businesses are people too? Anomalies in widening the ambits of" consumer" under consumer credit law, Australian Business Law Review, (2014). Read More