CORPORATIONS LAW

Analysing Corporations Law

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Introductions to Corporations Law

It is an established fact that the directors of corporate are obligated to not only makes their presence in the board meetings and other operations of the company, but are also under a strict obligation to make an active participation in the relevant affairs of the company. The Federal Court has delivered a judgement in the year 2011 in order to make a powerful reminder to the agents of the corp-orates which includes the directors as well as the officers which are occupying a similar position in the firms. The said precedent has been set in the name of ASIC v. Healey (2011). The directors were characterized as agents of the entities and were required to deliver utmost skills, diligence as well as care in exercising their duties and responsibilities. An active participation from the end of every director is a necessity now after the pronouncement of the judgement. The manner in which the judgement has been pronounced is likely to influence the manner in which the scope of duties shall be interpreted in the future. A particular impact can be seen in context of financial reporting by the directors and the extent to which they are liable to exercise skill and care. The judgement of the case is a clear indication of the fact that the courts view the directors of company as representatives of shareholders, particularly in the case of public listed corporate (Giordano, 2011). It has been specifically opined by the court that these officers ought to utilize their expertise as well as experience to evaluate and if required challenge the manner I which the management is functioning. It is their duty to ensure if the management is able to fulfil their obligations and responsibilities in an effective manner. The courts through this judgement have highlighted the importance of analyzing financial statements in order to ensure the effectiveness of the operations of management.

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Duties And Responsibilities Breached

The facts of the case involved publicly listed firms and the case was pertaining to the duties as well as responsibilities of directors of these companies. It was alleged that in the case that the directors of the company failed to exercise due diligence and disclose significant information which they ought to have known in respect to the company. The said information was in relation to the short-term responsibilities of the corporate, which in fact were categorized by the directors as the non-current liabilities. Moreover, the directors were also alleged to be unknown of the guarantees forwarded pursuant to preparation of the balance sheet in respect to the liabilities. This unawareness on the part of directors hampered the assessment in relation to solvency as well as liquidity of the concerned companies. This in turn was considered as contravention of section 180(1), 344(1) and 601FD(3) of the Corporations Act 2001 and therefore, ASIC sought a declaration from the directors. In response to the same the directors argued that in respect to the financial reporting they completely relied on assurances as well as expert advice of the management and the auditors. In addition it was stated by them that they trusted the accuracy of the financial reports as the same was prepared by the experts of the field. Basing their further argument on the stated justification the directors stated that there was no breach of any of the provisions of law on their part.

ASIC has now adopted an approach which can be described as a ‘stepping stone’ specifically in respect to director’s statutory duty of care. In this regard the directors and the related officers are likely to face severe liabilities for corporate fault. This principle is not just limited to breach of the provisions of the corporation act, but can also be applied in the instances wherein the environmental laws are violated. Section 180 of the Corporations Act imposes a civil obligation of exercising care and diligence (Tomasic, Bottomley and McQueen, 2002.). 180(1) of the Act says that every director and officer of a company shall exercise their responsibilities as well as discharge their duties in a manner which a reasonable person would have exercised if he/she was occupying the respective position in the company. In other words, the section requires every director of the company as well as the officers to act in a reasonable manner at all time while handling the affairs of the company. It requires them to invest utmost capabilities and skills while dealing in matters related to the corporate. Section 180(2) of the Act provides for a presumption in respect to the business judgments which are undertaken by the directors and the officers. It is presumed under the section that clause (1) has been adhered to by the officers at the time of making the business judgment. However, this shall stand valid only in the event the judgment has been made in good faith for a rightful purpose, the officer did not hold any personal interest in the decision and reasonably believe it to be suitable, are well informed in relation to the subject matter of the case and consider the decision to be rationally in interest of the company (Corporations Act 2001 - Sect 180, 2016).

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The directors in the case failed to undertake reasonable measures in the capacity of a director and failed to perform the requisite duties which they ought to have performed. The failure was in respect to not disclosing the short term debt, which allegedly was well known to them. It was also observed by the court that these matters should be known to the directors and in the event the directors were not aware of the same then this amount to be a failure to abide by section 180 of the act. In other words, unawareness of this information implies that the directors did not act in a reasonably fair and diligent manner. The impugned financial reports in question were approved by the directors, and hence it cannot be characterized as a matter of mere technical oversight. Non-disclosure of details of short term debt in the financial report led to implications which were serious in nature for both the shareholders and the share market. The rationale behind importance to this disclosure is that the market or shareholders shall not be able to assess the risk in an accurate manner. This in turn vitiates the primary purpose of preparing and publishing the financial report. In the instant the court opined that the concerned officers were under an obligation to not only read the statements for accuracy, but also to further enquire about the details to verify the authenticity of the same (Centro (Asic V Healey) Case Note: Directors’ Duties For Financial Statements, 2011.). Lastly, they were also made liable for certifying the reports as true and completely fair reflection of the financial position of the concerned corporate.

The directors in the instant case were also made liable for contravention of Section 181 of the act, which essentially requires the officers to act in good faith and in contravention of the same imposes civil obligations. The section imposes the obligation to act in good faith in respect to best of the interests of members as well as the corporation. Further, it also states that the duties shall be discharged in a manner which is appropriate for the company and can be termed as a proper purpose. This section also imposes a civil penalty and has been breached by the directors involved in the present case (Smith, 2012). Followed by the same, section 344 (1) of the Act has also been attracted in the present case. The provision makes the officers liable for contravening the provisions of section 324DAA, DAB and DAC, or Part 2M.2/ 2M.3. These provisions are particularly in connection to the eligibility terms in respect to directors of listed company.

In the present case, the directors failed to undertake reasonable measures in order to comply with the relevant provisions and hence, were made liable under this section 344. In addition, the directors were also made liable for violation of section 601FD of the Act. The section expressly imposes a statutory duty on the directors as well as the officers, in relation to operation of their respective entities. This statutory duty is inclusive of acting honestly, in a careful and diligent manner, prioritizing the best interest of the members and ensuring their welfare. In addition, it has also been specifically provided that the directors shall not take undue advantage of the secured information or the position to the detriment of the company, or for personal benefit (Corporations Act 2001 - Sect 601FD, 2016). In the instant case the directors breached clause (1) of section 601FD as they failed to exercise reasonable care and diligence at the time of approving the financial reports. Moreover, they also did not act in the best interest of the shareholders or the members of the company, which in turn is also a violation of section 601FD (1). This section imposes a civil liability on the directors of concerned companies, which amounted to a penalty of $30,000 in respect to the CEO, along with the other penalties which were imposed.

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Analysis Of The Judgment

The judgment has imposed an irreducible obligation on the director and the related officers to stay an active part of the management of their respective corporate, and undertake all possible reasonable measures to monitor and guide the operations of the company. This obligation has been reiterated as a statutory obligation and has been imposed on the officers of corporate at the core level. Particularly in respect to financial reports the court has mandated the concerned officers to go through the entire report in a diligent manner and understand each and every aspect. This whole process would then require the director to stay informed of all the affairs of the company and possess knowledge in respect to the financial position. This implies that the directors in pursuance to this judgement and the related sections shall be required to stay involved in the affairs of the company, gain a rudimentary understanding in relation to the business of the corporate, stay aware of fundamentals of the business and stay updated about all the matters pertaining to the company. In addition to above, the officers shall monitor the manner in which the corporate affairs are being carried out and in turn, apprise oneself of the financial status of business or the corporate (ASIC v. Healey (2011), 2011). It can be implied from the above mentioned obligations that the directors have been appraised with duties which cannot be delegated. For instance, verification of the financial reports shall be personally undertaken by the director, and in order to abide by the same all of them shall be financially literate.

Conclusion

The three most important issues which have been ascertained by the court in this judgment are that of non-delegation of one’s duty, non-reliance on knowledge of others, financial literacy of the officers and lastly the role of management. One of the most fundamental contributions of the present case is that it imposed a strict requirement for the directors and the related officers to possess reasonable skills in respect to understanding of financial statements. It further requires the directors to act in a reasonably diligent manner to delegate their duties to others. In addition, the delegation shall not be stayed aloof of criticism and hence, the directors shall exercise utmost care and skills in order to make any sort of judgement with respect to the affairs of the company. Lastly, it requires the directors to undergo special trainings if they find themselves deficient in any of the mentioned subjects, and upgrade themselves to the best of their positions. Therefore, it can be concluded that the primary focus of the judgment is on the diligence and skills of the director in respect to delivery of their duties and responsibilities. In addition, to always cater to the interests of the corporat
e and related members.

References

  • Giordano, F., 2011. Company Secretary: Financial Reporting Duties of Directors-Ten Corporate Governance Lessons from Centro for Non-Executive Directors of Listed Public Companies.Keeping good companies.
  • Smith, D. K., 2012. Governing the Corporation: the Role of Soft Regulation.UNSWLJ.
  • Tomasic, R., Bottomley, S. and McQueen, R., 2002.Corporations law in Australia. Federation Press.
  • ASIC v. Healey (2011), 2011. [PDF]. Available through: <file:///C:/Users/SW/Downloads/ASIC%20v%20Healey.pdf>. [Accessed on 15th January 2017].
  • Centro (Asic V Healey) Case Note: Directors’ Duties For Financial Statements, 2011.
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