Corporate Law - Duty & Roles of the DIrector

Australian case involving the breach of duty of an officer to a company

When a business organisation is run by a officers or the head, there are certain duties and rights which is directed by the guideline of law. Such rights and duties are necessary to follow otherwise the officer shall be held liable for conduct a breach in his duty which will result into some kind of legal liability. There are many duties of the officer against the company and employee, working in his office and a head or an officer is bound to perform these duties. One of the most important duties which is even recognised by law is the duty to act in a good faith that is no false impression shall be carried out by the company or its officer(Wigmore, 2012). There are many acts which has been established in the process to ensure the rights and duties of an officer for an example in Australia, a major act is implemented by the government that is Corporation act 2001. some of the provision in this act deals with the duties of an officer residing in a company. Whenever a business organisation is being set up then a head or an officer is appointed in the team to ensure that the work is being being managed and all the formalities regarding work Is carried out properly(Weis, 2013). This act will impose some fiduciary duties on directors as well as on the officer. But when a government board is appointed in the company then they are not in pressure to follow the provisions of corporation act. The duties which corporation act imposes on the director are:-

To act in good faith to establish a proper purpose:- section 181 of corporation act establish first and foremost duty on directors, secretaries and other officers that when ever these individual persons are working in a company then they must discharge their duty in good faith. Working is a good faith will help the company and the board itself to fulfil its purpose. For an example an officer has launched a new scheme for the office which is helping him to create a self interest and self profit. Such activity in office will not be considered an act of good faith(Hillman, 2012). Whenever a person is under an obligation to perform in good faith but due to self interest the person fail in doing so shall result into criminal liability.

Duty to act with care and Diligence:- according to section 180 of corporation act, it is the duty of an officer as well as the board that whole discharging his duty towards an individual ir the company, reasonable degree of care and diligence shall be taken. That it while making of any decision or judging any kind of situation, it is the duty of director to take care so that the right of any other individual shall not get infringed. For an example while making any judgements, the officer has to act in a good faith(Carroll, Shabana, 2010). The officer must not possess any kind of material personal interest in subject matter of a judgement. To believe reasonably that the judgement has been taken in best interest of the corporation.

Duty to avoid improper position:- section 182 of the act provide that no individual that is the officer, the director or any other kind of person from the board shall have the power to take wrong use of its position that is no person is allowed to use its position in order to gain advantage from themselves or someone else to cause detriment to the company. Section 182(2) of the act shall provide that id any person has committed such kind of offence that is wrongful use of its position to gain advantage then such person shall be held liable for committing an offence that is to use position for dishonest.

Duty to disclose certain interest:- it is the duty of an officer or the board to that if such concerned person is making any personal interest or gaining any kind of advantage from the company then he must disclose such information(Scherer, Palazzo, 2011). For such information to disclose a particular notice shall be served to the company.

Penalties:- whenever any individual who is the director of the company or an office breach any kind of statutory duties then penalties shall be drawn to him under corporation act. A penalty of up to $200,000 shall be imposed on to the person who shall breach his duty. In some of the cases it has been observed that when an director has breached his duty towards the office, then was entitled for disqualification from office also.

There are many cases which are instituted in respect to the breach in the duty of an officer bvut onw of the famous case which has been instituted for breach of duty is a recent case of ASIC v Healey.

CASE LAW: ASIC v Healey & Ors [2011FCA 717 (centro case)

This case was instituted with respect to the duties of director in context financial statement of the company. It has been seen in this case that ASIC has instituted the proceeding against director of the company as well as against the financial officer of Centro group. The allegation which has been put on to directors is that they have failed to taker all the reasonable step to comply with the company financial reporting obligation in terms of corporation Act(Brammer, Jackson, Matten, 2012). In this case the duty to due care and diligence has been breached by the director as no precautionary steps has been taken in context to financial statement. In this case a incorrect classification of substantial liabilities of about $2 million in the annual report of 2007 and failure in the disclose of such substantial balance date grantee liabilities in the financial statement. When the case has been taken into federal court it was found that the company has not committed dishonesty. It was clearly observed by the court that no reasonable care has been taken by the company which shall result into not taking the due care and diligence by the company. It can be clearly seen in this case that the duty of due care and diligence has been beached by the director of the company as they have not taken any reasonable step regarding the financial statement. In the case, federal court has imposed a penalty on to the CEO of the company. A penalty of 30,000 dollar has been imposed as well as CEO romano Nenna is disqualified from the post of director for 2 years from 10 October 2011. the court has further held that no penalty and disqualification shall be held to the non- executive directors.

Significance of the judgement

After the judgement has been passed by the federal court, there are certain ground rules which has been established that is :-

• whenever a financial statement has been passed by the company then the directors has to apply their own mind and has to review the whole financial statement so that necessary change can be done or any reasonable care shall be taken.
• Considering that the director must have the specific knowledge about the financial statement
• the director must have the sufficient knowledge about accounting to carry out the financial procedure and to carry out their duties adequately(Bebchuk, Weisbach, 2010).
• And an appropriate enquiries shall be made in teems of any kind of financial statement.

In this case the court found that:-

• It is the duty of the director of the company regarding any kind of financial statement that all reasonable steps shall be taken for an example if any kind of financial statement has been proposes in from of the company then such statement must be reviewed by the director.
• The directors of the must make an inquiry to all the work carried out in the company so that no fault can occur later.
• A proper supervision shall be conducted by the director rather then making a detailed direct involvement in operational matters.

The court has further held that there are numerous of errors which has been committed on the end of director and hence he should act in due care diligence and no negligence shall occur on the part of him(Mishra, Suar, 2010).

Hence the case was fully covered the are of law that the provision related to the duty of director has been covered and it was clearly seen that a director must review the financial statement and all reasonable steps must be taken against it.

Summary

There are many other cases which has been outlined on the basis of responsibility of director but from the above case it can be extracted that that there are many responsibility which has been granted to the director of the company and he is under the obligation to perform certain duties. If by chance, director fails in fulfilling his duty then he shall beheld liable for the breach of his duty and entitled to pay damages(Granovetter, 2010). The part of duty which is being highlighted in this case is the duty of care and diligence. When the case was decided by the federal court thin the first step towards fulfilling the duty to due care and diligence in terms of the financial statement is that whenever a company or its director is proposing any kind of financial statement then a review must be done by the director so that no further fault can be rectified once the financial statement is proposed. The director Centro case makes it very much clear that in listed public company , directors have skill of financial matter which is why a review shall be conducted by the director(Wood, 2010). It has been seen that section 180 of corporation act has been infringed by the company's director by which he has to pay a large amount of penalty to the court. It is very clearly mentioned in the act of corporation 2001 that any director who shall breach any duty of director in terms of company then such person shall be entitled for penalty. In certain cases penalty cloud be disqualification likewise it occur in this case that the CEO of the company was disqualified as he has breached the duty to care and diligence against the company as no reasonable care regarding the review of financial Statement has been conducted by which the company has to suffer losses(THOMSON REUTERS, 2017).

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Conclusion

It shall be concluded from the above project that to protect and safeguard the interest of corporate world, Australia has implemented an act called Corporation of act 2001. there are many provisions described in this act of which one describes the duty of the director. The project has explained various kinds of duties which are being explained in the act and it has been explained that such duties are necessary for a director to follow. The project has further explained the duties with the help of the corporation law case complied with the judgement.

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• Role of Agency Law

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References

• Carroll, A.B. and Shabana, K.M., 2010. The business case for corporate social responsibility: A review of concepts, research and practice. International journal of management reviews.
• Granovetter, M., 2010. 19 Business Groups and Social organisation. The handbook of economic sociology. p.429.
• Hillman, R.A., 2012. The richness of contract law: An analysis and critique of contemporary theories of contract law (Vol. 28). Springer Science & Business Media.
• Horrigan, B., 2010. Corporate social responsibility in the 21st Century: Debates, models and practices across government, law and business. Edward Elgar Publishing.
• Layne-Farrar, A. and Lerner, J., 2011. To join or not to join: Examining patent pool participation and rent sharing rules. International Journal of Industrial organisation.

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