Relevant Law The Companys General Meeting

Question: Write an essay onRelevant Law. Answer: Issue In this case, Mr. Smith is the retired director of XYZ Co Ltd, but he continued to attend the companys general meeting and give valuable advice to them. The new directors are accustomed to act according to his advice. Recently, the auditors and the directors of the company have signed off the financial statements as true. However, the company at the end of the year was unable to pay the immediate debts. Finally, the company decided to appoint a voluntary administrator who discovered that the company had sold some of its valuable assets to Mr. Smith at a rate quite lower than the market value before his retirement. Relevant Law Corporation Act 2001states that a person would be referred to the director of the company if he is appointed as the director by the shareholders or possess the powers of directors and discharges them accordingly or if he possesses the status of a shadow director. A shadow director is neither an officially appointed director nor he enjoys the privileges of an appointed director. Nevertheless, he attends the meetings of the directors and passes valuable advice to which the directors are accustomed to follow. According to Section 95A of Corporation Act, insolvency of a person means who is not solvent and is unable of to pay all his debts when it becomes due and payable. In case of a company, it said to be insolvent when the company is unable to pay off the debts incurred by it, it is under the burden of overdue taxes, it has tried to negotiate with the creditors to extend the period of repayment of taxes, has bad reputation with the banks or is meeting continuous loss. Section 180of this Act says that a director or any other official who holds the post of Director or discharges the functions as directors must discharge its functions with due care and diligence like any reasonable, prudent person would do in such circumstances. The decision of the business judgments by the directors must be made in good faith, must be free from his personal interest, must be aware of the subject matter of the judgment and must rationally believe that it has been taken for the best interest of the company. Business judgment refers to the decision taken for the operation of the company. The directors are allowed to plead relief in cases of insolvency of the company only if they have acted in good faith and with due care and diligence for the benefit of the company. The directors of the company are obliged to act honestly for the betterment of the company so that the shareholders can maximize their profits, and the company earns huge gains of profit. In Daniels v Anderson, the court stated that the director of the company had acted in contravention of Section 180 of the Corporation Act. He had not acted in good faith and the best interest of the company as under no circumstances the said director could have advanced $10 million as financial assistance. There was no reasonable justification given by him to escape his liability. The court held that it is immaterial whether the person is an executive or non-executive director. It is essential for every director to act with minimum standards of good care and diligence. According to Section 436Aof this Act, a company can appoint an administrator by writing if by resolution they decide that the company has become insolvent or is soon going to be insolvent. According to Section 588G of this Act, it is the duty of the director to prevent insolvent trading by the company if he was the director of the company when the debt was incurred, or the company became insolvent at that time after by incurring it and the director had reasonable grounds to believe that the company was insolvent or is soon going to be insolvent. These provisions will apply from the commencement of this Act. However, the directors can escape their liabilities if they satisfy the courts on reasonable grounds that under no circumstances they could assume that the company will become insolvent when they incurred the debt, or they incurred the debt after they were satisfied with the information provided by competent staffs or the directors were not present when the decision of the debt was taken, or they had undertaken all possible efforts no to undertake the debt. In ASIC v Vines, the court held that if the director of the company acts in the contravention of the Act but for the best interest of the company while discharging his duties with due care and diligence then he may be discharged from his liabilities provided he had furnished adequate reasons for such actions to the court. Section 1317 and 1318of this Act says that the Court being satisfied on the evidence that there was no act of default or negligence on the part of the directors and had acted in good faith and had discharged their duties with due diligence and honesty then it can discharge the directors from their liabilities or pass any other order which it may deem fit and proper. Application Thus, we see that Mr. Smith is a shadow director as he has already retired from the post of a director. However, he attends the meetings of the board of directors, and they are familiarized to work under his direction and recommendations. He is paid consultancy fees by the company for his work, but he does not possess the privileges as the directors of the company. Nevertheless, as the directors are accustomed to work under his advice, it can be concluded that he influences the decisions of the directors and thus have indirect control over the company's affairs. There are three circumstances, which show that the company had become insolvent. Firstly, the company was unable to pay a number of its immediate debts. Secondly, Mr. Smith on behalf of the company had negotiated with the creditors to extend the time limit for the payment of the debts that the company owes to them. Lastly, the company had to place itself under the control of the voluntary administration, and accordingly they appointed an external administrator. Thus, we find that they were ample grounds for the directors to realize that the company has become insolvent. Even then, the directors signed the financial statements of 2015 after auditing and confirmed that they were true and correct which was not in reality. Therefore, they failed to inform the correct financial statements to the shareholders to whom they owe the fiduciary duty. In ASIC v Healey, the court held that the directors of the company are expected to maintain familiarity with the financial statements of the company. They must possess the qualification to understand the financial statements and must undertake regular reviews on them. They must scrutinize the accuracy and the content of the statements. Finally, Mr. Smith had bought some of the valuable assets of the company at a lower price than offered in the market. This shows that he had contributed to the insolvency of the company by paying less to the company by which the company failed to pay back the debtors a reasonable amount. Conclusion The directors are liable for breaching the provisions of the Act. The reasons behind this are- Firstly, the directors are required to act in good faith and with due care and diligence for the best interest of the company, which they failed to perform as the company had become insolvent. The Act says that it is the duty of the directors to ensure that the company does not become insolvent. In this case, the company was unable to pay its outstanding debts so it is obvious that the company had become insolvent and accordingly the company directors will be responsible for such situation. The financial condition of the company was so poor that they had to appoint an administrator to resolve the insolvency. Secondly, the company directors had audited the accounts of the company and then it had justified the statements to be true and correct being aware of the fact that the company had become insolvent, as they were unable to pay their debts. They failed to produce the true financial statements before the shareholders to whom they are obliged to do so. The directors owe a fiduciary duty towards the shareholders and the company, which they have breached. They did not act in the best interest of the company and did not deal with honesty with the shareholders as they had provided wrong statements to them. In ASIC v Plymin, the court found the director guilty for not disclosing the correct financial statements to the stakeholders, as he owed the fiduciary duty towards them. The defenses available to the directors are that they were not present at the time when the debt was incurred. They can also plead that they had taken all reasonable steps to ensure that the debt is not incurred and had tried to take all reasonable steps so that the company does not become insolvent. However, they cannot plead that they did not foresee that the company was on the verge of insolvency as there were ample grounds in front of them to believe that the company has become insolvent. They can also plead that they were absent on justified grounds when the decisions of incurring debts were taken, and they had relied on the competent auditors that the financial statements prepared by them were accurate and correct. The liability of sign the financial statements are- The directors are supposed to provide the adequate assistance to the auditors so that they can make the correct financial report. The directors must provide them with true accounts of financial status, and such financial statements must be registered with the company relying on which the auditors will make the reports. The directors, on the recommendation of the CEO, approved the financial statements made by the auditors. The financial statements were not true, as the company was unable to pay its debts. The directors had failed to look into the truth of the statement and had negligently approved it. The auditors need not have to audit the financial statements if they are made in discussions or analysis. Thus, they failed to perform its fiduciary duty towards the shareholders as the shareholder entrust the operation of the company into the hands of the directors. Later, the company is seen becoming insolvent which means either the financial statements were incorrect or the directors failed to rely on or act in accordance with the financial statement so provided. The laws that will be applicable to Mr. Smith are as follow- Firstly, he will be considered as a shadow director as he has already retired and attends the meetings only to advise the directors on which the directors are ought to work. He is paid accordingly for his consultancy job. Therefore, although he is working as a director, he is not experiencing the privileges of a director. Secondly, Mr. Smith had not discharged his functions with due care and diligence and had acted in contravention of this Act when he was the director of the company. He had bought companys assets at a low price, which further lowered the income of the company by selling its assets to meet the debts incurred by it. He had involved his personal interest while dealing with the companys assets as a director of the company. Hence, he had pushed the company a step further to insolvency. Thirdly, he had also consented at the time of the approval of the financial statements, which proved to be incorrect in later times. Thus, he failed to preserve the solvency of the company. He even failed to perform his fiduciary duty towards the shareholders as he failed to present the true financial statement before them. Therefore, he had committed a breach of duty under this Act. To precise, Mr. Smith is found guilty under Section 180 and 588G of this Act when he acted as a director and a shadow director of the company respectively. However, being a shadow director only on one occasion he had acted in compliance with this Act. He had suggested for the appointment of an administrator for putting the company under voluntary administration to resolve the financial issue of the company under Section 436A of this Act. References 03-144 Court Finds Against Water Wheel Directors | ASIC - Australian Securities And Investments Commission(2016) Asic.gov.au Adolfo Paolini,Research Handbook On Director's Duty(Edward Elgar Publishing Inc, 2014). Asian Journal of Finance and Accounting, (2016) 3Macrothink Institute Australian Corporations Securities Legislation 2012: Corporations Act 2001, ASIC Act 2001, Related Regulations(CCH Australia, 2012). CORPORATIONS ACT 2001 - SECT 436Acompany May Appoint Administrator If Board Thinks It Is Or Will Become Insolvent(2016) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s436a.html CORPORATIONS ACT 2001 - SECT 588Gdirector's Duty To Prevent Insolvent Trading By Company(2016) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html. Corporations Act 2001 (2016) Legislation.gov.au https://www.legislation.gov.au/Series/C2004A00818 Corporations Act 2001 (2016) Legislation.gov.auDuty of Care and the Business Judgement Rule,Australian Institute Of Company Directors(2016) https://www.companydirectors.com.au https://www.companydirectors.com.au/director-resource-centre/policy-on-director-issues/policy-submissions/1997/duty-of-care-and-the-business-judgement-rule Hargovan, Anil. Assessing insolvency for purposes of directors personal liability for insolvent trading.Governance Directions, Vol. 66, No. 7, Aug 2014: 428-430. Journal Issue (2016) Lawlib.wlu.edu https://lawlib.wlu.edu/CLJC/index.aspx?mainid=824issuedate=2010-05-06 Vasudev, Susan Watson,Corporate Governance After The Financial Crisis(Edward Elgar Publishing, 2012). Mcser.org (2016) Mia Mahmudur Rahim,Legal Regulation Of Corporate Social Responsibility(Springer, 2013). Paul Davies, Paul Lyndon Davies, Klaus J. Hopt, Richard Nowak, Gerard van Solinge,Corporate Boards In European Law: A Comparative Analysis(Oxford University Press, 2013). Stephen Bottomley,The Constitutional Corporation: Rethinking Corporate Governance(Routledge, 2016). Corporations Act 2001(2016) Legislation.gov.au https://www.legislation.gov.au/Series/C2004A00818. Corporations Act 2001(2016) Legislation.gov.au https://www.legislation.gov.au/Details/C2013C00605. Corporations Act 2001(2016) Legislation.gov.au https://www.legislation.gov.au/Details/C2013C00605. Duty of Care and the Business Judgement Rule,Australian Institute Of Company Directors(2016) https://www.companydirectors.com.au https://www.companydirectors.com.au/director-resource-centre/policy-on-director-issues/policy-submissions/1997/duty-of-care-and-the-business-judgement-rule. CORPORATIONS ACT 2001 - SECT 436Acompany May Appoint Administrator If Board Thinks It Is Or Will Become Insolvent(2016) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s436a.html. CORPORATIONS ACT 2001 - SECT 588Gdirector's Duty To Prevent Insolvent Trading By Company(2016) Austlii.edu.au https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html. Hargovan, Anil. Assessing insolvency for purposes of directors personal liability for insolvent trading [online].Governance Directions, Vol. 66, No. 7, Aug 2014: 428-430. Journal Issue(2016) Lawlib.wlu.edu https://lawlib.wlu.edu/CLJC/index.aspx?mainid=824issuedate=2010-05-06. 03-144 Court Finds Against Water Wheel Directors | ASIC - Australian Securities And Investments Commission(2016) Asic.gov.au https://asic.gov.au/about-asic/media-centre/find-a-media-release/2003-releases/03-144-court-finds-against-water-wheel-directors/. Asian Journal of Finance and Accounting (2016) 3Macrothink Institute.