The area of law relevant to this case study is directors’ duties of care and due diligence, of avoiding conflict of interest, as well as of good faith and proper purposes.
Step 2: Discuss relevant legal principles Harris, Harboring and Adams (2011, 485) states that directors owe a fiduciary duty to their company and as such, must act in the company’s best interests. ASIA v Adler (2002) NCSC 171 was a deciding case in dealing with breaches of directors’ duties concerning conflicts of interest, making secret profits and acting for Improper purposes.
Directors?under section 181 of the Commonwealth’s Corporations Act 2001 we the duty to act for proper purposes in the best interests of the company. Directors also have a duty to avoid conflict of interest, as per section 182 of the Corporations Act. This section disallows members from using their position to ” gain an advantage for themselves or someone else; or… Cause detriment to the corporation. ” Such acts may also be considered criminal offences if they are reckless; or … Are intentionally dishonest,” as per section 184 of the Corporations Act.
Green v Bestowal Industries Pity Ltd (1982) 1 CLC 1 was a case in which a senior angers position in a company allowed him to gain a secret profit for another company he had set up. The court held that because he had a conflict of interest, he was in violation of his fiduciary duty. Additionally, in Chew v R (1992) 173 CLC 626, it was decided that one must not necessarily achieve their intended purpose in order to be in breach of section 182, as long as there is proof of intention. Section 191 of the Corporations Act requires directors to disclose any material personal interest they have that may conflict with their fiduciary duty.
The court led in Regal Hastings Ltd v Guiltier (1967) 2 AC 134 that such parties may only escape liability if consent has been given by the shareholders of the company. Section 1 80(1) of the Corporations Act obligates directors and officers to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in the same situation would exercise. ” Directors following the case of Daniels v Anderson (1995) are no longer allowed to defend against liabilities on the basis of ignorance or lack of inquiry.
They are expected to have a reasonable degree of awareness of he goings on of the business and any misconduct that may occur within the company?regardless of whether they are of executive or non-executive status. The decision in ASIA v Rich (2003) 44 SCARS 341 held that non-executive directors owe the same duty of care that executive directors do and that they are obligated to use whatever skills they may have that may be of use to their company. A director who is thought to have breached their duty of care may rely on the business judgment rule?under section 180(2) of the Corporations Act?as defense, if it can be proven that they “… De the judgment in good faith for a proper purpose; and… Do not have a material personal interest in the subject matter of the judgment; and… Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and… Rationally believe that the judgment is in the best interests of the corporation. Directors may also use the reasonable reliance defense?as per section 189?if it is found that they relied on information given by “… Another director or officer in relation to matters within the directors or officer’s authority. “
A director may delegate their powers to another director, officer or employee as per section 19TH of the Corporations Act. However, the director will be held responsible for the ways in which the delegate exercises those powers, under section 190.
Step 3: Apply legal principles Of the facts presented, it is clear that the former directors of Red & White Ltd have breached a number of their duties. To begin with, Vernon as a former managing director of the company breached his duty of disclosure, under section 191 of the Corporations Act, by not disclosing his family’s majority share of Phillips Glass Bottles Pity Ltd.
By doing so, he also breached his duty to act for proper purposes for the best interests of the company, as well as his duty to avoid conflict of interest?thereby breaching both sections 181 and 182 of the Corporations Act. He is also liable for intentions to make a secret profit from the purchase of the company and breached his fiduciary duty to Red & White Ltd, following the precedent set by Green v Bestowal Industries. It is irrelevant whether or not he made any personal gain from the acquisition. Following the case of Chew v R, Vernon is in breach of his duties based on his intentions alone.
It is reasonable to assume with his family’s significant involvement in the company that he would have had sufficient knowledge on the value of the company and that the $75 million purchase price was as described “grossly excessive”. Had he made the disclosure to the other board members, the financial loss from the purchase could have been avoided. Moreover, had he disclosed the information and the other board members still proceeded to approve the purchase, he would have no longer been liable for his breach of duties, as per the Regal Hastings Ltd case.
It is reasonable to assume that Vernon had every opportunity to closes this information in the board meeting but actively chose not to, thereby further committing a criminal offence under section 184 for being reckless and intentionally dishonest. The business judgment rule cannot be relied upon in this case as it is clear that Vernon had a material personal interest in the acquisition. Jacques, as the company’s financial officer also breached his duty of care by making obvious mistakes on his financial report.
However, the other board members had they spent more time analyzing his report should have had the business knowledge and experience to spot those mistakes. ASIA v Rich set a precedent making it a necessity to do so. However, Jacques cannot defend against liability by using the reasonable reliance defense as he was the financial officer and as such, the other board members were reasonable in having relied on the information provided by him. Rocco, on the other hand, breached his duty of due care and negligence by not allowing more time during the board meeting to properly discuss the business proposal.
Rocco had a fiduciary duty to ensure a reasonable amount of care and diligence when exercising his powers as the non-executive director chairman. Regardless of his non-executive status, he is expected to exercise the same degree of care as an executive member of board, as held in the ASIA v Rich case. By only allowing 10 minutes for Nicole to present her business plan as well as not making sufficient inquiries regarding Jacques’ financial report which later proved to be flawed, it is reasonable to assume that Rocco did not do his due diligence in ensuring that the acquisition would not negatively affect Red & White Ltd.
Had he made proper inquiries on the financial report, there would have been a much better chance of the mistakes in the report being noticed and amended, thereby avian the company from its subsequent “financial disaster”. With the Daniels v Anderson case as a precedent, Rocco cannot claim defense for not having made sufficient inquiries as it was within his scope of duties to do so. He also cannot rely on the business judgment rule as it is obvious that he did not substantially fulfill his duty to ensure that he was fully informed.
Lastly, Nicole and Chenille are also liable for breaching their duties of care and due diligence. Nicole, as the managing director, should reasonably have been most informed on the subject matter. By signing the purchase contract without avian done her due diligence, she has mishandled her powers as director and caused a major financial loss for the company. Chenille, like Rocco, cannot avoid liability by citing his non-executive status as he had as much responsibility as the other board members to exercise his powers with proper purpose for the best interests of the company.
On the day of the board meeting, none of the board members were fulfilling their duties as required by law. Although they may use the reasonable reliance defense to defend against Jacques’ flawed report, they cannot escape liability for the lack of care given.
Step 4: Conclusion In conclusion, the new directors of Red & White Ltd are advised to prosecute the former board members for their breach of duties the main one being their duty of due care and diligence.
Specifically, Vernon should be made liable for his non- disclosure of his conflict of interest as well as his intentions to make a secret profit. He may also be prosecuted under criminal offences for his breach of section 184 of the Corporations Act. Jacques must also accept liability for the seemingly substantial flaws in his analysis as he also did not fulfill his duty of care. Rocco should also be made liable for not fulfilling his duty of care and would not be allowed the business judgment defense.
