Business and Company Law

Research Assignment Business and Company Law

Topic: Discuss the effectiveness of the current directors’ defences regime in Australia in attempting to create a space for director decision making and in enabling the entrepreneurial spirit of directors.

Should there be more defences available to directors for breaches of the directors’ duties regime or are the current defences sufficient?

Introduction

The business landscape towards the corporate governance domain has been changing in Australia which impresses a high standard expectation and a high risk of civil and criminal penalties and increased level of personal liability on directors.

This had narrowed the space for decision making and can discourage the entrepreneurial spirit of directors in Australia in the face of red tape, increased regulations and issue over their risk of increased personal liability.

The purpose of this research essay is to present a discussion on effectiveness of the existing defenses regime effectiveness for directors in an effort to develop a safe and sound environment for decision making and encouraging the entrepreneurship. The essay also discusses whether or not current directors’ defenses sufficient or else towards the need of more defenses for directors’ duties breaches.

Issue

There are wide ranging duties of director in Australia under the corporation Act, Australian consumer Law, at general law (fiduciary duties), and also under the legislation of workplace health and safety, anti-bribery and corruption, taxation and environment.

These duties impose the high level of expected standards as well pose several restrictions in their action and decision making. Thus, the issue is that the Australian directors are open to the elements of different duties and the breach is associated with penalties and prone to personal liability.

Thus, there can be concern towards the need to support the directors who are working diligently in their duties to lower the risk of personal liability and to improve the suitability as well as availability of the defenses available to the directors in Australia.

The fundamental issues that derive from the existing situation are:

Whether the current director defenses regime in Australia is effective for director decision making and to facilitate entrepreneurial spirit of directors.

Another issue is that is there is need of additional defences to directors for breaches of the directors’ duties or the existing defences are adequate in Australia.

Rule

The relevant laws that are applicable includes the Corporations Act, the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and Australian Consumer Law.

The Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) is concerned to govern the personal liability of directors in the country to being the court proceedings in opposition to the directors of a company[1].

Also, under the Australian Consumer Law (ACL) is concerned with the liability provision for directors for company breaches that involves consumer protection provisions such as false representation, breach of safety provisions, unconscionable conduct, and unsolicited agreements.

The Corporations Act 2001 is concerned with the key duties for directors to govern a company that are imposed as general, fiduciary and specific duties of directors under this act.

These includes to act with care and diligence under section 180, to act in good faith under section 181, to not engage in improper use of director position under section 182, and not to make use improperly use information  gained under section 183.

In addition, the section 180 of the Corporations Act 2001 discusses the business judgment rule which is a remedial defence for a director with relation to the claim made towards the breach of duty (to act with care and diligence under this section).  The subsection 180 (2) and 180 (3) provide for the director defence under the business judgment rule[2].

Also, under the section 588G for insolvent trading there is a defence available for the directors under section 588H of the Corporations Act[3].

Application

There are different defences available to director in Australia. One legal defence available is the business judgment rule for directors in the situation of litigation towards that director has not acted or performed their duty with care and diligence.

It can be analysed that this rule provides a safe harbour that recognise the consequence of breach of director duty in situation of a commercial reality where the decision taken or action by a director is not always certain.  Thus, the decision taken by director can result in consequence of financial challenge or loss for a company.

Thus, this rule has value for directors to give them space to make decision to pursue business opportunities without being focus on the concern towards the certainty of the every decision and action.

Thus, for decision taken by director that fails in such case the business judgment rule can be effective if the director show that business judgment made was in good faith, reasonably believed to be suitable, for proper purpose and in the best interests of the company.

On the other hand, owing to the significance of this rule, it is also considered to be less transparent by many field experts[4].  Here, the case of Australian Securities and Investments Commission v Rich [2009] NSWSC 1229  can be referred where it was decided that ASIC have not been able to prove the breach of the statutory duty of care by Jodee Rich (One.Tel director and joint chief executive) and Mark Silbermann (One.Tel’s finance director)[5].

Thus, in Australia jurisdictions, the business judgment rule haven bee set towards the defence of director’s duty breach of care and diligence. Thus, it can be said that subsections 180(2) and (3) of the Corporations Act provide suitable defence for the directors in relation to their claim for statutory duty of care and diligence and also defence of claim made under the general law.

The case of Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788 invoked by business judgement rule but it was found breach of duty of care under section 180 thus, there was no aspect of exercise of judgment drawn in which made this rule unavailable[6]. However, according to Bruner Christopher (2013), there have been rare uses of the business judgment rule in the Australian corporate law.

There are also provisions such as sections 1317 (2) and 1318 in the chapter 9 of the Corporations Act that provide defenses for directors towards the breach of duties under this Act[7].

However, in Australia, there has been wide discretion towards these provisions of the Act upon the courts as in the case of Daniels v Anderson (1995) 37 NSWLR 438 at 525 these was consideration given to an equivalent provision to section 1318 of the Corporations Act by the NSW Court of Appeal to provide defense from liability in circumstances where it would be unfair in not doing so[8].

Considering the defences against claims of insolvent trading, the section 588H of the Act provide defence to director under the section 588G. It can be analysed that this defence under subsection 2 leave out the liability of directors towards the solvency defence

who are able to prove that there are reasonable grounds at the time of debt was incurred and the company was solvent and would remain like that in the situation when the debt was incurred. Also, under subsection 3 there is defence available which is based on reliance on another individual that provide sufficient information with regards to the solvency of the company.

It is stated that availability of the defences to avert insolvent trading claim under section 588H of the Act is underutilised and has achieved success on a rare basis[9].

Thus, this highlight the need of a more broad defence in the area of insolvent trading claims to be introduced in Australia that give director more flexibility in taking decision during financial hardship or for distressed companies. In addition to this, the defence under subsection 588H(2) is only available to directors in proceedings situation of civil penalty under 588G subsection (2) and is not available for a criminal offence under 588G subsection (3).

In the context of insolvent trading, the case of Hall v Poolman (2007) 215 FLR 243; 65 ACSR 123 can be referred where the court has considered the approach of commercial realities towards a relief application from liability of a director where Mr. Irving was considered to act in a honest and ought fairly to be exempt from the insolvent trading up liability in anticipation of negotiations with the tax office may possibly not be determined promptly[10].

On the other hand, it can be discussed that Australia is considered of having unkind insolvent trading laws that focused on punishing the directors and did not focus on providing the protection to creditors. It can be said that this defence is posing a hindrance towards the risk factors in the decision making process of the Australian directors.

In Australia, there are also few protection provided against the directors liability. One is the update of the constitution of the corporation to take account of provisions that addresses the related entity transactions, insurance and indemnity.

Second is by ensuring that the individual directors and companies group go into access deeds. Another is a suitable Directors and Officers (D&O) insurance to seek protection of director from liability.

The D&O insurance is a defence for the directors in situation when they are sued for supposed wrongful acts to cover the legal defence costs, settlements or damages.

Thus, this defence protect the director to be help person liable for non-profit companies and private companies for proceedings against breach of fiduciary duty that lead to bankruptcy of financial loss, company assets or funds misuse, company assets misrepresentation, suspect of fraud, intellectual property theft and corporate governance issues.

Also, under the Australian Consumer Law, a defense is available to the directors only if they can prove that they acted in an honest way or a reasonable person in the given circumstances in situation of claim for false or misleading representations. However, this had been seen successful in rare cases as there have been several cases where the court have order penalties in million under the ACL.

The case of ACCC v Energy Watch Pty Ltd [2012] FCA 749 where the director was help personal liable to pay for false and misleading representations about goods and services and a penalty of $1.95 million dollars was issued[11].

Also, in the case of Grande Enterprises Ltd v Pramoko [2014] WASC 294, the Western Australian Supreme Court decision considered the director personal liable for deceptive and misleading conduct and was ordered to pay $2.25 million dollars[12].  On the other side, in ACL, there is no precise prevention on attaining D&O insurance for the civil penalties arising for the personal liability on directors[13].

From the above points, it can be analysed that there is a concern among the directors towards the defences such as the business judgment rule in Australia which has limited operations[14].

In support of this, it is stated that there is no appropriate extension to the rule in Australia due to which the helpfulness of this defence is not realized in Australia[15]. It can be analysed that the current defences are not sufficient which indicate the need of additional defences to be made available for the directors in Australia.

This is due to the facts that there us high concern among the director towards the issue of personal liability, the risk for directors increases when the companies are in present or future state of insolvency. In addition, also due to the restricted nature of the business judgment rule in Australia also points to the insufficient existing director defense.

Thus, it can be said that the existing legislative provisions towards the director in the Corporations Act and other act and legislation had increased the concern of the directors towards the personal liability.

Conclusion

It can be concluded that in Australia the regulation on the director duties is relevant issue as it leads and imposes to high personal liability and risk of civil and criminal penalties.

The regulation and underutilised defences available to directors affect the entrepreneurial spirit and do not offer an adequate freedom for decision making in the situation of economic uncertainty or for companies under distress.

It can be concluded that there is limited usefulness of the existing defences available to directors in Australia. It is also concluded that the existing defences are not utilised and are not been successful thus there is a need of more wide-ranging defences to be made available for directors for the breaches of the directors’ duties in Australia.

References

Bird Helen, and George Gilligan, ‘Deterring corporate wrongdoing: penalties, financial services misconduct and the Corporations Act 2001 (Cth)’, Company and Securities Law Journal 34 (2016): 332

Bruner Christopher M, ‘Is the Corporate Director’s Duty of Care a Fiduciary Duty-Does It Matter, Wake Forest L. Rev. 48 (2013): 1027.

Comino Vicky, ‘Effective regulation by the Australian Securities and Investments Commission: the civil penalty problem’, Melb. UL Rev. 33 (2009): 802.

Harris Jason, ‘Director liability for insolvent trading: Is the cure worse than the disease?,’Australian Journal of Corporate Law 23, no. 3 (2009).

Hooper Matthew, The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide, ‘Enterprise Governance eJournal 1’, no. 1 (2011): 6919.

Lewis Patrick J, ‘Insolvent trading defenses after Hill v. Poolman’, Company and Securities Law Journal 28 (2010): 396-410.

Lin Chen, Micah S Officer, and Hong Zou, ‘Directors’ and officers’ liability insurance and acquisition outcomes’, Journal of Financial Economics 102, no. 3 (2011): 507-525.

Radin Stephen A, Dennis J Block, and Nancy E Barton, ‘The business judgment rule: fiduciary duties of corporate directors’, Wolters Kluwer Law & Business, 2009.

Ramsay Ian, and Benjamin Saunders, ‘An Analysis of the Enforcement of the Statutory Duty of Care by the Australian Securities and Investments Commission’,Company and Securities Law Journal 36, no. 6 (2018): 497-521.

Scardamaglia Amanda, ‘Misleading and deceptive conduct and the internet: Lessons and loopholes in Google Inc v Australian Competition and Consumer Commission,’ Misleading and Deceptive Conduct in Australia: Google Inc v Australian Competition and Consumer Commission [2013] HCA1’(2013) 35, no. 11 (2013).

Welch Katrina, Directors beware-Personal liability for misleading contractual promises, ‘Governance Directions 66’, no. 11 (2014): 704.

Windsor Duane, ‘Tightening corporate governance’, Journal of International Management 15, no. 3 (2009): 306-316.

Young Simon, The Evolution of Bias: Spectrums, Species and the Weary Law Observer, ‘Melb. UL Rev’, 41 (2017): 928.

[1] Comino Vicky, ‘Effective regulation by the Australian Securities and Investments Commission: the civil penalty problem’, Melb. UL Rev. 33 (2009): 802.

[2] Radin Stephen A, Dennis J Block, and Nancy E Barton, ‘The business judgment rule: fiduciary duties of corporate directors’, Wolters Kluwer Law & Business, 2009.

[3] Harris Jason, ‘Director liability for insolvent trading: Is the cure worse than the disease?,’Australian Journal of Corporate Law 23, no. 3 (2009).

[4] Bruner Christopher M, ‘Is the Corporate Director’s Duty of Care a Fiduciary Duty-Does It Matter, Wake Forest L. Rev. 48 (2013): 1027.

[5] Hooper Matthew, The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide, ‘Enterprise Governance eJournal 1’, no. 1 (2011): 6919.

[6] Young Simon, The Evolution of Bias: Spectrums, Species and the Weary Law Observer, ‘Melb. UL Rev’, 41 (2017): 928.

[7] Bird Helen, and George Gilligan, ‘Deterring corporate wrongdoing: penalties, financial services misconduct and the Corporations Act 2001 (Cth)’, Company and Securities Law Journal 34 (2016): 332.

[8] Ramsay Ian, and Benjamin Saunders, ‘An Analysis of the Enforcement of the Statutory Duty of Care by the Australian Securities and Investments Commission’,Company and Securities Law Journal 36, no. 6 (2018): 497-521.

[9] Harris Jason, ‘Director liability for insolvent trading: Is the cure worse than the disease?,’Australian Journal of Corporate Law 23, no. 3 (2009).

[10] Lewis Patrick J, ‘Insolvent trading defenses after Hill v. Poolman’, Company and Securities Law Journal 28 (2010): 396-410.

[11] Scardamaglia Amanda, ‘Misleading and deceptive conduct and the internet: Lessons and loopholes in Google Inc v Australian Competition and Consumer Commission,’ Misleading and Deceptive Conduct in Australia: Google Inc v Australian Competition and Consumer Commission [2013] HCA1’(2013) 35, no. 11 (2013).

[12] Welch Katrina, Directors beware-Personal liability for misleading contractual promises, ‘Governance Directions 66’, no. 11 (2014): 704.

[13] Lin Chen, Micah S Officer, and Hong Zou, ‘Directors’ and officers’ liability insurance and acquisition outcomes’, Journal of Financial Economics 102, no. 3 (2011): 507-525.

[14] Bruner Christopher M, ‘Is the Corporate Director’s Duty of Care a Fiduciary Duty-Does It Matter, Wake Forest L. Rev. 48 (2013): 1027.

[15] Windsor Duane, ‘Tightening corporate governance’, Journal of International Management 15, no. 3 (2009): 306-316.

 

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