The Purpose of the Director’s Duty to Act in the Best Interests of the Corporation

March 23, 2018 Law

which stakeholders can currently be considered to be part of the “the company” for the purpose of the director’s duty to act in the best interests of the corporation? Company is a form of corporation and regulated by the Corporations Act. The legal significance of being as a company is it exists as a separate legal entity and dependent upon human beings to make decisions on their behalf. The person who makes or participates in making decisions that affect the whole or a substantial part of the company’s business can be defined as a director.

The legal definition of director is stated under section 9 of the Corporations Act[1] which indicates that, it is more appropriate to look at the function of the people rather than at the job title itself. Duties are imposed on the directors to regular illegal behavior and ensure that they act for the benefit of the company. All directors and officers of a corporation are bound by a number of general law and statutes which include that: a) act in good faith in the interests of the company; b) act for a proper purpose; c) avoid conflicts of interest; and ) retain discretion Moreover, care, skill and diligence in the performance of their duties must exercised by directors. Stakeholder can be defined as a party that affects or can be affected by the actions of the business[2], which may be include shareholder, creditors, employees, customer, supplier and government. Under the principle of the company law, directors and officers owe duties to the company as a whole but not to the other person or group rather that shareholder as they are the residual owners of the company’s assets.

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As a result, it can be said that a scope is limited by the statutory duties to the company’ director and officer is to act the best interest of shareholder, any benefit is acting on the other group of the stakeholder (such as the creditor) will beyond the scope of director’ power. In addition, an essential problem might be arisen between the director and the shareholder is known as “agency costs” that is the cost incurred by company to ensure that the director (who manages the company) is acting on the behalf of shareholders (who is the owner of the company) and make decisions onsist with their best interest. The duty will be breached by each director if there is no action done to avoid a conflict of interest[3]. A director can not use his or her power to profit personally interest at expense of the company. An action may be brought against the company where it has managed in an oppressive, unfairly prejudicial or unfairly discriminatory against shareholder’s interest. Therefore, it seems that the company (shareholder) is the only beneficiary by the regulation of director’s duties. In other words, the enforcement of director’s duties is for the benefit of the shareholders. 2) Should directors duties, and corporate responsibilities, be extended to a wider group of stakeholders? What are the lessons from the James Hardie and the Waterfront Dispute experience? It is a challenge for the current legal framework to consider a wider group of stakeholder’ interest, as in modern society that greater deal of business and activities conducted by a company. Elena suggests that balance between the different groups of stakeholders is essential to the long-term viability of the corporation and the long-term shareholder’s value can be increased by taking account of the other group of the stakeholder. 4] For example, an under market salary is paid to the employees or the employees are scheduled in an inefficient way will result in a decreasing of shareholder’s wealth as the productivity of the company is affected by the dissatisfied employees. Hence, according to the definition of the stakeholder, employee can be classified as a stakeholder who will maximize shareholder’ wealth in a long-term. As a result, the maximization of stakeholder’ value goal might not only be concentrated on the shareholder but the other group such as creditor and employee.

The reasons why the director’s duty might be extended to the group of creditor can be stated as: creditor is a important stakeholder in the company and their interest should be taken into account; and also, based on the judgments of the decided case, it also indicates that there is a demand for director to regard the interest of creditor. Firstly, a company is a separate legal entity[5]. Therefore, the debt of the company is separated from its directors and shareholders. In addition, the money borrowed will be recorded under the name of the company and the creditor will sue the company if there is any unpaid account.

However, creditor is playing an important role in providing funds to assist company to manage its cashflow and expansions. Hence, it can be said that creditor is the stakeholder and can effect the action of the business. Nevertheless, according to the passage Re New World Alliance Pty Ltd (1994) 122 ALR 531 at 550,[6] there is not direct duty owed by the director and officer to the creditors because their duties are owed to the company. However, in the situation when the directors of company consider a high risk project or it is in a financial distress, the creditor has to occupy a weakness position.

This is because, if the project fails, shareholder will lose nothing but the money they have invested due to the limited liability then the risk of filature will shift to the creditor. Hence, it seems unfair for creditor who has not fiduciary protection and whose right is limited by the contract. On the other hands, according to the passage Re New World Alliance Pty Ltd (1994) 122 ALR 531 at 550,[7] there is not direct duty owed by the director and officer to the creditors because their duties are owed to the company.

The only time that the director’ duties are owed to creditor is when company is insolvency[8] and during that time, the creditor is entitled to displace the power of the directors and shareholders to deal with the company’s assets[9]. It can be argued that it is riskless for the secured creditor who holds a charge over a part or all of the company’s assets during the company’s insolvency. If the company is in financial distress, a receiver is appointed by the secured creditor to collect and look after the company’s asset in order to obtain money for them[10].

However, it is not easy for the creditor to claim all their money back according to: firstly, the money collected has to pay the certain priority claims, including employee entitlements (such as wages, superannuation contributions and leave payments) before paying to creditor; and secondly, director does not owe directly duty of care for the interest of creditor, this might result in a less consideration of managing and taking care of the asset that is held by the creditor.

Therefore, creditor who provides fund for company to operate or expand is playing a significant role to a company and their weakness position should be taken in to account and redeemed by the director’s duty and the corporate responsibilities. In addition, duty has been referred to the judgments of the decided cases. The emergence of the issue to regard the creditor’ interest is from the leading judgment by Mason J in Walker v Wimborne. 11] His statement has been acknowledged by the other courts such as in Australia, New Zealand and the United Kingdom. Also, according to the obiter comments in the recent case Spies v The Queen, the court has again acknowledged that there is an existence of the duty to creditor. As a result, it seems that protection for creditor’s interest is required in some certain circumstances. [pic][pic][pic] ———————– [1] Section 9 defines a director as: a) a person who: ) is appointed to the position of a director; or ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and b) unless the contrary intention appears, a person who is not validly appointed as a director of: i) they act in the position of a director; or ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes. [2] http://www. scu. edu. u/schools/gcm/ar/arp/stake. html [3] Relevant section under the Statue Law: Section 182(1) – Use of Position; Section 183(1) – Use of Information; Section 191(1) – Disclosure of Interest. Also, under the Common Law – Fiduciary Duties. [4] “Corporate governance: shareholders’ interest and other stakeholders’ interest. ” http://www. virtusinterpress. com/additional_files/journ_coc/full-text-papers-open-access/Paper006. pdf [5] The principle is established in Salomon v Salomon & Co ? 1897?

AC 22 [6] Harris, Hargovan and Adams: Australian Corporate Law, 1st ed, Page417. [7] Harris, Hargovan and Adams: Australian Corporate Law, 1st ed, Page417. [8] A company is insolvent if: 1. It is unable to pay its debts as they fall due. 2. Its assets are less than the amount of its liabilities, taking into account its contingent and prospective liabilities. [9] Kinsela v Russell Kinsela Pty. Ltd. (in liq. ) (1986) 4 NSWLR 722. [10] In some special circumstance, it may appointed by the court.

Eg: where there is a dispute between the owners of the company or the property over which the receiver is appointed [11] His Honour said: In this respect it should be emphasised that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.

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