HYPOTHETICAL ILAC QUESTION

 

         Issues

• The directors resolved to find a cheaper option for laundering motel linens and employ Brothers Cleaners Pty Ltd but Vienna fails to tell Paris and Sydney that her husband and brother –in-law are directors of the firm. The three vote unanimously for Dodgy Brothers.
• Paris is more interested in travelling than running the firm even though she should be overseeing the accounts. She comes back after 6 months to find that Milton is unable to its debts, of which Nikki could not inform her because she did not receive Nikki’s calls.
• She decides to commit $ 500,000 eve when the firm is facing bankruptcy.
• Sydney becomes friends with Norman, who informs her Bright Ideas Ltd success and she uses her own money to purchase shares in the firm.

The issue is whether these directors breached any of penalty provisions of Corporations Act 2001.

 

Principle

Under the Corporations Act 2001 relating to civil obligations as found in Section 180

• _S180: A director or officer of a given corporation should observe the level of care and diligence while performing their duties in a manner that a reasonable person would do if; they were occupying similar positions in the corporation and under similar circumstances; had similar responsibilities or occupied same position as the officer or director
• _S180: Directors cannot a breach of such duties through reliance on the fact that they did not have knowledge to make a particular decision. The duties of diligence and care should be judged against the directors’ expected standards since they occupied offices with responsibilities within the organization as directors in similar corporations.
• _S180: The directors are also expected to observe the duty to avert a potential or actual conflicts of interests between the firm’s interests and personal interests.

 

 Application

So as to determine whether Paris, Vienna and Sydney actions add up to reasonable care and diligence, it is important to ask whether a person who is reasonable with their experience and knowledge would have been expected to do the same in such situations. Paris, who heads the company accounts but does not discharge her responsibilities or duties since she is more interested in travelling rather than running the firm.  Her contravention of the expected duty of care leads to bankruptcy and she was not available to avert such a scenario and Nikki’s calls to her went unanswered. A reasonable director as the head of the company’s would be expected to take charge of the company’s accounts operations. Even when she is way, she would have communicated to ensure that the accounts are in order. A reasonable person would have remained in contact with Nikki who would have provided the going-ons in firm. The specific standard of diligence and care expected is determined in reference to the prevailing circumstances of the firm including the precise function that a director is expected to carry out. At common law, the director is expected to act in such a way that at the time of financial difficulties, they do not prejudice the creditors’ interests. Paris allocated $ 500,000 as cost for repainting the motels while clearly aware that the firm was unable to pay its debtors prejudicing the creditors’ interests.

 

   Vienna and Sydney engage in actions that brings about conflict between their interests and those of the firm. Contracting Dodgy Brothers Cleaners whose directors are her husband and brother-in-law and not notifying the other directors present a conflict of interest between the firm and Vienna. Sydney’s case does not involve a breach of breaching of the provisions of the Act. This is because even after befriending Norman, she did not place a conflict of interest between hers and those of their firm.

 

Conclusion

 

In the case of Paris and Vienna, they actions violates the provisions of the Act. Paris does not discharge her responsibilities or duties and her actions prejudiced the creditors’ interests.  Vienna’s actions bring about conflict of interest between the firm’s and her interests. Vienna did not contravene the Act since she uses her own money to purchase shares in Bight Ideas Lt.

 

 

Reference

 Latimer, P. (2011). Australian Business Law 2012. CCH Australia Limited. 696

 

Du Plessis, J. J., Hargovan, A., & Harris, J. (2018). Principles of contemporary corporate governance. Cambridge University Press. 244-246