Solved: Corporation Act 2001 Research Paper

Corporations Act 2001

Introduction

The current Corporation Act 2001 is Australia’s central legislative requirement that all officers and directors must observe. Under the ASX Corporate Governance recommendation and the Corporation Act 2001, the combination of the duties of the director has further forced executives to be deliberate about who is on the Board and how, as a group, they ensure they comply with both the corporate governance recommendations and company law (Barnes, 2013). Furthermore, under this legislation, the director’s duties are categorized as common law obligations, including the proper purpose and good faith (s 181). A director is personally held liable for breaching these responsibilities.

Good Faith under Common Law and History

The common law obligates an executive to act in good faith at all times in running the organization’s business affairs. In essence, this requirement guarantees the protection of creditors, the shareholders, and the corporation itself. In this regard, the director’s decision must be exercised in good faith, not at the absolute will of the manager or arbitrarily, but justly in the interests of the shareholders as a whole. Under common law, the absence or presence of good faith relies on the events that are present in each case. For this reason, there is no uniform rule determining whether good faith is present, considering the set of a given situation. A business deal entered into by an executive on behalf of the organization, which is outside of the objective from which the firm is established, may be regarded as one that has been entered in bad faith based on the circumstances. If a manager willingly and knowingly approves a contract against the law, it is possible that this will be perceived as not being entered into in good faith.

In Thorsby v Goldberg, the court held that when an executive negotiates a contract on behalf of an organization and the directors bona fide regard it in the interest of the firm as a whole, then that contract should be enforced. Furthermore, the directors may bind themselves by the contract to take the necessary actions to effectuate it (Thorsby v Goldberg, [1964]). In this regard, shareholders have generally desired that directors should have a considerable interest in the organization so that they may identify their interests with those of the organization’s shareholders. Consequently, a director will also promote his interests while promoting those of the corporation. Historically, managers are not forbidden from taking action in any matter that impacts their interest based on what they do in their position as directors.

Furthermore, based on common law, a director must consider the shareholders as a collective group when considering the organization’s interests. Nonetheless, remarkably, the interests of the creditors will prevail when the firm is at risk of or has become insolvent. Mostly, if the director’s actions are for the drive to attain the company’s goals, then the manager’s interest is deemed to be similar to that of the company. In some instances, the interest of the company and that of the director may not be the same. In such cases, the responsibility of a director in undertaking the ordinary course of operations of the corporation binds the company, provided it is carried out within the scope of its power. Nonetheless, adherence to good faith is not always enough in a particular transaction. The goal of benefiting the organization as a whole should as well be present. Thus, the act must be in the company’s interest.

Proper Purpose under Common Law and History

The standard of proper purpose is best understood in historical terms. Implementing this standard to the directors of organizations directly results from the use of the equitable standard. Furthermore, in accordance with the responsibility to act in the organization’s best interest, the managers are required to exercise their authority for their proper corporate tenacities. For this reason, the powers of the director must be exercised for the objective for which they were deliberated and in a way that improves the interests of the shareholders in general. Customarily, this responsibility may be violated, although the executive is acting honestly. Consequently, while an executive may perceive that they are acting in the company’s best interest by, for instance, exercising their authority to protect the firm from a hostile takeover, they will be in violation of their fiduciary obligations if they utilize their powers improperly to attain that goal.

In Whitehouse v Carlton Hotel Pty Ltd, Mr. Whitehouse was the managing director of Carlton Hotel, which was a family-owned business. The company used three classes of shares to control the voting in the organization: class A, B, and C. Mr. Whitehouse allotted class B shares to his two sons when he and Mrs. Whitehouse divorced. The reason for his action was to ensure that his sons continued regulating the hotel rather than his daughters, who supported their mother during the divorce. The high court concluded that the share issue was not valid since Mr. Whitehouse’s action was to dilute control of the organization away from his wife and daughters. A director may not use the authority to issue shares to manipulate control of the right to vote in the company. In a breach that comprises an improper issue of a share, which has not been ratified, an aggrieved person or a company may bring an action to have the share disallowed, such as in the case of Whitehouse v Carlton Hotel Pty Ltd. The importance of purpose, therefore, is that it must be examined to determine whether the director improperly used it.

Good Faith and s 181 CA

The Corporation Act 2001 currently complements the judicially formed responsibilities to act honestly through the terms of s 181 (1), which enact a civil responsibility of good faith. In a corporation, a director or other officer is obligated to discharge their duties and exercise their powers in good faith in the company’s best interest. In this respect, fiduciaries are expected to observe high integrity standards; furthermore, they must not permit their individual interests to contradict the organizations. The necessity that the executive acts honestly is implicit in these fiduciary duties. The obligation to act honestly is the center of business ethics. For this reason, it is not an aspect that should be left to the courts or statutes.

In ASIC v Adler, the judges found that Adler was the only director violating s 181. The reason for this is that the mentioned manager, besides failing to make suitable disclosure, endorsed his personal interest by pursuing or making a gain (ASIC v Adler, [2002]). He supported or maintained the HIH share price when there was a significant likelihood of a conflict between his personal interest and the organization in pursuing proceeds. Furthermore, as the manager, Adler put at risk the interest of HIHC and HIH by illegality under sections 260A and 208 and by hiding from the market that HIHC was funding the buying of shares from HIH, not Adler or his interest.

The court concluded that Adler violated various sections of the Corporation Act 2001. For instance, he breached the stipulation that a director should not use the information for their advantage or that of others (s 183). He also breached the duty to make decisions with due diligence and care (s 180). He further violated the duty to act within the realm of proper purpose and good faith (s 181). In brief, Santow J decided that both Williams and Adler abused s 182, which entails using one’s position to cause detriment to the corporation or gain advantage for themselves or another individual (ASIC v Adler, [2002]). Therefore, ASIC v Adler is significant since it presents various fiduciary breaches, such as conducting decisions with improper motives, generating undisclosed profits, and taking actions that contradict the organization’s interest.

Conversely, Hodgson v Amcor is a case involving two proceedings resolved in a joint trial. The court addressed issues that challenge organizations when employees or directors use their position in the firm to their own benefit. Based on Corporation Act 2001, the officers and directors are obligated to exercise their authority with good faith. Thus, in the case, the court concluded that Holihan, Bayley, Mihelic, Sangster, and Barnes did not hold the requisite degree of accountability to be deemed an officer under the Act. However, the judges found Hodgson to be an Amcor officer since he was responsible for the largest division of the organization, and thus, he had violated his statutory obligation owed to Amcor under s 181 of the Corporation Act 2001 (Hodgson v Amcor Ltd, [2011]). Thus, this case has produced significant results showing that directors and officers are obliged under s 181 to take action that considers the best interest of the shareholders.

Proper purpose and s 181 CA

Based on s 181 CA, the executives are obligated to exercise their authority for proper purposes. Furthermore, they may not violate this responsibility even if they only believe their actions are in the best interest of the organization in general. As an illustration, in Bell Group Ltd (in liq) v Westpac Banking Corp, the organization’s management organized for the group to enter various transactions with financial institutions. Based on the transaction, the unsecured debts were converted into secure ones. The executives implemented these transactions with the objective of keeping the financial institutions at bay to ward off liquidation. In the hearing, the court held that the executives exercised their authority for an improper purpose (Bell Group Ltd (in liq) v Westpac Banking Corp, [2008]). This is because their actions resulted in the Bell group entering into dealings that were in the interest of the financial institutions and, eventually, the parent organization instead of considering the interest of the Bell group and its creditors.

Furthermore, in Bell Group Ltd (in liq) v Westpac Banking Corp, the court held that in an insolvency context, the directors of organizations violate their obligations to act for proper objectives if they exercise their authority in a manner that fails to consider the interest of creditors. In essence, this is where the creditors should be part of their duty to consider and take action while keeping in mind the firm’s best interest as a whole. Similarly, in ASIC v Maxwell, it was established that the executives would breach their obligation to exercise their authority and discharge their obligation for a proper purpose pursuant to s 181 (1) if they allow or permit the company to contravene Corporation Act. Based on the verdict, it can be established that directors may jeopardize the corporation’s interest if they expose it to civil penalties or potential or actual liability or other liabilities under Corporation Act (ASIC v Maxwell, [2006]). The manager would further violate their obligations if they authorize or permit the company to participate in the infringing conduct where the threat to the firm is evident and the countervailing potential advantages to the organization are insignificant.

Arguably, based on the mentioned cases, s 181 is a slight extension of the equitable responsibility of the executives, who at all times are required to act bona fide in the company’s best interest. The segment that has been added is that the managers must further act for a “proper purpose.” The part was incorporated due to numerous court cases (Du Plessis et al., 2018). It was held that if directors base their judgments substantially or mainly on the purpose for which a specific was deliberated upon them, a court will not disregard such a decision regardless of the fact that incidentally or partially the authority might have exercised for an impermissible or improper purpose. Conversely, if a director had taken the decision primarily for an improper purpose (such as issuing shares to guard against a hostile takeover), a court will not consider such a decision despite the fact that the power might have been incidentally or partially exercised for a proper purpose.

Statutory Mechanisms to Facilitate Corporate Governance

Corporate governance in Australia is a concept that outlines the basic rules of business transactions. Based on this analysis, the current Corporation Act 2001 for the obligation of directors relates to corporate governance principles. For this reason, the crucial way to facilitate corporate governance in the country would be to ensure that in all sectors, the directors of all entities, including for-profit and not-for-profit, clearly understand their responsibilities as imposed on them by Corporation Act 2001(Barnes, 2013). Doing so would enable all boards’ directors to be ethical, fully informed, aware of all their obligations, and vigilant in all the decisions they make on behalf of and for their boards.

Furthermore, the conception of corporate social responsibility (CSR) that can facilitate corporate governance is one of the moral and ethical issues surrounding corporate behavior and decision-making. Furthermore, at its most sophisticated level of practice, CSR is incorporated with governance (Marshall and Ramsay, 2012). In this respect, the stakeholders’ views are considered, and ethics guide decision-making to develop long-term value maximization. It is also vital to consider that the governance framework of the Australian Charities and Not-for-profits Commission has reduced the responsibilities of the individuals who are employed by registered charities that are integrated under the Corporation Act (Ramsay and Webster, 2017). In brief, CSR can assist in reducing financial risk if the management integrates it properly into the strategic operations and decision-making of the organization instead of as an “add-on.”

Conclusion

The Corporation Act 2001, which was implemented on 15^th July 2001, functions as a national Act throughout all territories and states in Australia. Section 181 of this legislation requires various corporate officers and directors to exercise authority and discharge their obligations in the corporation’s best interest and good faith. In essence, this implies acting in sincerity and honesty without an intention to deceive. Conversely, the directors are also required to exercise their power of managing an organization by applying the concept of proper purpose. The notion is based on determining dividends and issue of shares. The powers need to be exercised for a proper purpose because they are considered to be fiduciary. A manager cannot use their authority to bargain for private gain as this would be considered improper.

References

ASIC v Adler [2002] ACSR 41 (NSWC), p.171.

ASIC v Maxwell [2006] ACSR 59 (NSWSC), p.373.

Barnes, L.R., 2013. The Albatross Around the Neck of Company Directors: A Journey Through Case Law, Legislation and Corporate Governance. Journal of Law and Financial Management, vol. 12, no. 1, pp.2-9.

Bell Group Ltd ( in liq) v Westpac Banking Corp [2008] WAR 9 (WASC), p.239.

Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge: Cambridge University Press.

Hodgson v Amcor Ltd [2011] VR 32 (VSC), p.495.

Marshall, S. and Ramsay, I., 2012. Stakeholders and directors’ duties: Law, theory and evidence. UNSWLJ, vol. 35, no. 1, pp.291-316.

Ramsay, I. and Webster, M., 2017. Registered Charities and Governance Standard 5: An Evaluation. Australian Business Law Review, vol. 45, no.2, pp.127-158.

Thorsby v Goldberg [1964] CLR 112 (High Court of Australia), p.597.

Whitehouse v Carlton Hotel Pty Ltd [1987] ALR 70 (High Court of Australia), p.251.