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Legal Regulation Of Business Structure

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Legal Regulation Of Business Structure

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The roles and responsibilities of a company’s directors in Australia are proposed to encourage good governance, which ensures directors to act for the company’s benefits. This ascertains directors to put the needs of the company in front of their own. Under the section 183 of the Corporations Act (Cth), 2001 states that there should be no improper utilization of the information. It signifies that the directors of a company should not use the accessible information in a wrong way such as for their own benefit or cause any harm to the corporation. The directors of the company are determined to have breached section 183, when they purposefully try to take advantage for their own good, which has a negative impact on the company. It may happen when the directors have poor knowledge regarding the financial statements, which includes the possibility of becoming insolvent (PricewaterhouseCoopers, 2011). The Corporations Act inflicts various additional credible responsibilities and duties on the directors of the company (The State of Queensland, 2016). The purpose of this assignment is to highlight the breach of section 183 of the Corporations Act (Cth) 2001 with reference to the provided case scenario.
Preliminary Issues
The Corporations Act (Cth) 2001 states the directors of the company and other executives to use their power and follow their duties and responsibilities with diligence. The directors of the company are prohibited from misusing the information for the benefit of oneself and others. The Act in addition sets out illegal offences if the directors and the other officers act in a reckless manner, thereby being deliberately dishonest and misuse their power and position. The duty of the directors of the company is to make complete and frank revelation of the information, which are within their understanding that will enable the stakeholders to make judgments regarding any matter (2Legal Services Commission, 2012).
The preliminary issue with regard to the provided scenario is that Dr Dawes, one of directors in the company GML had become bankrupt and had informed regarding his position to the other Board of Directors. The Board of Directors had accepted the resignation of Dr Dawes but the directors of GML had confirmed that he will still be attending all the board and committee meetings and discussions and had offered the position of ‘Consultant Director’ providing salary. It is considered to be a major issue under the Corporations Act (Cth) 2001. It has been stated that if a director of a company enters personal bankruptcy, the director is banned from conducting any company activities. The director can only get involved in the company activities if it is permitted by the Court, which includes individuals who have previously executed an act of arrangement as per the Part X of the Bankruptcy Act. Here, the terms are not completely accumulated. It also involves creditors who have agreed a composition as per Part X of the Bankruptcy Act, where no final payment has been made under such composition. It is treated as a criminal offense for a bankrupt director to manage a company without legal permit. If the director is found guilty of the offence, he can be charged with a fine of $8,500 and can be convicted for 1 year. The company needs to notify regarding the termination as a director. The bankrupt director can hold his position only after bankruptcy has been released (Australian Securities & Investment Commission, 2016).
It can also be seen that Mr. Huckenfusser is the Audio Visual Technician of GML for five years. One of the duties of Mr. Huckenfusser is to assist with the meeting of the board of the company and was present during the meeting when Mr. Boon and the Board of Directors agreed to purchase the shares of Menzies Mining Machines Ltd (MMM). Being at the meeting, Mr. Huckenfusser had shared information about the meeting to the outsider Mrs. Duck, who is in-fact the sister-in-law of Huckenfusser. Having got the information, Mrs. Duck purchased 5,000 shares in MMM at the rate of $5.20 per share and sold it at the rate of $12.5, thereby making profit. In this regard, it can be asserted that the sharing of the company information is considered to be unethical. It can also be seen as a crime. According to the section 183 of the Corporations Act (Cth) 2001, Use of information-Civil Obligations has stated that an employee of the company should not misuse the information to the outsiders in order to have personal benefits. The section 183 also prohibits providing benefits to the outsiders, which can create problems for the company (CCH Australia Limited, 2016). Thus, the sharing of the information to the outsider can be treated as an offence. The employees even after leaving the company cannot share the information to others (Office of Legislative Drafting and Publishing, Attorney-General’s Department, 2006).
Possible Breaches of the Corporations Law
As per the Corporations Act the breach of section 183 may lead to issue ‘Declaration of Contravention’ as per section 1317E. The ASIC (Australian Securities & Investment Commission) may direct the court to inflict a fine on the member of the company if it violates the interests of the shareholders and company. The court may also order the liable member of the company to give compensation for the damages suffered as an outcome of the violation (RBHM Commercial Lawyers, 2016).
With regard to Dr. Dawes, who is bankrupt and a member of Board of Directors of the company GML cannot be a part of company unless he pays his debts (Australian Government, 2015). Until Dr. Dawes clears his debt, he cannot participate in the management proceedings. If Dr. Dawes does not meet the requirements, the Court can see it as a contravention and can charge him with a fine up to $200,000 as per section 1317G of the Corporations Act and disqualify him from managing the events of the company. Dr Dawes also purchased 20,000 MMM shares through his wife, thereby using the company’s information for personal benefit along with violating section 183 under Corporations Act 2001. Considering the case of Mr. Huckenfusser, it can be said that providing company’s information to the outside person may be seen as an offense rightful to civil penalties under the Corporations Act 2001. The victim company may recommend ASIC to issue the ‘Declaration of Contravention’ from the Court (Harris, 2008). Mr. Huckenfusser can face a ‘civil penalty provision’ under section 1317E of the Corporations Act (Reid, 2016).
Mrs. Duck, who is the sister-in-law of Mr. Huckenfusser, can be charged for persuading Mr. Huckenfusser for sharing GML’s board meeting information. However, Mrs. Duck cannot be directly charged legally as the information had been provided by Mr. Huckenfusser, who rather can be said to have committed offense under section 183 of Corporations Act 2001.
The Board of Directors including Mr. Foster had a meeting at GML regarding the purchase of MMM shares. Following the meeting, Mr. Foster resigned from GML and was appointed as the Chief Financial Officer (CFO) of Queensland Equity Capital Group Ltd (QECG). Mr. Foster used information gathered from the GML Board meeting to purchase 60,000 MMM shares for Queensland Equity Capital Group Ltd, which is also a breach of section 183 under the Corporation Act 2001.
There are various breaches under the Corporations Act 2001. One of the violations includes a company failing to file suitable returns as required by ASIC (Australian Securities & Investment Commission). The second offence can be misuse of the position and power by the company directors for self benefit. The third breach is the involvement of disqualified directors in managing company. Insider trading can also be treated as a breach under the Corporations Act 2001 (1Legal Services Commission, 2012).
There is a possibility of breaches in Corporations Act relating to the role of directors in a company. A company may have a violation regarding the duties of the directors. Under the section 183 of the Corporations Act 2001, directors can misuse their power in order to have advantages and benefits for themselves, which is considered to be unethical within this Act (CCH Australia Limited, 2011). For example, the violation of the Corporations Act happens in case of resignation of Mr. foster of GML. Here in this case, Mr. Foster, a former executive of GML resigned from the company following the Board meeting regarding the buying of shares from MMM. After the resignation, Mr. Foster was positioned as CFO in Queensland Equity Capital Group Limited, who purchased around 60,000 shares already knowing that the company will be having profit from the selling of the same shares. Dr. Dawes, who was already bankrupt, had breached two laws. The first states that Dr. Dawes was appointed as a Consultant Director despite knowing about his personal bankruptcy, which is against the Corporations Act 2001 that states that a director who is bankrupt is disqualified to manage the activities of the company. In addition, Dr. Dawes asked his wife to purchase 20,000 MMM shares knowing that it will have profit.
The violation of the Corporations Act can also be seen in case of Mr. Huckenfusser and Mrs. Duck. According to the case scenario, it has been witnessed that being an Audio Visual Technician, Mr. Huckenfusser is present at the company’s board meetings and had information about the meetings. Mr. Huckenfusser having the information had passed it to Mrs. Duck, who is his sister-in-law. This act of providing confidential information to the outsider can be referred as a breach under the Corporations Act 2001.
The directors and other officers of the corporation have regular duties such as to act in the interests of the company. The directors and other executives should act only for company’s benefit instead of working for their own benefits such as removing voting powers of the stakeholders by formulating a new majority in the company. The directors as well as the other employees of the company should act in diligence. They should also act in a way that the confidential information of the company remains within the company and no inside trading takes place (Owen Hodge Lawyers, 2016). If the law is violated, civil remedies can applied. In case if the guilt is proved in the court, the court can order the director to pay a penalty of up to $200,000 on the basis of the declaration of contravention. The Court can also order reimbursement for damages for breaching civil penalty stipulation under section 1317E of the Corporations Act 2001 with regard to the disqualification of the directors managing the company (Owen Hodge Lawyers, 2016). There are various duties of the directors of the company in relation to the financial records of the company and they can face disqualification as well as civil penalties for the violation of provision (Brookes, 2013).
With regard to the overall assessment, it can be witnessed that the key role of the directors and other executives is to work for providing benefits to the company. It can also be viewed that the directors and other employees of the company GML have breached or violated some of the laws under the Corporations Act, which can be considered unethical accordingly. The violation of the law can be seen in terms of the fact that one of the directors despite being bankrupt had been acting as a Consultant Director, which is considered as violation as Dr. Dawes cannot manage activities of the company according to the Corporations Act. As per Corporations Act, Dr. Dawes can only be involved in the company’s management activity if permitted by the Court. It has also been observed that one of the employees of the company Mr. Huckenfusser had shared the company information with an outsider, thereby violating the law under section 183 of the Corporations Act, which states that the confidential information of the company cannot be used for the benefits of oneself or some other person. Dr. Dawes had again violated the Corporations Act by asking his wife to purchase the share of the Menzies Mining Machines Ltd (MMM) for personal benefit.
The role of ASIC has increased over the past years and it has focused significantly on the civil penalties as well as criminal offenses. The penalties for sharing of the company’s information under ASIC such as in case of MR. Foster, Mr. Dawes and Mr. Huckenfusser can be reported to the Court, who on the basis of ‘Declaration of Contravention’ can charge all the guilty employees with a fine of $200,000, disqualify the directors to participate in management proceedings and can charge them to pay compensations for the loss that GML had incurred.
Legal Services Commission. (2012). Criminal offences. Retrieved September 9, 2016, from https://www.lawhandbook.sa.gov.au/ch05s01s04.php
Legal Services Commission. (2012). General duties of directors – Corporations Act 2001 (Ctth). Retrieved September 9, 2016, from https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php
Australian Government. (2015). The bankruptcy act and corporations act. Retrieved September 11, 2016, from https://www.afsa.gov.au/practitioner/pir-newsletter/dec-2015-pir-newsletter/practice-matters/the-bankruptcy-act-and-corporations-act
Australian Securities & Investment Commission. (2016). Bankruptcy and personal insolvency agreements. Retrieved September 9, 2016, from https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/bankruptcy-and-personal-insolvency-agreements/
Brookes, M. (2013). Directors’ and officers’ liability – it’s a jungle out there. Retrieved September 9, 2016, from https://www.carternewell.com/icms_docs/183636_Directors_and_Officers_Liability_-_It_s_a_Jungle_Out_There.pdf
CCH Australia Limited. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.
CCH Australia Limited. (2016). Corporations Act 2001, section 183 use of information — civil obligations. Retrieved September 9, 2016, from https://www.iknow.cch.com.au/document/atagUio485899sl14504567/corporations-act-2001-section-183-use-of-information-civil-obligations
Harris, J. (2008). Relief from liability for company directors: Recent developments and their implications. Retrieved September 9, 2016, from https://www.austlii.edu.au/au/journals/UWSLawRw/2008/7.html
Office of Legislative Drafting and Publishing, Attorney-General’s Department. (2006). Corporations Act 2001. Contents, 1-434.
Owen Hodge Lawyers. (2016). Breach of fiduciary duties. Retrieved September 9, 2016, https://www.owenhodge.com.au/commercial-law-services/employment-law/breach-of-fiduciary-duties/
PricewaterhouseCoopers. (2011). A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia. Contents, 1-15.
RBHM Commercial Lawyers. (2016). Directors – duties and obligations. Retrieved September 9, 2016, from https://www.rbhm.com.au/web/article_3587.htm
Reid, K. (2016). Civil penalty and disqualification orders: An overview of the Vizard case. Retrieved September 9, 2016, from https://www.findlaw.com.au/articles/1970/civil-penalty-and-disqualification-orders-an-overv.aspx
The State of Queensland. (2016). Corporations Act 2001 (Cth) (the Corporations Act). Retrieved September 9, 2016, from https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx

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