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Bell Ltd is a company that installs kitchen facilities, and has four directors on its board:
The company's business has been very successful. However, recently it has experience a number of problems.
Following the board decision to offer customers a special installation package, Cathy has negotiated an exclusive contract with Western Sydney (WS) Ltd. Cathy has not informed the board that WS is actually owned by her son. Bob suspects that Cathy is personally connected with WS, however, he has not raised his concern with any of the other directors. In addition, Bob made sure the other directors were kept in the dark about company's real financial position and did not give them meaningful or accurate financial information for some time.
Despite Bell Ltd's negative cash flow position, Abbey proposes to expand its operations into dishwasher installation. Cathy questions whether the company can afford the costs associated with the expansion. As a result, the board delegates to Bob the task to investigate Abbey's proposal. Bob, however, spends very little time investigating the proposal due to his busy schedule, and hastily prepares a report recommending that the proposal be accepted.
The next board meeting is very long and the consideration of Abbey's proposal and Bob's report is the last item on the agenda. As the directors are anxious to leave, David allowed only 10 minutes for Abbey to present her business plan for the proposed expansion. Bob's financial report produced after his investigation on the matter was tabled at the board meeting but he was not allowed to speak or answer questions. Nevertheless, the directors approved the proposal.
Following the approval of the proposal, Abbey entered into a contract with Southern Queensland (SQ) Ltd for the purchase of new equipment for the approved proposal. The contract is worth $20,000 and is never paid. Shortly after the contract was signed, the board
discovered that Bob's report had obvious mistakes as he has overlooked many of the additional costs involved in the expansion.
Assume that Abbey's proposal has been proved to be a financial disaster for Bell Ltd, and as a result, the whole board of directors were replaced.
Advise the new directors of Bell Ltd whether its former directors breached any of their duties based on the facts stated above. Any defences available to the formal directors under the Corporations Act 2001 (Cth) to avoid liability?
Assume you have been asked to give advice to some directors on the board of a company that has been experiencing years of financial difficulties. The business has been failing for some time and on a regular basis the board has been reviewing its strategies in order to stay afloat. On a number of occasions the solvency of the company has been questionable but on these events the company has managed to refinance its operations with the bank, its major creditor. The bank has always held security over the whole of the assets of the company and has wanted to try and allow the company to keep going if it can to give it the best opportunity to recover the debts if possible. The bank has recently come to the view that the company may be failing for other reasons. It has lost confidence in the chairperson of the board and suspects he may be embezzling funds. It has reported its suspicions to ASIC.
You as a professional accountant are asked to write a formal letter to generally advise on the following issues based on the knowledge you learned in this course: (20 marks)
You should consider to use both primary and secondary sources, e.g. legislation, case law, text books, journal articles and websites, to demonstrate your research skills in support of your advice in the letter. Wherever necessary, you should reference the sources in the letter. (5 marks)
Letter format and communication skills. (5 marks)
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The main issues that arise after analyzing the facts of the case are:
The above issues can be resolved after evaluating the law that is applicable in the given situation.
The Corporation Act 2001 is the Act which specifically deals with the actions governing a corporate in Australia. Any corporate organization in Australia works under the guardianship of Directors and is mentioned under section 198 A of the Act. Further, specific duties can also be assigned to Managing Director of the company who carries out his actions under the governance of the board and is enshrined under section 198 C of the Act. Thus the importance of the director in any corporation cannot be negated and is analyzed in Deputy Federal Commissioner of Taxation v Austin. (1998).
With every power, there come abundant responsibilities. The directors of the company are empowered to carry the activities of the company in whatever manner they deem fit provided the same must comply with the object of the company, its Articles of Associations, a Memorandum of Associations and the governing laws of the country.
However, this power is not absolute and there is a need that restrictions are imposed so that directors must act within the frameworks of such powers. Considering the same there are few statutory obligations that are imposed upon the director of the company. Every director must comply with such obligations in order to avoid unnecessary penal provisions. The scope of director duties is discussed in NRMA v Geeson and Lister v Romford Ice and Cold Storage Co .
Now, it is important to analyze the directors' duties along with their penal provisions of non-compliance.
The foremost primary duty that must be furnished by the director of the company is that the director must carry its duty in good faith, for a proper purpose and in the interest of the company and is carved under section 181 of the Act. It is urged that while carrying out the duties and activities by any company officer he must act in a logical manner and the decision must be made by applying his mind and is discussed in Re Smith & Fawcett Ltd & Kuwait Asia Bank EC v National Mutual Nominees Ltd. In the leading case of Whitehouse v. Carlton Hotels Ltd, it is rightly observed that if any action which is not done in good faith, for a proper purpose or is not in company's interest then such director is held accountable for the penal provisions of the act.