Directors' Duties and Corporate Responsibility

This assignment examines the expanding scope of directors' duties in company law. It discusses the traditional duty owed to shareholders and explores how cases like Kinsela v Russell Kinsela Pty Ltd have broadened directors' responsibilities to encompass creditors, employees, and society. The analysis delves into potential conflicts arising from these expanded duties and the legal framework governing directors' actions in financially distressed situations.

Law 1
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986)

Law 2
Contents
Introduction of Case-.......................................................................................................................3
The duties and responsibilities breached and the reasons behind it-...............................................4
Analyze the tribunal decision and the reason for the decision in view of the Corporations Act in
Australia-.........................................................................................................................................6
The relevance of the decision in development of Australian corporation’s law and the impact of
the decision on the operation of companies in Australia-................................................................8
References:....................................................................................................................................10

Law 3
Introduction of Case-
An organization is an association of group of individuals who work together in order to attain
some motive whether it be economic or social. No legalities and technologies can be attached to
its meaning. An organization should make its registration under the Companies Act, 2013. An
organization can be defined as a group of individuals who make contribution of funds and
employ these funds towards business activity and also shares the loss and profit according to the
contract signed by them. There are various features of organization under the Companies Act,
2013-
 Independence- An organization has a distinct identity from its directors, owners and
employees and carries out its business activities after complying with all the legal
requirements of incorporation.
 Perpetual- An organization has a succession on the perpetual basis and is considered as
an artificial person. This states that the organization will continue its business to infinite
period of time as it does not get affected by death and inefficiency of the directors to
perform and because of any other event (Hayne, 2014).
 Common seal- The organization is an artificial person, therefore agents of the
organization work on its behalf. The agents of the organization enter into a contract by
the common seal of the organization.
 Liability- The liability of the members of the organization is limited. As, the organization
has a separate legal entity therefore the organization is responsible for the repayment of
debts and not the members and owners of the organization.

Law 4
The family of Kinsela was doing the business of funeral and also was shareholders in different
organizations in addition to the directors. The organization was effectively carrying out their
business. The organization was involved in the business of providing claim of insurance in
respect to the cost incurred on the funeral of their customer. The organization was receiving
amount from clients and in order to this the organization used to provide funeral for free. But
after a period of span, the organization incurred severe liabilities and thus losses were increased.
Funeral Act 1979 was introduced in order to safeguard the creditor’s interest. When the
organization was suffering losses, Kinsela family thought that they should continue their
business in spite of all the losses. They thought of giving it lease for the time period of 3 years.
But, In April the organization thought to wind up their business because of increase in liabilities
(Langford, 2011). The reason behind increase in liabilities and huge losses of the organization is
that the directors were not able to work in a proper manner and were unable to maintain funds for
the organization.
The duty of directors of the organization was to solve all the conflicts before winding up the
operations of the organization and the organization should pay proper amount to their
contributors if there is joint petition of winding up has been signed up by the creditors and
contributories of the organization. The directors of the organization should look after the proper
payment of funds to the creditors which were due to them. The liability of the organization has
been raised at the time when the organization has give lease on the least market value and this
the organization has dissolved (Koh and Oh, 2015). At the time of liquidation of the
organization, the lease was being challenged as the director was not being able to pay to the
creditors and other members.

Law 5
The duties and responsibilities breached and the reasons behind it-
The organization is an artificial person so it does not make decisions and cannot enter into
contract on its own like a natural living individual. The agents act on the behalf of the
organization and enter into contract on behalf of organization through common seal. Therefore
the director is responsible to act in a proper manner for the benefit of shareholders and other
stakeholders. Directors can be described as trustees, employees or as a part of the organization.
The directors of the organization should work with diligence and with proper care. Directors are
the trustees of the organization and should carry make proper transaction of the funds. There are
various duties of directors-
 As an employee- The directors are considered as an employee of the organization and has
a position same as the employee in the organization. The directors can make some
financial incentive as like any other employee from the organization. This creates a
relationship of master and servant between the directors and the organization. The
organization possesses full control over the activities of the directors. This can be drawn
from the instance of Normandy V India Coope.
 As a Managing partner- It can be also considered as partnership business. A director has
some interest in the organization as a partner. Therefore directors work for the benefit of
the organization.
 As trustee- A trustee can be considered as an individual who hold the property for
another individual on basis of trust. The directors are the trustees to the organization
(Redmond,2012).

Law 6
 As an Agent- Directors are also works as an agent of the organization. The organization
act with the help of their directors. When any contract is made by the directors on behalf
of the organization than the organization is held liable and not the directors.
In this particular case study, the director as an agent and as a trustee of the organization was
unable to meet with their duties and obligations. The directors have breached their duties and
also did not carry their duties towards the creditors of the organization. Shares of the
organization are transferable and moveable as mentioned in the articles of association. This states
that the shareholders have right to transfer or dispose of the shares which they are having. The
directors are trustees of the organization and have a fiduciary duty towards the organization. In
this case study the directors were not able to perform in suitable manner and the idea of
improvisation lead towards increment in liabilities and losses.
From this case it can be analyzed that the organization was having huge liabilities and losses. So,
it becomes quite impossible to carry out the business activities for the organization. Therefore
the director will be held liable for the mismanagement in the business activities as they had a
fiduciary duty towards the organization (Zahid and Ali, 2011). The directors cannot be held
liable for the doings of third parties bur are liable for all the cats of the organization. From this
case it can be analyzed that the company can be held liable for all the fraudulent practices and
also sale of the assets of the organization at a lesser value than the market price.

Law 7
Analyze the tribunal decision and the reason for the decision in view of
the Corporations Act in Australia-
Section 425 of the companies Act 2002 states two ways of winding up of the organization i.e.
winding up by court or tribunal and winding up on a voluntary basis. There are various ways of
winding up of the organizations. The company can be wound up if a special resolution has been
passed. If the organization has made any default in carrying of the statutory meetings and the
organization has not started its business activities within the stipulated time period. The
organization can also be wound if it is unable to meet its debt and liabilities. From this case it can
be analyzed that the organization was having huge liabilities and losses. So, it becomes quite
impossible to carry out the business activities for the organization. The directors did not perform
their duties and also not able to make repayment of debts and this is because the case has came
into the court. The reason behind winding up of the organization is its inability to pay the debts.
The winding up of the organization should take place by the liquidator as appointed by the court
under Sec 488 of the act of companies (Keay, 2015). The liquidator as appointed by court should
carry out all the duties at the time of winding up as directed by the tribunal or court.
Sec 457 states the powers of the liquidators in the event of winding up. The liquidator has power
of making definition of suit, to sell the property of the organization whether moveable or
immoveable, to make loans and also to make inspection of the records of the organization. It is
found that at the time of the formulation of lease the organization was facing various financial
crises and landing the organization towards liquidation. Therefore, the directors of the
organization were under a duty towards creditors to make them payments but this duty was
breached by the directors when the lease was made (Humphery-Jenner, 2014). This lease was
made by the directors in order to make asset of the organization out of the reach of the creditors

Law 8
of the organization and this will lead towards nonpayment to creditors. This was a fraudulent
activity carried out by the directors.
When a company went in to the proceedings of winding up then always interests of the creditors
got arise. The creditors become entitled to deal with the assets of the organization if the process
of liquidation has been started and the creditors also has the power to get the payments before
shareholders and the directors. The assets of the organization were used by the directors for their
own benefit. It was stated that the lease was not ultra vires and also void as it exceeded the
capacity of the organization. When the directors made lease, it can be clearly identified that there
was breach of duty by the directors and this lead towards inefficiency to the creditors in terms of
making payment (Keay, 2015). This can be stated that it is a voidable action by the organization
and which the organization has to avoid it.
The court stated that in various situations the director’s duty extended to the corporate social
responsibility and not limited to only the interests of the shareholders. The court emphasized
that the directors of the organization should consider the interests of the shareholders and the
creditors. If, the directors failed to do so than they can face various adverse results. The tribunal
decision was that the director had acted in breach of their duties and their conduct was fraudulent
in respect to creditors. In the process of liquidation this was decided that the asset of the
organization should be the asset of the shareholder and creditors which was correct in many
sense (Hargovan and Harris,2013).

Law 9
The relevance of the decision in development of Australian corporation’s
law and the impact of the decision on the operation of companies in
Australia-
In a case of Parke v. Daily News which was decided in the year 1961. In this case there was a
dismissal of the statement and argument that the directors had a duty towards the employees of
the company and also had a duty towards the shareholder of the organization as they have
invested funds in the organization. But, in the case of Kinsela v Russell Kinsela Pty Ltd (in liq)
(1986) the court has developed greater corporate responsibility for the directors of the
organization. The duties of directors have been extended to customers, society, employees and
shareholders. The duties of the directors have become more apparent after this case. After this
case, the argument was raised the courts should extend the liabilities and duties of the directors
of the organizations from the traditional system which was prevalent. The directors duties should
be extend to the serious problems of the interests in the organization. The directors of the
organization should consider the interests of the creditors in the limits of benefits of the
organization (Keay, 2005). When some duties are identified by the directors than there are
possibilities that such duty can raise a conflict with the duties that are owed by the directors of
the organization in respect to the shareholders and various other stakeholders.

Law 10
References:
Hargovan, A., & Harris, J. (2013). For whom the bell tolls: Directors' duties to creditors after
bell. Sydney L. Rev., 35, 433.
Hayne, K. M. (2014). Directors' duties and a company's creditors. Melb. UL Rev., 38, 795.
Humphery-Jenner, M. (2014). Barristers Operating as Corporations. Journal of Corporate Law
Studies, 14(1), 277-286.
Keay, A. (2005). Wrongful trading and the liability of company directors: a theoretical
perspective. Legal Studies, 25(3), 431-461.
Keay, A. (2015). Directors negotiating and contracting in the wake of their companies’ financial
distress. Journal of Strategic Contracting and Negotiation, 1(3), 214-230.
Keay, A. (2015). The shifting of directors' duties in the vicinity of insolvency. International
Insolvency Review, 24(2), 140-164.
Keay, A. R. (2015). Challenging Payments Made by Insolvent and Near Insolvent
Companies. Nottingham Insolvency and Business Law e-Journal, 3, 215-228.
Koh, J., & Oh, E. (2015). Re-Examining Bondholders' Rights in Exchange Offers. Bus. L.
Int'l, 16, 119.
Langford, R. T. (2011). The Duty of Directors to Act Bona Fide in the Interests of the Company:
A Positive Fiduciary Duty? Australia and the UK Compared. Journal of Corporate Law
Studies, 11(1), 215-242.

Law 11
Mayanja, J. (2014). Clarifying the Object of Directors' Endeavors: What Australia Can Learn
from the United Kingdom. UNSWLJ, 37, 874.
Redmond, P. (2012). Directors' duties and corporate social responsiveness. UNSWLJ, 35, 317.
Zahid, A., & Ali, H. M. (2011). Director's Obligations towards Creditors under the CSR Regime:
Common Law versus Islamic Principles. US-China Law Review, 8, 981.