Director Duties and Creditor Interests
Added on 2020-03-28
7 Pages2360 Words54 Views
|
|
|
Case introduction: After going through the judgment delivered in this case, the brief facts canbe described as follows. In this case, the parties (Kinsela family) were operating a funeralbusiness and for this purpose they have incorporated company. The company took insurancecover regarding the cost of funeral services, but after the introduction on new legislation forregulating insurance services, the family was anxious if their business may suffer as its financialposition was unstable. As a result, a lease was signed by the family. It provided that husband andwife (director and shareholder) were going to rent the business premises at a appreciably lesservalue. All this took place when the company has already become insolvent. Consequently, whenthe company was went into liquidation, the liquidator confronted the lease claiming that thedirectors have violated their fiduciary when they could not consider the interests of the creditorswhile they went ahead to transfer the lease at worth much lower than its market value. The courthad expressed the opinion in a statement that in this case, indeed, the directors are liable forbreach of duty. Being the shareholders also, the directors cannot be permitted to authorize theirown behavior, as the creditors suffered a loss due to it. Given that the directors knew very wellregarding the hard fiscal situation of the corporation and probable insolvency, it can be said thatthe assets of the company by the essence of the creditors and they did not belong to theshareholders, that were placed under directors administration through the corporation. The significance of the decision given by the court in this case increases due to two reasons. Thefirst reason is that in this decision, the court has recognized that when the corporation is facingpossible insolvency, the main beneficiaries of the Directors duties became the creditors of thecompany and not its shareholders. Another reason that was present behind this significance wasthat this decision provides that according to the fiduciary duty imposed on the directors, which
requires them to keep in view the interests of the creditors during the company's insolvency,cannot be diluted by the shareholders.The duties/responsibilities breached:NSW Court of Appeal has notably granted judicial recognition to the fiduciary duties obligatoryfor the directors concerning the creditors. It was mentioned by the court that when thecorporation is facing possible insolvency, the directors owe a duty towards the company as awhole and not only the shareholders of the company. Therefore, the directors are also under anobligation to keep in view the interests of the creditors of the company. Hence, under thesituation where there has been a breach of duty that has resulted in a loss to the creditors, it is notwithin the scope of authority provided to the shareholders to absolve the directors from theeffects of such breach. An example in this regard can be given of the present case where themembers of the Kinsela family were the only directors and shareholders of the company. Thecompany was owned by this family and they were carrying on the business as funeral directors.All the companies had a very good reputation and the family members to crowd in this respect.However, there was one company, Russell Kinsela Pty Ltd that was also providing a type ofcontributory insurance to cover the cost of funerals, along with providing the funeral servicesitself. According to this theme, regular payments were made by the clients and in return thecompany providing funeral services free of cost. But this scheme was not properly structured bythe corporation. The reason was that the company had not considered the rising costs. As aresult, by 1976, increasing trading losses were being suffered by the company. Similarly, theliabilities of the company start to exceed the assets of the company. This was the time when thegovernment introduced the Funeral Funds Act. It was provided by this legislation that the
companies that were in the business of providing funeral insurance schemes had to declare theirfinancial position. According to this Act, power was granted to a legal officer who couldinterfere in case of defaulting company to protect the interests of the creditors. These were thecircumstances when Mr. Kinsela, was the appellant in this case and also director of thecorporation, made a proposal according to which he expected that the business was going tocontinue even when it became quite clear that the company was going to collapse. Hence, thedirectors entered into a lease of the company premises. The tenure of this lease was for threeyears. There was also an option available according to which it can be extended for the next threeyears. The Lessees were Mr. and Mrs. Kinsela. The terms of the lease would particularlyfavorable, but collectively, it was in the favor of the company's shareholders. During the sameyear, proceedings were initiated to wind up the company. Hence, the liquidator challenge thelease on various grounds, but the court was of the opinion that only one ground needs to bediscussed in detail. The liquidator has argued that the company has used his power to leave thepremises for a purpose that was not in the best interests of his shareholders. Hence, a claim wasmade by the liquidator that believes needs to be avoided by the company. On the other hand,countering these arguments, the appellants claimed that the submissions of the liquidator werenot true. They claim that the lease has been exhibited as an act the corporation and theshareholders of the company have unanimously approved it.After hearing the submissions made by both the parties, the Court at the first instances had heldthat even if the directors had the authority to lease the premises provided by the articles of thecompany, but this power should be used for the purpose of furthering the stated objects of theCorporation. Consequently, the court expressed the opinion that the lease was avoidable at theoption of the Corporation. Even if Powell J. had expressed his reservations concerning the
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents