Business Law: Director Duties, Oppressive Remedy, Financial Reporting

This business law report examines several key aspects of corporate law. It begins by analyzing the duties of directors, encompassing both common law principles of equity and fiduciary duties, as well as statutory obligations outlined in the Corporations Act 2001 (Cth) (CA). The report considers p...Read More

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1........................................................................................................................2
Question 2........................................................................................................................4
Question 3........................................................................................................................7
Question 4........................................................................................................................9
Question 5.....................................................................................................................10
References.....................................................................................................................13

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Question 1
Issue
The question which has to be analyzed in relation to the given case study is that has the
duties of directors as provided by common law in form of equity and fiduciary duties
along with the statutory duties set out by the Corporation Act 2001 (Cth) (CA) been
breached by High Rise development limited’s directors.
Law
Duties are set out by the CA through s 180 to 184 which are applicable on all officers
and directors of organizations operating in Australia. A person who has the right to
make decisions in relation to the organization or who hold the position of directors are
considered as its directors under section 9 of the CA.
Under the provisions set out by section 180 (1) in the CA it is the duty of all directors to
utilize the skill and diligence possessed by them in the management of the day to day
activities of the company. It is not upon the directors to state that they have skillfully and
diligently taken a decision in relation to the company and therefore their decision is
analyzed by the court. The courts have been provided with a specific test under section
180(1) of the CA. The test is known as the objective test and is used to analyze the
decisions of the directors. The principles of the test state that an imaginary reasonable
director is placed in the shoes of the original director and then if the imaginary director
would have taken the same course of action the original director passes the test and if
not the test is not cleared by the directors.

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Further the directors have been imposed with a duty to act in the best interest of any
organization they work for as directors. This duty has been imposed on the directors
through the application of section 181 of the CA. the directors of the company must act
in a proper purpose and in good faith while managing the affairs of the company. This
duty is also provided in the fiduciary and equitable duties owed by directors to the
company.
It is the duty of directors under section 182 of the CA to not make secret profit on the
cost of the company while using the position which is held by them in the company. This
duty also corresponds to the equitable and fiduciary duty to not have any conflict of
interest with the interest of the company. There is an obligation imposed on the
directors to go for the profit of the organization other than personal profit in case any
situation with conflicting interest takes place.
In the same way as provided by section 182 of the CA, section 183 imposes an
obligation not to use the information gained by the company for personal gains and
secure the interest of the company as a priority. This duty also corresponds to the
equitable and fiduciary duty to not have any conflict of interest with the interest of the
company.
Application
It has been provided in the scenario that the organization is managed by two directors.
The core operations of the organization is to manage buildings. A recent deal has been
entered upon by the organization where it has been provided with the opportunity to
manage a new high rise. The organization has get into a contract for cleaning and the

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contract is supposed to be provided to the fired of one of the directors wife. The offer
which has been made by the fired has quest which looks excessive. In spite of such
facts the organization is willing to provide the contract to the friend. Section 180(1) of
the CA would clearly be breached if the contract is provided as under the test no
reasonable director would allow the organization to accept quotes which are excessive.
The deed would also not be for the best interest of the organization therefore the
equitable duty of good faith and section 181 of the CA would also be breached. The
directors would be at the risk of breaching section 182 and 183 along with the fiduciary
and equitable duty to avoid a conflict of interest by getting into such deed as they are
giving priority to the interest of a third party instead of the organization by using their
position and information gained by the company.
In the given situation the directors have two alternatives. They can either try to claim the
defense provided by section 180(2) of the CA which relates to the common law
business judgment rule or they can avoid getting into the contract with the other
company belonging to the friend of one of the director’s wife. The business judgment
defense would however not be strong as any reasonable director would not have done
so.
Conclusion
The director’s duties both statutory and equitable have been violated
Question 2
Issue

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The question which has to be analysed in this case is whether the two sons can make a
successful film of oppressive remedy under the provisions of the CA.
Rule
The rules and regulations with respect to oppressive remedy are provided through the
CA in section 232-234.
It has been stated by section 232 of the act that court has been provided with the power
to make any ruling which is allowed to be made with respect to the provisions of section
233 of the CA. When a resolution has been made or a resolution has been proposed
with respect to how the operations of the company are to be carried out or an actual or
proposed act is committed with respect to the organisation which is actually detrimental
to the members of the organisation as a whole or discriminatory unfairly or unfairly
prejudicial or oppressive towards any member or a group of the organisation the court
has the right to make such orders. It has been additionally provided by the section that
where a person has been transferred any shares of the company through the operation
of law or through the will of the directors that person would be considered as the
member of the company.
There are several orders which the court is allowed to make under section 233 of the
CA which are provided in the following list.
 The winding up of the company
 Reduction in share capital
 Supervising the operations of the company in future
 Repeal or modification of the constitution

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 Purchase of shares from members to whom shares have been transferred
 Authorizing a member to continue, institute or defend a legal suit
 Order to continue, institute or defend a legal suit
 Restraining a specific conduct
 Appointment of receiver or manager
 Order to amend the constitution
 Ordering specific action
Section 234 of the CA states that an application for an order under section 233 can be
made by any member of the company
Application
The situation in the case studies text at Lester and Malcolm have been provided with
100 shares each by their father in the company Malta Harbor Pty Ltd. Therefore as
discussed above according to the provisions of section 234 they have the right to make
a claim for an order under section 233 as they are a member of the company.
Membership is attained by an individual when shares are transferred in them by
operation of law or through will. In the case study it has been provided that Gangman
has himself transferred the shares of the company to his sons. Therefore an oppressive
remedy claim can be made by them. In order to make a claim for oppressive remedy it
has to be shown that and unfair treatment is done to the members of the company. It
has been provided in the case study that Gangman who holds the major shares of the
company and looks after its operations is paying himself extensive bonuses and

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concealing profits. Therefore it can evidently be stated that such actions are unfairly
prejudicial and discriminatory against the members of the company who are his sons.
Therefore has provided above the two sons can make an oppressive remedy claim
under the provisions of section 232 of CA. The order which may be claimed by them
may include and injunction or a specific action to stop Gangman from continuing the
operations of the company in an illegal and discriminatory manner. In addition they can
also claim for winding up of the company from the court.
Conclusion
From the above discussion it is clear that Malcolm in Lester have the right to make an
oppressive remedy claim.
Question 3
A
It has been set out through section 286 of the CA that an organisation has to accurately
and appropriately describes and records the operation of the organisation with respect
to its financial position and performance. The section also states that the records have
to be prepared in such a way so that an independent auditor can conduct a fair and
accurate audit of the financial records. Financial records are defined by section 9 of the
Corporation Act. Bills of exchange, Invoices, received orders, documents of primary
entries, vouchers, promissory notes and other working papers are included in the
definition of financial records. Until and unless a small proprietary company has been
requested by the shareholders or the Australian security investment Commission to
prepare a financial statement it is not required to do so under the provisions of the CA. It

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has been provided by the case study that Jasmine is the director of a small proprietary
company and therefore it is not necessary for her to prepare financial records until she
has been asked to do so by the commission or the shareholders.
B
All disclosing entities along with large proprietary companies, public companies and
registered schemes belong to the list of companies that are required to make financial
reports as well as the directors reports under the provisions of section 292 of the
Corporation Act. Therefore it is not mandatory for a small proprietary company to
prepare financial reports. However with the application of section 293 and 294 of the CA
a small proprietary company can also be asked to make a financial report as well as the
directors report. In case the company is a registered foreign company or is controlled by
a foreign company in a financial year it would also be required to comply with the
financial reporting provisions even if it is a small proprietary company. Financial reports
have to be prepared by a small proprietary company even in case they are a disclosing
entity or a registered scheme. Shareholders having a 5% voting right have the power to
instruct a small proprietary company to make and send a financial report to all
shareholders. The directions to prepare an issue search report can only be provided by
the shareholders in writing and also within 12 months when the financial year has ended
(Allen & Kraakman, 2016). The directions provided by the shareholders may also
contain the fact that the reports needs to be audited by an independent auditor or they
are not complying with acceptable accounting standards. A small proprietary company
can also be asked under section 294 to prepare a financial report in the same way by
the Australian security investment Commission. The commission may provide specific

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or general direction related to a specific requirement. The date within which the report
has to be prepared and sent to the commission have to be mentioned in the directions.
The commission has the right to provide such directions within 6 years when the
financial year has ended (Schulman, Moscow & Lesser, 2016).
C
The provisions of a strict liability offence are triggered by any directors who fails to act in
accordance with the requirements of financial reporting under section 293 and 294 of
the CA with respect to Section 6.1 of the criminal code. Therefore Jasmine in the given
situation would be liable to be prosecuted under this section if she fails to comply with
the financial reporting obligations of her company.
Question 4
A
The provisions of the CA allow the court to appoint a liquidator with respect to an
organization upon the request of the shareholders. The appointment of the receiver on
the other hand is done through the secured creditors of the company as per the
authority provided to them by the security agreement. The receiver of a company has
the function of selling off the assets of the company by gaining control over those assets
which have been secured by the creditors against the money which the company owes
to them (Lieberman et al., 2016). The organization is allowed to continue trading when a
receiver has been appointed however no trading can be done when the appointment of

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a liquidator is completed. The organization may theoretically come out of the position of
receivership after the job of the receiver is finished. On the other hand the company
would be brought to an end by the formal process of winding up when the role of the
liquidator has been concluded (Cheeseman & Garvey, 2014). All the assets of the
company would fall under the control of the receiver in the same manner as the
liquidator if the creditor has secured all the concerned assets. There can only be one
liquidator appointed in a company whereas multiple receivers may be appointed and
can operate at the same time. Section 420 of the CA sets out the powers and
responsibility of the receiver. Section 477 of the CA provides for the powers of a
liquidator. A receiver cannot make the directors at fault accountable and also is not
under the position to make an investigation into the affairs of the company however
such powers are vested in the liquidator (Stout et al., 2016).
B
When the debt of the organization exceeds the minimum statutory amount set by law
the creditors have the right under section 459E of the CA to ever the company with a
statutory demand. Section 9 of the CA sets out the minimum statutory amount at $2000.
Any person owes the company one or more debts in total exceeding the minimum
statutory amount can make a statutory demand notice (Crane & Matten, 2016). The
total amount outstanding has to be specified if the demand is in relation to more than
one debt and in case of a single debt the demand has to specify the debt and the
amount owed. The creditor must provide the statutory demand in the prescribe form and
it must be in writing and signed by the creditor himself. The total amount which the

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company allegedly has to pay and the verification of debt has to be made by the creditor
in form of an affidavit (Wahlen, Baginski & Bradshaw, 2014).
C
Section 459H sets out two grounds on which the organization can dispute any statutory
demand notice sent by a creditor. A dispute can be launched by the organization to the
Supreme Court within a time span of 21 days from which the demand has been made.
The ground on which a company has the right to file a dispute includes that a genuine
dispute related to the amount which needs to be paid is present and an offsetting claim
has been made by the company. A genuine claim which is raised through a counter
claim or a cross demand is known as an offsetting claim (Loewenstein, 2016).
Question 5
Section 180(1) of the CA have been violated by the directors of Avestra in the first place
as they failed to exercise degree of care intelligence which a reasonable director in their
position would have observed and exercised. The principles of the test state that an
imaginary reasonable director is placed in the shoes of the original director and then if
the imaginary director would have taken the same course of action the original director
passes the test and if not the test is not cleared by the directors. The violation of the
section accounts to a civil penalty provision under the CA (Coffee, Sale & Henderson,
2015).
The equitable duty to avoid any conflict of interest is corresponded by section 183 and
182 of the CA. The duty imposes an obligation on the directors of the company to take
all measures to avoid a situation where conflict of interest may take place. The directors

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have the duty to go with the interest of the organisation and not with personal interest
when any situation of a conflict of interest occurs between personal and organizational
interest as a fiduciary relationship exists between the organisation and directors. The
board of the organisation have to be disclosed about such interest according to the
provisions provided by section 191 of the CA. The directors are not allowed to use any
information of the organisation or the position which have been provided to them by the
organisation for making personal games under the provisions of section 182 and 183 of
the CA. It was ruled by the court while taking a decision in relation to the case that “…if
Avestra had observed effective compliance and conflict-management practices, it is
likely that the episodes of misconduct described … would not have unfolded, or not to
the same extent. Dempsey’s and Rowles’s omissions … were not merely procedural or
technical contraventions. They were shortcomings that created or reflected a
significantly deficient corporate culture, which enabled Avestra to act with a systematic
and serious disregard of its fiduciary and regulatory obligations.” (Asic.gov.au, 2017).
What the judges actually meant to the judgment was that the directors of the
organisation did not have in place any compliance practice or effective compliance
management which was the cause of the misconduct. At the minimum the directors of
the organisation have a duty to ensure that no illegal objectives are a part of company’s
goals and it complies with all the existing legislations. When noncompliance with law
can be established it can clearly be indicated that inefficiency and negligence was
present during the management of the organisation. The court ruled at the directors did
not make any procedural or technical contraventions which arise in the course of
business. A significant problem with respect to the management of the organisation was

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depicted by the actions of the directors as systematic and serious non-compliance of
fiduciary and regulatory duties by the company has been identified.
The scenario provides that the court has appointed and liquidator with respect to the
organisation. The provisions of the corporation at provider liquidator with a wide range
of powers with respect to an organisation. In the given situation the primary role of the
liquidator would be to wind up the organisation in a correct manner by appropriately
managing the liabilities and Assets of the organisation. The liquidator has the duty to
settle all the claims of the organisation before dissolution of the organisation can be
initiated.

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References
Asic.gov.au. (2017). 17-140MR Federal Court disqualifies former directors of
responsible entity | ASIC - Australian Securities and Investments Commission.
[online] Available at: http://asic.gov.au/about-asic/media-centre/find-a-media-
release/2017-releases/17-140mr-federal-court-disqualifies-former-directors-of-
responsible-entity/ [Accessed 27 Oct. 2017].
Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
Cheeseman, H. R., & Garvey, J. R. (2014). Business law. Pearson.
Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and
materials.
Corporation Act 2001 (Cth)
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. Oxford University Press.
Lieberman, J., Siedel, G., Warner, D., & Mayer, D. (2016). Business law and the legal
environment.
Loewenstein, M. (2016). Benefit Corporation Law. Browser Download This Paper.
Schulman, S. H., Moscow, C., & Lesser, M. R. (2016). Michigan Corporation Law &
Practice. Wolters Kluwer.

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Stout, L. A., Robé, J. P., Ireland, P., Deakin, S., Greenfield, K., Johnston, A., ... & Dine,
J. (2016). The Modern Corporation Statement on Company Law.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.