ASM-2- -Group-Assignment PDF

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Course

Law of Investments and Financial Markets LAW2485

Assignment

Assignment 2 - Group Assignment - Nguyen Ngoc Bao Chau - s3807100

Student’s name & ID - Tran Hoang An - s3768191 - Le Thi Phuong Anh - s3768790 - Au Duong Quynh Phuong - s3760964

Lecturer

Tutorial

Ms. Esmira Hackenberg - Monday 11.30 class (Tran Hoang An, Le Thi Phuong Anh, Au Duong Quynh Phuong) - Tuesday 15.00 class (Nguyen Ngoc Bao Chau)

I) ISSUE In order for ASIC and ABC Ltd to take legal actions against the directors, they need to consider whether they have breached: 1) a) Fiduciary duty to act in good faith for the best interests of the company, Fiduciary duty to act for proper purpose and and the corresponding statutory duty under s1811: Susan for receiving commissions from Dickson/Celebs, being director of company that supports ABC’s competitors, sold land undervalued and embezzled ABC’s fund; Ben and Proctor (B&P) for taking unsecured/interest-free loans and agree with Westley to take secret profits from property sales; Scott for not taking action to protect shareholders’ interests and failure to prevent other directors’ misconduct.

2) Fiduciary duty to avoid conflict of interest & Disclosure and the corresponding s182(1)2 for not misuse position: Susan for using her power to receive commission, for being the director of the competing company to ABC, for selling the land the land at an undervalued value, and for failing to account regarding the money received from sell land and partly transferring to her bank account; B&P as similar above; Scott for using his power for entertainment while not caring the least about ABC’s affairs.

3) Duty of disclosure s191 3: Susan for not disclosing the commissions from Dickson/Celebs, and her role in Celebs when selling land; B&P for not disclosing the agreement with Westley,

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Corporations Act 2001 (Cth) s 181(1) Corporations Act 2001 (Cth) s 182(1) 3 Corporations Act 2001 (Cth) s 191 2

4) Common law Duty of care (DOC), skill, and diligence and the corresponding s180(1)4: Susan for not taking reasonable steps to preserve ABC’s interest; B&P for not realising that Susan misconduct in relation to the sale of Adelaide land; Scott for

careless conduct letting Susan sell the land and for ignoring the misconduct of B&P.

II) RULES & APPLICATION

1. GOOD FAITH AND PROPER PURPOSE Fiduciary and statutory duties under s 181(1)(a) 5 to act in good faith in the best interest of the company requires directors to act and genuinely believe that their decisions are for the best interest of the company. Under s181(1)(b) 6 and fiduciary to act for proper purpose, directors exercise their powers and for proper purposes prioritizing the company’s interest over their own or others. a) SUSAN

1. Dickson promises 50,000 in commision for susan, and Celebs give $500,000 commission for the sale of land The legal tests will be taken into analysis to determine whether Susan’s act of personally accepting the $50,000 promise from Dickson and receiving $500,000 in commission for selling land to Celebs breached s181(1)(a) and s181(1)(b).

Subjective test:

Its element concentrated on belief. Susan had an honest belief that her

actions would be beneficial to the company if they entered into the contract with Glamour since it provides a stable of celebrity speakers that the ABC can use for any events involving its speakers. Moreover, she might believe that selling the land for Celebs would bring more

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Corporations Act 2001 (Cth) s 180(1) Corporations Act 2001 (Cth) s 181(1)(a) 6 Corporations Act 2001 (Cth) s 181(1)(b). 5

profits to ABC company since this company performed a great financial success. However, objective test is also examined to know whether it is satisfied.

Objective test: The objective purpose of proposing to corporate with Glamour and to sell the land for Celebs respectively was to ABC profits from using their human resources, and for better value. However, the profound purpose here is the secret promise and arrangement to receive the commission from both Glamour and Celebs. It is similar with Bell Group v Westpac Banking Corporation7, where directors’ decision making were affected by the secret profit, to use their power for the interest of external parties. The court held that directors of Bell Group had breached s181. Therefore, Susan also breached s180(a),(b) and corresponding fiduciaries for exercising improper purposes to take avantages for herself.

2. Being the director of Celebs, a competitor with ABC To determine whether the act of Susan forming the rival company named Celebs to ABC breached s181(1)(a) and s181(1)(b). The legal test will be taken out to examine.

Subjective test: Since Celebs was also a hotel, thus, there is no way that the act of Susan forming a competing company to ABC would bring the interest for ABC and its shareholders in general, thus, the subjective test is not satisfied.

Objective test: Susan’act was not a reasonable director should do for the best interest of the company since she preferred her own interest to build a competing company and attempted to take over ABC’s customers. It resembles the case Mordecai v Mordecai 8, when David and Meyer, two directors of Morpack acted for their own benefits by forming the competing company, and taking over all the Morparck’s customers. They had misused their position as directors of the company to enter the transaction with customers under their name but not under the company’s name. Thus, the court concluded that these two directors breached s181.

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The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 Mordecai v Mordecai (1988) 12 NSWLR 58 (CA).

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Similarly, to benefit herself and external parties, Susan exercised her power for improper purpose. Hence, she also breached s181(a), and s181(b).

3. Selling lands to Celebs at an understated value To examine whether Susan’s act of selling land to Celebs at an understated value constitutes a breach of s181(1)(a), we need to conduct several tests. Subjective test: This focuses on belief. From Susan’s perspectives, she may genuinely believe the sale of land was suitable for the company, but this does not matter until the objective test has also been satisfied. Objective test: The way Susan acted was not that of a reasonable director since they failed to consider the actual interest of shareholders by not consulting their views. Moreover, the price is in favour of Celebs (Susan’s joint venture). It is clear that B&P disregarded Susan’s offer because the act is bold. A reasonable director, in the same situation, would take reasonable steps to evaluate the land or at least hiring experts for land valuation before selling. The fact that Susan outrageously offered to sell the land at $20million is not what a reasonable director should do. Also, such act is not in the best interest of the company since the actual value of the land is much higher. Hence, objective test is not satisfied. Hence, overall, Susan has breached s181(1)(a).

4. Fail to account for the money received from land sales and partly transfer to her private bank Susan failed to account for the company for sums of money received as the result of the sale of land and transferred some of the amount to her private bank. Under objective test, Susan’s act is not what a reasonable director should do for the best interest of the company. By transferring some money to her personal bank account, Susan has inappropriately taken away the profit that should belong to the company, which eventually hurt shareholders in terms of lower dividends. Here, we assume that part of the company’s profit would be distributed to

shareholders as dividends. Hence, Susan failed to act in the best interest of the company. Hence, the objective test is not fulfilled. This shows that Susan has breached s181(1)(a).

b) BEN & PROCTOR

1) Agreement with Westley The objective purpose of proposing to accept Build’s offer was for ABC to generate more profits from the use of vacant land in Adelaide. Nevertheless, the real motivation underlies the secret agreement to obtain the percentage of profits from the sale of future residential and shopping units. This resembles the case Bell Group v Westpac Banking Corporation 9. The directors in both cases were influenced by some form of secret profit, to exercise power for interests of external parties: Westley (share of profits from sale of properties ) and the Westpac Bank (converted unsecured debts into secured debts to gain advantage during liquidation). The Court concluded Bell Group’ directors to breach s181. Similarly, B&P exercising power for improper purposes to benefit themselves and external parties, therefore, they also breached s181(a),(b) and corresponding fiduciaries.

2) Loans Under no circumstances could two directors justify their personal loans from ABC’s fund for the interest of the company and shareholders as a whole, hence, they failed the subjective element of the legal test. For the objective element, no reasonable director would act as B&P, since they prioritised self-interests to incur bad-debts in ABC’s financial records and disregard the interest of the shareholders entirely. This would adversely affect ABC’s perceived value from future investors/creditors.

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The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [ 2008] WASC 239

In the case of Park v Daily News Ltd 10 shareholders successfully challenged the payment to ex-workers was not incidental to the conduct of its business, and the director did not act in the best interest of the company. The interests of the company were its members, not its employees, or directors themselves, as declared by the Court. Unsecured condition means there was no collateral, and interest-free loan is basically free money. As B&P’s business collapsed, those loans would not be repaid, thus being considered as loss to ABC Ltd. In the same respect with the case law, ABC’s shareholders can challenge those loans to be unnecessary, risky, and would not generate any profits for the company. In fact, those loans with no prospect of repayment compromised ABC’s payment to creditors, funds for future hotel expansion, or dividends distribution to shareholders. Therefore, B&P did not exercise their management power for a proper purpose as any reasonable directors would act to the best interests of the company, and thus breached all the fiduciary duty to act in the best interest and s181(1)(a),(b).

c) SCOTT It is stated in ASX Corporate Governance Council (2019) 11 that non-executive directors usually have the role to objectively view and judge the management team’s conduct. Accordingly, Scott went against s181(1)(a), which states that directors must not be tempted to prefer their own interests to the company’s, as he did not attend any meetings and not feel the need to be informed about the company’s matters. Moreover, he chose to shut eyes on misconduct of B&P as they are his friends. His joke indicated that he knew they took advantage of their position for improper purposes. But Scott had no response to stop them, meaning he exercised his power by being silent after being informed, also counted as agreement, meaning he prefered his friends’ interest over ABC’s. Regarding s181(1)(b), the conduct for analysis is Scott’s failure to prevent B&P from misuse of ABC’s fundings. The situation is similar to Permanent Building Society v Wheeler 12 when 10

Parke v Daily News Ltd (1962) Ch 927. ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, (ASX, 4 th ed, 2019), 12. 12  Permanent Building Society v Wheeler [1994] 12 ACLC 674 11

the conduct causing the society to purchase land overpriced was held by the court as a breach of duty to act for proper purpose of directors, one of which was not involved in negotiation but still breached his duty since he was acknowledged and failed to prevent the transactions. Hence, though Scott didn’t participate in the transactions (proved as for improper purposed), he knew about it and failed to avoid its proceedings for the company. Hence, Scott breached fiduciary and s181(1)(a),(b).

2. DUTY TO AVOID CONFLICT OF INTEREST AND MISUSE OF POSITION A director has fiduciary duty of loyalty to satisfy both no-conflict and no-profit obligations. Under s182(1), the corresponding statutory duty requires directors not to improperly take advantage of their position to cause company’s damages or derive benefits for themselves/someone-else. a) SUSAN

1. Receiving commission from Dickson and Celebs

The promise from Dickson to give Susan $50,000 in commission if the proposal on cooperation succeeds, and the commission of $500,000 from Celebs for selling land, which would only bring benefits to Susan, not the company as a whole, were for the purpose of influencing Susan’s decision making. Similarities found in Boston Deep Sea Fishing v Ansell13 case where the directors received the bribe to perform a particular course of action. It can be said that, if Susan was not the executive director, she would not be able to get that amount of money, thus she breached the no-profit rule. Moreover, she did not disclose those offers which she accepted/ received as she tried to support other companies, particularly Glamour and Celebs, to persuade ABC to cooperate with them. Additionally, the legal test of real sensible possibility of conflict is considered. It stated that a reasonable director must prevent getting into the situation where they would prefer their own interest rather than company’s. Hence, Susan breached the fiduciary duty of loyalty as well as s182(1) (misuse position) since she used her position to get advantages for herself and other companies.

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Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339

2. Forming Celebs, a competitor of ABC A director has fiduciary duty of loyalty. There are two rules, no-conflict and no-profit, for this duty. No-conflict rule states that directors must not put themselves in a situation in which they are tempted to prefer their own interests over those of the company. An objective test can be conducted to see whether there is ‘a real sensible possibility of conflict’ and hence determining whether it breaches no-conflict rule. As in Boardman v Phipps 14, a possibility of conflict exists when “the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict”. In the case of Susan, she formed Celebs, which is a hotel management company. Since ABC is also operating in hotel management industries, it is clear that Celebs and ABC are potential competitors. Hence, potential conflict may arise. Therefore, no conflict rule is compromised.

3. Sales of land to Celebs at an understated value Here, we will employ the no-conflict rule to determine whether Susan’s act of selling the land at an understated value constitutes a conflict of interest. In our case, by selling the land at a low value, Susan can benefit Celebs at the expense of ABC. As in the case Aberdeen Railway Co v Blaikie Bros 15

, the director purchased equipment from his partnership without disclosing his position to the

directors. Similarly, Susan did not reveal her position in Celebs joint venture. Hence, it is clear that Susan has put herself in the situation of preferring her company’s interests (Celebs’s) over the ABC, by misuse her powers, Susan caused $10,000,000 detriment to ABC in terms of land value. Therefore, no-conflict rule is breached. Similar to Clark, Susan breached the duty to avoid conflict interest and s182(1)

4. Unable to account the money from land sells and partly transfer to her bank account In the case Boardman v Phipps 16 states that the existence of a real sensible possibility of conflict would be determined by whether a reasonable man, considering the circumstances of the case, would think that there was. When Susan partly misappropriated the amount of 14

Boardman v Phipps [1967] 2 A.C. 46  berdeen Railway Co v Blaikie Bros [1854] 1 Macq 461 A 16 Ibid 14 15

money by selling the land, meaning that not only she’s risking the conflict of interest between herself and the company (the ambition for luxury lifestyle versus the profits needed), but also among herself and the shareholders ( the ambition to get commission versus the desire of profits). Therefore, she violated both conflict and profit rules. Thus, breached fiduciary and s182(1).

b) BEN & PROCTOR

1. Arrangement with Westley An agreement with Westley, which granted benefits to B&P only, not the shareholders of ABC, was with the intention to influence their decision making. Again, it resembles the case Boston Deep Sea Fishing v Ansell, where directors in both cases received the commission/a portion profit to perform certain action. Without the position of the directors of companies, they would not have such agreement or bonus, therefore, this violated no-profit rule . Also, they did not disclose to the board of directors/shareholders about the personal gain in order to appear neutral and convincing, in an attempt to support the gain for external parties, such as the Build and Boston Deep Sea’s suppliers. Applying the conflict-rule , a reasonable director must avoid putting themselves in situations they may prefer their own interests, or someone’s

interests, over those of the company. Therefore, similar to Ansell, B&P breached the fiduciary duty of loyalty and the overlaps s182(1) as they misuse their positions to gain advantage for themselves and external parties.

2. Loans There is no justification for the fact the directors prioritized their benefit to obtain free money over the benefits of ABC. A real sensible possibility of conflict presented here, as B&P had control over the company fund but they chose to manipulate the fund using their position’s advantage. This brought many similarities to the case of ASIC v Adler & Ors 17, where three unsecured and interest-free loans worth $2.04million were made to Adler himself and his Adler Corporation from a trustee company also controlled by himself. The Court held that Adler improperly misused his position in controlling trustee funds to gain advantage for himself and his other business under s182, he also breached s180 and s181 (after the appeal). Evidence suggested that at least Adler and his company repaid certain parts of loans, while unlikely the loans would be repaid by B&P. In both cases, the directors used funds in the manner that if their personal investments had been successful, the profits would belong entirely to them, but their respective companies and the shareholders had to suffer the risk and loss if the investment failed. Therefore, B&P breached the fiduciary duty to avoid conflict of interest and the corresponding s182(1).

c) SCOTT R v Byrnes (1995)18 is the case that 2 directors breached s182(1) when they mistakened that their act of executing internal documents to another company was for their company’s interest. This case shows that besides from actions, even the intention of the director that caused the company’s loss is counted. Hence, Scott’s act of travelling and playing golf while not paying attention to any of the company’s affairs didn’t cost any loss to ABC butl is still considered as a kind of abused powers (powers that are taken advantage of) since directors of a company normally have to delay their own interests to after corporation’s business is through. Hence, he can be considered to have breached proper use of position as a director of

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ASIC v Adler & Ors [2002] NSWSC 171

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R v Byrnes [1995] 183 CLR 501