Lecture notes, Section 181 Good Faith PDF

Preview

Summary

These are my study notes throughout the whole semester. I received a HD for Company Law in semester 2, 2015. These notes cover pretty much everything on the lectures....

Description

Section 181 Good Faith applies to both directors and officers of the company. It states that they must exercise their powers and discharge their duties:  In good faith in the best interest of the company  For a proper purpose Good faith means the director must act honestly. When we say the directors have a duty to act in the best interest of the company, best interest of company are those of:  Members. The best interest of the company does not always mean what the majority members want. The court says that directors must act in the interest of the company as a whole in the case of Greenhalgh v Ardene Cinemas Ltd. This means that directors must balance the interest of the majority and minority while acknowledging that in most circumstances, the interest of the company will be those of the majority of its members. 

The company as a commercial entity separate from its members. Some courts have said this cannot be done Greenhalgh v Ardene Cinemas Lt. Some says it can



Creditors. When the company is insolvent the directors are expected to act in the interest of the creditors, for example the directors must ensure that creditors are paid in accordance with any contractual arrangements the company as with them. In the case of Kinsela v Russell Kinsela Pty Ltd (in liq) and Walker v Wimborne the court held that the interest of creditor company should be the interest of the director during insolvency. The court found that the transaction regarding the property was to place the assets and properties beyond the reach of the creditors. Thus it was against the interest of the creditor even after the shareholder approved. It is also important to note that directors do not owe a duty directly to its creditors but to the company as a whole. Spies v the Queen



Other companies within a group of companies, or. Section 187 states that a director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interest of the subsidiary if: (a) The constitution of the subsidiary expressly authorises the director to act in the best interest of the holding company; and (b) The directors acts in good faith in the best interest of the holding company; abd (c) The subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act. If section 187 does not apply, the directors of the subsidiary must act in the interest of the subsidiary and not the parent company or any other company in the corporate group. When there is question whether the directors of a company have breached their duty to act in the interest of that company by making a decision that benefits another company in the group, most court have applied the following test. It is whether an intelligent and honest person in the position of the director could have reasonably believed that the decision was for the benefit of the company. In the case of Equiticorp Finance v BNZ the court held that the directors of Equity finance has not breached their duty to allow repayment of debts of their parent company, as the insolvency of the parent company may give rise to worse situation of the companies in the group including the company the directors are in.



Employees, customers, suppliers and the community. As a general rule, the interest of the employees and other stakeholders mentioned above should not be given priority by directors over the interest of the company’s members. In the case of Parke v Daily News Ltd, the proceed of selling newspaper is distributed to the employee that is affected by the job cut. The court held that the directors although well-intentioned, have breached their duty to give a large sum of money to the ex-employees and not acting in the best interest of the company. In section 596AB it is stated that a person must not enter into an agreement or transaction with the intention of preventing employees of a company to receive their entitlements.

What are proper purposes. If it is alleged that a director has acted for an improper purpose, the court will adopt a two-step analysis to determine if there is a breach of duty as in the case of Howard Smith Ltd v Ampol Petroleum Ltd.  Step 1: What is the particular power in question and what are the legal (proper) purposes.  Step 2: The court will examine the facts of the case before it to ascertain the actual purpose of the directors. The court then will compare step 2 and step 1 and if the actual purpose is not within the lawful purpose in step 1, then the director will have breached the duty to act for a proper purpose. An example – The power to issue shares Proper purpose:  Providing employee with financial incentive to work in the interest of the company  Entering into a joint venture with another company by issuing shares to that company where this ensures long term stability for the company issuing shares. Harlowe’s Nominees Pty Ltd v Woodside Oil co NL  Raise Capital The court has also considered several situations where issue of shares have been for improper purpose:  Diluting the shareholding of a member ( Kokotovich Constructions Pty Ltd v Wallington)  Entrenching control of the company in certain shareholders by issuing them more shares (Whitehouse v Carlton Hotel Pty Ltd)  Attempting to reduce to a minority position, a member or members who hold a majority of the voting power (Howard Smith Ltd v Ampol Petroleum Ltd)  Directors maintaining control of the company (Hogg v Cramphorn Ltd)  In the case of Western Ventures Pty Ltd v Resource Equities Ltd the court also decided that there was an improper issue of share, as the share were issued to ensure that the shares would be available to be voted in favour of securing the position of the current board of directors.  ASIC v Australian Investors Forum Pty Ltd case was also a case for improper purpose for issue, to preserve control of the company in the hands of the existing controllers (directors and officers of Australian Investors Forum)

Other cases that involves powers other than issue of shares

In the case of Permanent Building Society v Wheeler the court found that there is an improper purpose in having PBS purchase the land from Tower. The improper purpose was to ensure that Tower had sufficient funds to purchase the business of JCLD. If tower had sufficient funds to purchase the business of JCLD, this would provide a substantial financial benefit to Wheeler and Holding who controlled JCLD through their control of capital hall. Where directors have mixed purposes It is decision of the court whether there is a breach of duty by exerting the facts to determine whether the proper or improper purpose is more important. It must be shown that the substantial purpose is improper for there to be a breach of director’s duty. Kokotovich Constructions Pty Ltd v Wallington and Whitehouse v Carlton Hotel Pty Ltd. Civil Penalty and criminal penalty (if there is intentional dishonesty) are available for the court, if ASIC bring the case to the court....