Directors Duties

Topics: Board of directors, Corporate governance, Non-executive director Pages: 7 (2415 words) Published: October 2, 2013
Hampton Park Pty Ltd (HP)
In the case study of Hampton Park Pty Ltd (HP) has four directors; William (Managing Director); Susan, Jack and Gail (Non-executive directors). As HP’s financial position begins to deteriorate, George, the Chief Financial Officer of the company advises the accounts still show a profit and the company would have a solid base to pay out a dividend to its members. In July 2010cHP’s financial state worsens however George declares a technical profit and advises HP can still declare the dividend. June 2010 there was a change in the law for the declaration of dividends however George did not find out about this until late September 2010, the same time the board signed off the financial reports and therefore George could not inform HP of the company’s financial difficulties. The board not knowing George’s advice was regarded as not true, seen it as favourable advice and decided to sign off the reports and declare the dividend to members. Susan was absent from this meeting from an unknown cause. Soon after her dividend was paid the company went into liquidation. The issues relating to this case is whether there have been any breaches of the officers and directors duty of care under the corporations act and what consequences will be made if such breaches occur. Another issue is whether there have been any breaches of directors duties in relation to insolvent trading and what defences are available for directors who have breached their duties. And also what consequences are in order if such breaches occur.

Issue 1: Breaches of a Director’s and Officer’s Duties under the Corporations Act.

Director’s duties are supported by the Corporations Act (2001)1. Under section 180, it requires directors to act with a degree of care and diligence. Section 1812 requires directors and other officers to act in good faith, in the best interests of the company and for a proper purpose. Section 1823 and 1834 requires directors to not improperly use their position and information to gain advantages or to cause detriment to an organisation. The common law provides an objective and subjective standard toward the duty of care, skill and diligence. Section 181(1) of the Corporations act supports this.5 This standard requires what a common person with certain experiences that apply to the certain position would do when making important and proper decisions. Directors in HP hold different responsibilities and their duty and care are at different levels also which depends on their position. However, all directors of a board are equal. In the case, ASIC v Healey6 it was held that directors of the ASX listed entities in the Centro Properties Group and the Centro Retail Group breached section 181 (1) of the Corporations Act7 by approving the financial reports of the two groups. Both groups classified a large amount of their current liabilities and their short term debts as non-current liabilities. The court held that the directors also failed to take reasonable steps to comply with the financial reporting provisions of the Corporations act.8 The directors argued that they didn’t have to take responsibility for the errors as the auditor should have detected them and advised the directors to alter the financial reports before they were signed and released. As I said above, all directors are equal in a company. Even though the auditor failed to classify the financial reports properly, the other directors should have detected this. “All directors must have the ability to read and understand a company’s financial statements.”9 All directors hold the same mutual responsibility in a company, and should have the skills, knowledge and experience when it comes to making the right decisions. Therefore, relating these facts to HP’s case, the directors breached their duty of care by failing to detect the errors of the financial reports. Referring back to HP’s incident, Susan was missing from the board meeting in which...

References: WA Court of Appeal in Vrisakis v Australian Securities Commission (1993) 11 ACSR 162 at 170Williams v Scholz [2007] QSC 266
Harris, J. Hargovan, A. Adams, M. Australian Corporate Law LexisNexis Butterworths 4th edition, 2013.
Corporations Act (2001)
Directors’ Duties – The Insolvent Trading Issues From a Lawyers Perspective, (18 February 2004), Allens Arthur Robinson.
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