Civil Penalties and Responsive Regulation

Questions: 1. What common law duty and statutory duty if any has Julian breached? 2. What common law or statutory duty have Sol and Daniel breached? 3. If the directors have breached their duties do any of them have a defence and if not what are the consequences for them? Answers: 1. In this question, the issue is if Julian had breached her duties as the director of Property Developments Ltd. The issue arises because Julian had failed to disclose a relationship with Gerald and also due to the fact that she had helped her brother Raphael in securing the contract from Property Developments Ltd. There are certain duties that have to be followed by the directors. These duties are statutory (imposed by the Corporations Act, 2001 (Cth)) and they are also imposed by the common law. In this case, the common law provides that the director should act bona fide. For this purpose, the directors are required to give preference to the interests of the corporation instead of their personal interests. This common law duty is called the duty of good faith. Therefore, in view of this duty the directors should act bona fide and give preference to the interests of their corporation as compared to their personal interests (Welsh, 2009). In this case, Julian can also be held liable for the breach of the statutory duties that are imposed on the directors. As mentioned above, the Corporations Act, 2001 describes these duties for the directors. The relevant duty in the present case is the duty mentioned in section 181. According to this duty, when the directors are exercising the powers that have been given to them and when they are discharging their duties, it is required that the directors have to act in good faith. For this purpose, the directors have an obligation to act for a proper purpose (Keay, 2001). On the other hand, the law will consider that this duty has been breached by the directors if the powers given to the directors are used by them for any improper purpose. This remains the case even if the director is under the impression that they have acted honestly. Hence, even if no loss has been caused to Property Developments Ltd., still Julian can be held liable for breaching her duties. It can also be said that Julian had also breached the the duty t hat has been mentioned in section 182. This duty provides that the directors are prohibited from improperly using their position. Hence, the law provides that the directors should not be position improperly. It is said that a director has used the position improperly if the director was trying to achieve an advantage for themselves or for any other person or try to cause a detriment to their corporation. In the present case, Julian acted for achieving a benefit for her uncle Gerald and for her brother Rafael. 2. The other two directors of the company can also be held liable for the breach of their duties. For instance, it can be said that Sol and Daniel had breached the common law duty which it was the directors to act with care and diligence. Similarly, the duty prescribed by the Corporations Act, 2001 in section 588G has also been reached by them. According to this duty, it is required that the directors have to prevent their corporation from trading if they suspect the presence of reasonable grounds due to which it can be said that the company may be insolvent. According to the duty of care and diligence, it is necessary that all the directors of corporation should remain unaware of the financial affairs of the company. Such knowledge includes information regarding the solvency of the corporation (Anderson, 2006). This is a very important duty and the directors cannot hide behind the fact that they had delegated this responsibility to some other person. The result is that the ignorance of the directors concerning the affairs of the company cannot act as an excuse, especially when the directors themselves can be held liable for this ignorance. As a result of this duty, the law requires that questions should be asked by the directors whenever any information is put before them. This will allow the directors to become sure that such information represents the real position related with the corporation. 3. As it has been concluded in this case that the directors of property developments Ltd. have breached their duties, it needs to be seen in this question if they have a defense available to them. Similarly it also needs to be considered if a defense is not available, what penalties can be imposed on them. The business judgment rule, which was a rule of the common law and was also included in the Corporations Act, provides a defense to the directors (Fridman, 1998). Hence now section 180(2) provides that a defense will be available to the directors if the judgment has been made by them in good faith. Another requirement is that the judgment should be made for a proper purpose and no personal interest of the directors should be involved in it. The rule also requires that the directors have an obligation to properly inform themselves regarding the subject matter and it should be rationally believed by them that the judgment that they're going to make, is in the best interests of the co mpany. Hence in the present case, the defense is not available to the directors, they may have to face the consequences for the breach of their duties. The Corporations Act also prescribes civil as well as criminal penalties for the breach of duties by the directors. Under the civil penalties, a fine up to $200,000 may be imposed on the directors. In case of the criminal penalties, imprisonment up to five years and a penalty up to $200,000 may be imposed on the directors. References Anderson, H (2006) Creditors rights of recovery 30 Melb Uni LR 1 Fridman, S. (1998) An Analysis of the Proper Purpose Rule, 10 Bond Law Review 164 Keay, A (2001) The directors duty to take into account the interests of company creditors: When is it triggered? 25 Melb Uni LR 315 Welsh, M., (2009) Civil penalties responsive regulation: The gap between theory practice 33 Melb Uni LR 908