Best Dressed Homes Ltd. is an expanding and successful interior design company with directors David, Richard and Belinda. A friend of David, Rodney, invested in the company and was appointed as a non-executive director. Rodney insisted that he wants to be treated as a silent partner in the company. As Best Dressed Homes Ltd. continues to grow, partly because of the cash injected by Rodney in the company, David, Richard and Belinda did not declare their dividend for the present year instead they gave themselves salary increases and arranged to lease three new Mercedes-Benz cars for their personal uses under the company. When Rodney decided to actively participated in the company he found out and questioned David, Richard and Belinda about the pay increases and Mercedes-Benz cars they have rewarded themselves. The three directors in question hated being interrogated thus they concluded to actions that would eventually result to the removal of Rodney as director of the Best Dressed Homes Ltd. These actions include:
- The changing of office locks so that Rodney can no longer enter the premises or attend meetings.
- They called a shareholders’ meeting that agreed to remove Rodney as director of the company.
- During the shareholders’ meeting it was resolved that Rodney’s shares will be acquired by David, Richard and Belinda for a total of $500,000 which is half of what Rodney paid six months ago.
Issue
Rodney, as one of the directors and shareholders of the firm, Best Dressed Homes Ltd., can sue David, Richard and Belinda for initiating his removal from the firm and acquiring his shares at half of what he had paid six months ago given that the company grew with the help of Rodney’s money invested on it. In this case, the issues are whether Rodney’s removal from the company as director and stockholder valid or invalid and whether the actions of David, Richard and Belinda in acquiring a pay raise and having the company rent Mercedes-Benz cars for their personal usages present a breach of their fiduciary duties as directors of Best Dressed Homes Ltd. according to the Corporations Act 2001 – Sections 180, 181 and 182.
Rules
Section 9 of the Corporations Act 2001 defines a director of a company or other body as someone appointed to the position of a director or appointed to the position of an alternate director and is acting in such capacity regardless of the position name given to that person though a person who is not validly appointed as a director (de facto director) can be considered as one as long as they act in the position of a director or the executive directors of the company or body are accustomed to act in accordance with the said person’s (shadow director) instructions or wishes. A director is someone whose decisions affect the business and financial position of the said company.
The execution of decisions and actions by directors are discussed in sections 180 in relation to care and diligence, 181 with regards to the execution of duties in good faith and 182 the use of positions by directors. According to the Corporations Act 2001 – Section 180 care and diligence, directors must exercise their powers and discharge their duties with care and diligence. As a director, the officer must make business judgments based on the requirements of good faith and proper purpose, decisions must not be based on material personal interests of the decision maker and they must be of reasonable and appropriate judgment in accordance to the company’s benefits and advantages. Section 181 further elaborates the act of good faith where directors must exercise their powers and discharge their duties in good faith where decisions are in the best interests of the company for proper purposes. Lastly, section 182 discusses the use of positions by officers in the company. Directors or other officers of a company must not improperly use their positions to gain advantage for themselves or someone else and/ or must not use their positions to cause detriment to the company.
Application
In accordance to section 9 of the Corporations Act 2001, Rodney is considered one of the directors of Best Dressed Homes Ltd. together with David, Richard and Belinda. Though he was appointed as a Non-Executive Director (NED) and he insisted to be considered as a silent partner still he has the right to be part of the decision making body of the company. As a Non-Executive Director, Rodney performs on an intermittent basis though he is not expected to be informed of minute details but is expected to be informed of anything untoward or appropriate for consideration by the board (Lipton, Herzberg and Welsh, 2009). When Rodney decided to be actively involved in board meetings and questioned financial decisions of the other directors and management, he was exercising his right according to section 9, solely because he was an appointed director of the company. In terms of section 180, 181 and 182, Rodney as one of the directors and shareholders of the company is performing accordingly to his duties with care and diligence. In section 180 of the Corporations Act 2001, Rodney as a director (validated by section 9), exercises his powers and discharges his duties with the degree of care and diligence. He questioned the pay raises David, Richard and Belinda gave themselves and the rental of three Mercedes-Benz cars for the said directors’ personal usages which breached Section 180 (2b and 2d) where the decisions of directors’ on business judgments must be based on the company’s best interests and not on material personal interests. Aside from the breached of section180, David, Richard and Belinda, have also breached the Corporations Act 2001 sections 181 and 182. According to section 181 good faith, the exercise of powers must be in good faith and in the best interests of the company and the purpose must be proper while section 182 states that directors must not improperly use their positions to gain advantages. The actions of the three directors were exercised neither in good faith nor in the best interests by Best Dressed Homes Ltd. but more on their own personal interests. They would have opted to declare the dividend shares of the current year rather than giving themselves salary increases. The company may have had a good year in terms of sales but the subsequent years may not be as promising as the previous thus the pay raises the three directors are receiving may present as burden to the company in the long run. Also the leasing of expensive and luxurious cars by the company for the three directors to use for their personal affairs may also present the material interests of the directors and none of the company. The cars are expensive and these might take a toll on the accounting department of the company where funds are used for the personal benefits of the directors. Where section 181 (1a) requires directors to exercise their powers and discharge their duties in good faith and in the best interests of the company, David, Richard and Belinda have done the opposite by attending to their own interests first while sacrificing that of the company’s. Directors must genuinely believe that they are acting in the best interests of the company. The duty has an objective element. It is breached if a director acts in a way that no reasonable director would have considered to be in the best interests of the company. Directors must not improperly make a profit from their office, but goes beyond this. They cannot have any conflicts of interests (Lipton, Herzberg and Welsh, 2009). The three directors in question were committing self-interested transactions with the company, gaining personal profits from acting as directors, they have also misused company funds and did not disclosed their benefits to the board until Rodney questioned their acts. In order to avoid liability, David, Richard and Belinda could have disclosed their personal interests and obtained the full informed consent of the company in their salary increases and Mercedes-Benz cars. Such issues could have been disclosed during shareholders general meeting, board of directors meeting and/ or to the ASX but they have kept it a secret until Rodney found out the irregularities on the finance and questioned the three directors. All fiduciaries must avoid conflicts. They cannot allow situations to arise where their own personal interests are in conflict with the best interests of the company (Lipton, Herzberg and Welsh, 2009). Such duty is strictly applied, so that even if the directors did not have fraudulent intentions they can still breach such duty. A breach occurs when the directors placed themselves in the position where they put their own interests ahead of that of the company’s. In this case the breached occurred with the provision of pay increases and expensive cars David, Richard and Belinda gave themselves. The personal profits of David, Richard and Belinda, arose from them acting as directors of Best Dressed Homes Ltd. Though the personal profits gained by directors may not have affected the company in suffering loss, it is still considered a breach according to section 182, even if the transaction was fair from the company’s point of view (Lipton, Herzberg and Welsh, 2009). It is stated that directors cannot gain an advantage for themselves or for any other person or cause detriment to the corporation.
Advices for Plaintiff
As the plaintiff, Rodney can sue Best Dressed Homes Ltd. for his force removal from his position as one of the directors of the company and the acquisition of his shares by David, Richard and Belinda for the sum of $500,000 which is half the amount he paid six months prior. He can state his rights as director and shareholder of the company in section 9 of the Corporations Act 2001. The reason why he was eradicated from the company’s board was because he had discovered the breach performed by the three acting executives in relation to sections 180, 181 and 182 where the three exercised their powers for their own personal interests. Also Rodney can claim that as a shareholder he has the right to attend major meetings such as the meeting on his eviction. As a shareholder, he must be given written notice of forthcoming meetings where he is entitled to vote. The purpose of the notice is to inform on what business will be considered. Where such notice is given no other business can be considered unless all shareholders are present and consent to it (Lipton, Herzberg and Welsh, 2009). Rodney was not invited or given notice to such meeting for David, Richard and Belinda changed locks on the main office premises so that Rodney can no longer attend board meetings.
Advice for Defendant
Defending their side, David, Richard and Belinda can claim that the pay raises and luxurious cars were in compensation for the dividend they opted not to declare for the current year. They can site that they were acting in good faith with regards to section 180, 181 and 182 because the option they opted for is much cheaper than the bonus they would have received for the current year. They were looking after the best interests of the company and set aside personal interests. As for the removal of Rodney from his position as director and the acquisition by the three directors of the former’s shares, David, Richard and Belinda can claim that they have voted for such accordingly and fairly among the board of directors. They can also argue that Rodney has insisted on becoming a silent partner of the company thus his active participation in the company finances was an act interpreted as meddling in company affairs and disruption of order thus he was banned.
Conclusion
David, Richard and Belinda’s failure to declare their bonuses for the current year and their actions in giving pay raises to themselves and leasing luxurious Mercedes-Benz cars by the company for the directors’ personal uses can be considered a breach of sections 180, 181 and 182 of the Corporations Act 2001. Rodney, one of the directors and shareholders of the company, can sue David, Richard and Belinda on the grounds of breaching the three sections of the said Act.
References
Lipton, P., Herzberg, A. and Welsh, M., 2009. Understanding Company Law. 15th ed. Australia: Thomas Reuters Australia Limited.