Corporate Law. African & Middle Eastern Delights Essay

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Introduction

Directors of companies have various duties and responsibilities which they are meant to abide by for the purpose of running the company in the correct and legal way. Generally, liabilities and responsibilities of directors of companies are derived from various sources which include the constitution of the company in which the director is a member, case law, and the statute law which look into companies undertakings. In case a director fails to abide by the duties of his/her directorship, the person may be liable to civil or criminal proceedings and may result in disqualification from acting as a director of a company.

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There are several facts that are portrayed in the case of Sally and Harry which show a breach of the director’s duties. In this case, Sally made a catering company with Harry and invited Martha who is a retired businesswoman so that they can be able to get loans from banks. Martha became the managing director and Sally and Harry were also directors. Due to increased overheads and interests, the company, ‘African delights’ suffered a cash flow shortage and as a result, borrowed 200,000 dollars more. Martha did not bother to examine books of accounts while Sally and Harry did not think they were in serious financial trouble. Harry set up a catering business without informing Sally and Martha and called the business ‘Middle Eastern Delights’.

As a result, he secured large contracts and took phone orders for African Delights, and advised the customers to use the services of Middle Eastern delights. African delights took much longer to settle their debts due to the mounting of debts and shrinking of turnover. They, therefore, had a choice either to close the business or to trade on. The company decided to trade on and due to the continuation of the problems, the company was liquidated and had debts of up to 1 million debts. However, Harry was not worried as his business was making big profits and would be better due to the loss of its competitor. Martha however did not care about it and Sally realized what Harry did and was very furious.

Directors duties

As directors, Harry, Sally, and Martha had various duties. One of the main duties of company directors according to section 181 of corporate law is to act in good faith for the benefit of the entire company which involves all stakeholders such as other directors, employees, creditors, and the general company. This means that the director must act in good faith and the person owes a duty to act in the interest of all its shareholders who are present and who will be in the company in the future. The director as far as it can be deemed practicable must have the regard to achieve outcomes that are fair between members and be of benefit to everyone.

According to section 182, another duty of a company’s director is to exercise the powers for the proper purpose which will benefit the whole company. A company’s director must exercise the powers for the proper purposes, this means that the powers must not be exercised for purposes that are different from the purposes for which the powers are given. The substantial and primary purpose of the exercise of the director’s powers should and must be for the benefit of the entire company. In case the primary purpose is found to benefit one or more directors for some other reasons like gaining the powers of the company, the powers of such a director should be set aside because they are dimmed to have breached this duty even if the director acted for the good faith of the company. (Hogg v Cramphorn Ltd [1967] 1 ch 254).

The third duty is for the director not to delegate powers except with proper authorization and duty to exercise judgment which is independent. A director of a company must not delegate any of the powers to another person except if the director is authorized to do so by the memorandum and the articles of association or by any resolution of the company. A director is therefore expected to exercise independent judgment relating to any exercise of the given powers.

The fourth duty of a director in a company in section 180 is to exercise care, skill, and diligence. A director of a company must exercise care, skills, and diligence which would be exercised by a reasonable person who has the skills, knowledge, and experience which is expected of a reasonable director. The courts determine whether a director has exercised the given duties with care, diligence, and skill which a reasonable person with such characters would. (Fletcher v National Mutual Nominee Ltd,[1990]3 NZLR 641,661).

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The fifth duty according to section 191(1) is the duty to avoid conflict between personal interests and the company’s interests. A company director is not allowed to make his/her personal interests collide with the company’s interests. Directors should therefore ensure that their personal interests at any level do not collide with the interest of the company so as to avoid problems. Directors should always put the interests of the company firsts at all times for the sole benefit of the company as a whole.

The sixth duty is where the director should not enter into a transaction where the director has interests that are not in compliance with the requirements of law. A company director has certain duties where there is material interest in any transaction which the company may be or is a part of the transaction. Therefore, the director must not authorize, procure or permit the company to enter into a transaction until he/she has complied with these duties in the performance of the function as a director. Unless the director has complied with the law requirements, he/she must not enter into a transaction with the company. According to law, the director must disclose the nature of interest in respect of such transactions and under some circumstances, the constitution may prescribe procedures that secure approval of directors or members regarding the transaction which has been proposed. A director of a company is required to disclose the relevant interests and where possible secure the requisite approval of members of the directors. ( Deane 1994).

Another duty is not to gain an advantage from using the position of directorship. A director is not meant to use the position as a director so as to gain an advantage for him/herself or someone else either directly or indirectly, which may cause a detrimental effect to the company. Directors should ensure that their position as directors is to help the company achieve the best and therefore not use it for personal gains or for gains that do not benefit the entire company. (Lipton 2008).

Another duty according to section 182 is that a director should not make unauthorized use of the company’s property or information or any opportunity which presents itself in the company. The only exception is where the use or the benefit has already been disclosed to the company in its general meetings and the company has accepted it. Directors should therefore only use the assets which are in the company for doing businesses or undertakings which are for the company’s benefit but not for other reasons.

A director has a duty not to accept a personal benefit from a third party due to the position of being a director. A current or former director of a company must not accept benefits from third parties due to the powers as a director or a reward by the third party due to the exercise of the powers as a director. The only exception is when the company itself gives the benefits or where the benefits given are incidental to the proper performance of any of the functions as a director.

The director should observe the memorandum and the articles as association as well as the resolutions of the company. The director should therefore act in accordance with the company’s constitution and comply with the resolutions which are made in accordance with the constitution of the company. The director should further ensure that the acts in these binding legal documents are well observed so that they are not breached, (Lipton 2008).

A director must keep proper books of account and should take all the reasonable steps to ensure that the books are kept properly for the purpose of giving a fair and true view of state affairs of the company and explain the transactions which it is entering into. according to section 588G, the director of a company should not allow a company to incur further credit knowing that there is no possible prospect in which solvency of the company can be avoided. (Bratton, 2000).

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Breach of duties

From the facts of the case, therefore, Harry and Martha have clearly breached some of their duties as directors of the African Delights company.

Section 181 of the corporate law states about the duty of good faith by directors to a company and therefore, in this case, Harry breached the duty of good faith of the African delight company. This is because by setting his own business without the knowledge of others, he did not act for the benefit of the company but for his own benefit. Two, according to section 191(1), he breached the duty of company interest where his personal interests were in conflict with the company interest, Harry put his personal interest first and conducted his duties without caring about the business. Three, he also used the company to gain personal interests which collided with the company interests. For example, he would advertise his business and convince African Delights customers to move to Middle Eastern Delights while using the assets of Africans. Harry also breached the duty of proper use of position and information of the company in subsection (ss 182 A-3).

In Martha’s case, she breached some of her duties as a director of African Delights. Some of these duties which she broke are; one, she breached the duty of good faith of the company according to section 181 of corporate law. This is because she did not bother with the running of the company and instead of making sure that the company was running well, she opted to keep her distance. Secondly, According to C.A. section 189, Martha breached the duty of care, skill, and diligence of the company. This is because she had the skills, knowledge, and diligence which are required in a director yet she did not use them. She also larked care because as the company ran into losses, she was on one of her overseas holiday trips. This shows that she larked care for the company and did not mind what happened.

Thirdly, Sally breached the duty of looking into the books of accounts and ensuring that the business did not get any further credits if it was already experiencing problems with paying its creditors. This is because she approved of the company entering into a contract of getting 200,000 dollars on top of the already big amounts of debts without even caring to look into the books to determine whether they were in a position to do so. Section 588G forbids a director to allow a company to trade in insolvency. (Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR (305).

Remedies for Breach of duties

There are ways in which Sally can be able to claim compensation from Harry and Martha for breaching their duties as directors. Sally can do this by bringing action against them in the name of the company and show how much the company has suffered due to their negligence.

For breach of director duties of good faith by Harry and Marthas, Sally in the name of the company can seek an injunction so that the court can stop the continuation of the breach. Subsection 181(1) of the law also provides civil penalty which consequently leads to civil liability and according to s184(1), breach of good faith can be a criminal offense if the contravention is reckless or is intentionally dishonest.

Harry is also meant to account for profits he made in his business and they should also provide equitable compensation for the losses which have been sustained by the company.

For breach of care and diligence according to section 180 by Martha, Sally can show damages of equity restitution and common law damages which should be measured in the same manner, (permanent building society v Wheeler, (1994) 14ACSR 109 at 161-168).

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According to section 1317E CB 375-77, Sally can ask for a civil penalty, claim damages from Martha, and can also seek for injunction as well as Martha’s disqualification as the company’s director. Section 1317H also shows that the company can claim damages for breach of this duty. A director can also be disqualified from directorship in section 206C.

For breach of conflict of interest duty in section 191(1), by Harry where he was making secret profits, remedies such as rescission are available. Harry should also account for profits which should be supported by the constructive trust if necessary. Constructive trust should also be imposed on him for breaching the director’s duty of conflict of interest and making profits. Equitable compensation for losses by the company should also be sought. The same remedies are also available due to the diversion of the company’s opportunity by Harry to his own company. (Woodward, Bird & Sievers 2005).

Creditors remedies

According to section 428-038, creditors of African delights have various remedies which they can use to get their unpaid debts. The law which assists creditors states that if a debtor defaults on payment, a secured creditor can determine whether a creditor will get a complete, partial, or no payment of the amounts owed by the company. Creditors who have no priorities are the last to be paid. The creditors can contact African Delights for discharge of its liquidated assets, that is, assets that are definite or fixed in amount, upon the payment of a sum which will be less than what the creditors are owed. The creditors can also be assigned benefits of debtors assets, a move which is allowed by the common law and the statutes. This is where the debtor assigns assets to trustees for the creditor’s benefits, the debtor voluntarily transfers the title of the assets it owns to trustees who sell or liquidates the assets so that the creditors can be paid. The informality and flexibility of an assignment can save creditors time and expenses, therefore, be able to get better prices once the debtor’s assets are liquidated. (Woodward, Bird & Sievers 2005).

The creditors can also sue the African Delights for the unpaid debts by filing a lawsuit and after obtaining a judgment from the courts, the creditors can then execute its judgment by pursuing the assets of the African Delights so that they can recover their unpaid debts.

Conclusion

In conclusion, company directors need to carry their duties with great care and for the benefit of all. the various duties which directors need to abide by so that their duties as a director can be for the benefit of the company are; acting in good faith of the company, exercising the directors powers for the purpose which they are meant to and not for other purposes, the director should not delegate powers to another person unless the articles or the memorandum of association stipulates that, directors should carry out their duties with care, skills, and diligence. Others are that the directors personal interests should not collide with the interests of the company, he should ensure that the transactions entered into by the company are for its benefit, and a director should not use the company’s assets for own gains or for the benefit of a few. When all these duties are carried, the company will therefore be able to run well and there will be minimal problems to be experienced like in the case of African Delights.

References

Bratton WW, 2000, corporate law, Ashgate, ISBN: 0754620867.

Deane, R S 1994, Besieged by Duties. Will the new Companies Act work for Directors?, Company Law Conference. (Fletcher v National Mutual Nominee Ltd,[1990]3 NZLR 641,661). (Hogg v Cramphorn Ltd [1967] 1 ch 254).

Lipton P. & Herzberg A. 2008, understanding company law, 14th ed, Pyrmont, NSW: lawbook Co. (Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR (305).

Permanent building society v Wheeler, (1994) 14ACSR 109 at 161-168 Woodward S; Bird H & Sievers S. 2005, corporations law in principle, 7th ed Pyrmont, NSW:Lawbook. Directors duties. Web.

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IvyPanda. (2021, October 24). Corporate Law. African & Middle Eastern Delights. https://ivypanda.com/essays/corporate-law-african-amp-middle-eastern-delights/

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IvyPanda. (2021) 'Corporate Law. African & Middle Eastern Delights'. 24 October.

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IvyPanda. 2021. "Corporate Law. African & Middle Eastern Delights." October 24, 2021. https://ivypanda.com/essays/corporate-law-african-amp-middle-eastern-delights/.

1. IvyPanda. "Corporate Law. African & Middle Eastern Delights." October 24, 2021. https://ivypanda.com/essays/corporate-law-african-amp-middle-eastern-delights/.


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IvyPanda. "Corporate Law. African & Middle Eastern Delights." October 24, 2021. https://ivypanda.com/essays/corporate-law-african-amp-middle-eastern-delights/.

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