Criminal Penalties

If ASIC believes that a breach of the statutory duty is so serious that a criminal penalty should be imposed it can bring criminal proceedings under s 184. A director or other officer who commits an offence and can be subject to criminal penalties if they are reckless dishonest or fail to act in good faith in the best interests of the company or for a proper purpose. 15 General Law Remedies If a company has suffered a loss, then compensation can be sought for damages for negligence or deceit.

As discussed above, where directors have enriched themselves at the company's expense the company may take action for account of profits for breach of fiduciary duty. 16 Members' Statutory Remedies A member has a statutory right to enforce the constitution as a statutory contract under s 140 and under s 1324 a member can seek an injunction to stop a director, member or other person contravening the Corporations Act 2001. However a member cannot apply for an injunction under s 1324 in relation to a breach of a statutory duty contained in ss 180-183.

Oppressive conduct Minority shareholders may apply for a court order under pt 2F. 1 'Oppressive conduct of affairs's 232 where directors fail to act in the interest of the company and breach their fiduciary duties. If minority shareholders of Alphabet Ltd had grounds for such a court order s 233 confers the power to the Court to order that the company institute legal proceedings or authorize a member to institute or defend legal proceedings in the name of the company.

Such an order would be appropriate in cases where a company ratifies a breach of duty by directors or if it fails to bring an action against a director for a breach of duty in circumstances where the ratification or failure is oppressive or unfairly prejudicial or unfairly discriminatory to one or more members. In Re Spagos Mining NL (1990) 8 ACLC 1218 18, Murray J ordered that two directors of the company be replaced by a newly constituted board. The new board was ordered to investigate certain transactions entered into by the company and cause the company to commence proceedings against the former directors if that was appropriate.

It is therefore possible for Alpha and Bravo to be removed as director and for the new board to investigate transactions with Immunity Ltd and bring proceedings against them. QUESTION 2 Duty of Loyalty and Good Faith XYZ Ltd is a public company of under s. 436A. As the XYZ Ltd is listed on the Australian Stock Exchange, which engages in a range of commercial including the manufacture of herbal remedies. As above, we discuss the fact that directors stand in a fiduciary relationship with respect to the company.

One consequence of this is that they are not entitled to receive any remuneration from the company unless specifically sanctioned by the members, the replaceable rules or the company's constitution: Re George Newman & Co [1895] 1 Ch 674 19. The private school fees and HECS charges were not part of a remuneration package for the directors, given that it could be taking the debts from the company while the company may be insolvent. Under s. 588G, forbids the directors to take the debts when they reasonably know or ought to have known that the company is insolvent.

The directors held the meeting to appoint the administrator the company had experienced financial difficulty in paying debts when they were due. According to that he administrator knowing the company almost insolvent so they paying the school fees from company debts and they have agree with the schools to pay the annual fees. Duty of Care and Diligence The director has breached of duty of care, skill and diligence in the general law under s. 180. The directors of XYZ Ltd notify that some of the process that was using in the manufacturing of its herbal remembers did not meet Australian standards.

The most important case dealing with Daniels v AWA Ltd (1995)20 the Duty of Care falls under Section 180. So the board of directors delegated the evaluation of the manufacturing process to The Risk Management Committee. They are also performed their role in advised that XYZ Ltd licence would be suspended these products already in the stores would have to be recall the company cash flow would diminish and its would face legal claims from customer and creditors. To overcome these potential problems XYZ Ltd set up a subsidiary company to take the resulting liabilities with the same board of directors as XYZ Ltd (the holding company).

Given that any claims from customers, creditors and secured priority creditors. They did not exercise care in remedying the faulty manufacturing process in the future. According to that XYZ Ltd seems to ignore it and plan for winding up of the liabilities by transferring them to a subsidiary company of XYZ (Herbal) Ltd. According to the directors of duty of care where the directors did not take appropriate to ensure compliance of the manufacturing process after warning. Under section 206B ASIC has the power to disqualify the directors for period of within 5 years or to pay fine up to $200,000.

Also it can be proved that the board took no action to remedy the problems. Using confidential information Directors are also not permitted to use for their own benefit property or information entrusted to them for use on behalf of the company. This principle includes the misuse of trade secrets, and lists of customers for the use of competitors and other confidential information. This was considered in Commr for Corporate Affairs v Green V. R. 50521. In that case Green had been charged with breaches of the U. C. A. s124 which is similar to s232 of the Corporation Law.

The directors of Ron acquired information that the shares in XYZ Ltd would have dropped in value. On the basis of this information he sold a significant portion of the company shares. The director of Ron has breached of the practice of insider trading. Ron was one of the directors of XYZ Company, so he knew the floating tendency of shares. Ron must sell his share to the ASX. As the above Ron has breached of criminal penalty for an individual who is found guilty of insider trading is a $200,000 fine or five years goal under s 1311. Ron also advised his friend not to buy the shares.

Ron has breached of tipping offence within the practice of inside trading under section 1002G. In s 1002G requires that when an insider commits the tipping offence if they communicate the insider information to someone else and the insider knows or should know who is likely to buy or sell the shares or some one produce to buy or sell the shares for them. Ron was telling to his friend the value of the shares has dropped from around $4. 75 a share to around $2. 50 and with information Ron friend did not apply any shares and did not sell any shares from XYZ Ltd.

Also Ron friend could sell the shares with short term based on the director of Ron information. So Ron has breached of the tipping offence under s. 1043A (2). In the Part 7. 10 of the Corporations Act Ron has prohibited that such market conduct. Statutory Law Payments and other benefits to directors The annual private school fees were part of a remuneration package for the director, it seems feasible that they wish to complete of their payments before likely creditors or other members of the company.

The director has breach of duty to at good faith in the best interest of the company under section 181(2). This section requires that remunerating the directors and other officers can consider their own interest but where there a conflict between it and the interest of the company, the company must always come first. Which is also under in section 191 of statutory duties to avoid there a conflict of interest. 22 Lifting the veil of incorporation The recognition that a company is a separate legal entity distinct from its shareholders is often expressed as the "veil of incorporation".

This is doctrine of separate legal personality and the reason for that it setting up the subsidiary company was need to be overcome their problem from outsider such as creditors and other unsecured creditor where the veil of corporation can be lifted. Since the House of Lords handed down its decision in Salamon v Salamon & Co Ltd v Morely 23, it has been recognized that an inflexible application of the concepts of separate entity and limited liability, with all that they imply, can result in undesirable consequences. There are various statutory provisions that have the effect of lifting the corporate veil.

In addition, the courts have sometimes sought ways to look behind the company form. XYZ Ltd transferred the license, existing and contingent liabilities to XYZ (Herbal) Ltd . The subsidiary company did not continue manufacturing of all the herbal until license had been suspended and products had been recalled. XYZ Ltd formed wholly owned subsidiary company XYZ (Herbal) Ltd with the same board of director as XYZ Ltd (the holding company. in this case the court will not allow XYZ Ltd setting up of XYZ (Herbal) Ltd and being a separate person from its members and those who manage its operations.

According to the case it for company itself not for them. So this is not breach of any duty by law. The company secretary Under s 1002G Ron has breached the practice of insider trading. According to this section the trading offence occurs when some one with share price information is not generally available to the public nut likely to have an affect to the company on share price by sellers or buyers those shares. 24 Remedies Civil Remedies As discussed above, where there has been a contravention of ss 180-184, the ASIC may seek a pecuniary penalty order, a disqualification order or a compensation order.

XYZ Ltd may also be able to obtain a compensation order as a civil remedy for breaches of statutory duties. In addition, XYZ Ltd may seek civil remedies for breaches of general law for example, an injunction, a compensation order, an account of profits, or rescission of contract. If the court finds John in contravention of a civil penalty provision it may make a declaration and order him to pay the Commonwealth a pecuniary penalty of up to $200,000 under s1317G or disqualify them from acting as director. Criminal Penalties

If ASIC believes that a breach of the statutory duty is so serious that a criminal penalty should be imposed it can bring criminal proceedings under s 184. A director or other officer who commits an offence and can be subject to criminal penalties if they are reckless or intentionally dishonest or fail to act in good faith in the best interests of the company or for a proper purpose. 25 General Law Remedies If a company has suffered a loss, then compensation can be sought for damages for negligence or deceit.

As discussed above, where director has enriched himself at the company's expense the company may take action for account of profits for breach of fiduciary duty. S 588V of Corporation Act 2001, provides that a company will be insolvent of s 95A when it is unable to pay all of it's' as and when they fall due. In this case XYZ Ltd to be placed in administrator and the board of director know it the company might be insolvent if the subsidiary company winding up, the parent company was still liable for the debts, even if the directors of parent company ranked themselves as a secured priority creditor before.

In other words, not only the repayment to the priority secured creditor (Parent company) was avoidable, the parent company had to indemnify all the debts incurred by the subsidiary company.

Reference

1. Phillip Lipton and Abe Herzberg, Understanding Company Law (10th ed 2001), Lawbook 2. Paula Hanrahan, Ian Ramsay and Geof Stapeledom, Commercial Applicantions of Company Law (5th ed 2004), North Ryde 3. Susan Woodward, Helen Brid and Sally Sievers, Corporations Law in Principle (6th ed 2003), Lawbook 4. Central Queensland University 2004, LAWS19032 Company and Association Law:StudyGuide, Central Queensland University, Rockhampton.