Formation of Company Is One of the Methods â€Myassignmenthelp.Com

Question: Discuss About The Formation Of Company Is One Of The Methods? Answer: Introduction When any business needs to be established then formation of company is one of the methods of doing so. In Australia, a company is established when the same is registered as per the provisions of the Corporation Act 2001. Once a company is registered then it is separate legal entity in the eyes of law[1]. In order to govern a company, there are requirements of officers and employees. One of the significant officers of the company who runs a company is its directors. A director is a person who is placed at such a position and is define under section 9 of the 2001 Act and is rightly held in Buzzle Operations Pty Ltd(in liq)v Apple Computer Australia Pty Ltd[2]. Further, at times, the person is not appointed as a director but he carried out the functions of a director and such person is also consider to be deem director, that is, de-facto director or shadow director under section 9 of the Act. The position of a company director is very important as he has to cater so many duties and resp onsibilities that come along with the position of a director.[3] The leading case of ASIC v Adlerand 4 Ors[4] is found to be very important from the very fact that there are duties which are imposed upon a company director but which are not furnished in the given case. The result of the breach of the duties of the director has resulted in the failure of HIH and which lead to a very important question which requires analysis is the extent of CORPORATE GOVERNANCE that is required. The three major parties of the case are:[5] Adler - Pacific Eagle Equity Pty Ltd (PEE) is controlled by him and he was the Non-Executiev Director of the Company. He is also a shareholder in HIHC via Adler Corporation Limited. William He was the Managing Director in HIH and HIH Casualty and General Insurance Ltd (HIHC). Fodera He was the Finance Director in HIH. There are several actions that are undertaken by them which become the main reasons for the collapse of HIH. The same are discussed herein below: Actions of Adler Breach of duties Adler was the main controlled and the Non executive Director of PEE. PEE, through Adler, took a loan of $10 million from HIHC. The loan was taken by Adler in 2000 June and the loan was neither secured nor even undocumented. After Adler secured loan from HIHC, PEE was made the trustee of Australian Equities Unit Trust (AEUT). This loan was later utilized by Adler to HIHCs subscription. Adler through PEE also bought HIH shares of $ 4million so that the market position of the company is portrayed to be very strong even though these shares were later sold at $ 2 million loss. The Technology and communication shares (unlisted) were also purchased by PEE from Adler Corporations. Adler also received $ 2million from AEUT under trust[6]. All these actions were mainly intent by Adler to bring gain to himself at the cost of HIH and HIHC. All these actions were later become the resultant factors for the fall of HIH which brings to an important Question, that is, the scope of corporate governance for the Australian companies. Final Decision After considering all the relevant facts and circumstances and the actions of Adler, the main decision of the court are:[7] A twenty year ban on Adler along with a fine of $450,000 A ten year ban on William along with a fine of $250,000. A fine of $5000 is imposed on Fodera. A fine of $450,000is imposed on Adler Corporation Limited. Adler Corporation Limited, Adler and William were also imposed with compensation of $7,986,402. Basic Justification of the Decision The main justifications are: The court held that all the actions of Adler, that is, to secure loan, to purchase shares, to sell shares etc, were carried out by him by seeking no prior permission from the board of director/shareholders of PEE. The Board of Directors and the Investment committee of HIH were also not aware that a loan was granted to PEE through Adler, who is also one of the shareholders in HIH itself. The loan of $10 million was unsecured and no proper paper work was carried out so that the board of HIH were not gain knowledge of such loan; All the transactions have ultimately resulted in undue advantage to Adler. Breach of Directorial duties by Adler Adler was the non executive Director of PEE. As per section 9 of the act, any executive director is considered to be the deem director under section 9 of the Act. Adler was performing all the directorial duties of HIH and thus he must be considered as the director of the HIH under section 9 of The Act. He is also a shareholder in HIHC via Adler Corporation Limited but is performing major directorial functions and thus is the director of the company. No formal appointment is made to Adler as the company director but since he is playing an active role in the finance committee of HIH and also has major role in the decision making process of the company, thus, he fits in the category of a director as per section 9 of the Act. The various acts that are undertaken by Adler were nothing but directorial breaches. The same are submitted herein below: Breach of Section 180 of the 2001 Act section 180 of the Act imposes a directorial duty that every company director should carry out his duties with utmost care and diligence. Sub section 1 of the Section submits that the duty of care and diligence must be equivalent to what a normal prudent man will think in the like circumstances. this duty of care is imposed on every company director and officers of the company, thus, this duty must be furnished by the executive directors of the company as well.[8] Violation by Adler Adler being the non executive Director of PEE is normally engaged with the basic functions of the company but his involvement in the company decision making process placed him at par with the directorial position, so, he must comply with the directorial duties of the company. Adler was the Non executive Director of PEE. However, William was the executive Director of HIHC and HIC and Fodera was the Finance Director in HIH. Now, when the loan is provided to PEE by HIHC, then, William and Fodera has not taken adequate protection before granting the loan to PEE, that is, the loan was unsecured and there is no paperwork. Also, when the loan was sought by Adler, no board of directors was aware that PEE was taking a huge loan of $10 million from HIHC. Thus, all the three directors, that is Adler, William and Fodera have not comply their actions with due care and skills and thus have violated section 180 of the Act. The parries sought the business judgment rule defense (section 180 (2)) but could not avail the same as the actions were not in good faith nor they were for proper purpose and Adler has material personnel interest in the whole transaction. When the loan was taken there is conflict of interest amid the position of PEE and HIHC, but, Adler prefer his own interest before seeking the interest of the companies. Breach of section 181 of the 2001 Act Section 181 of the 2001 Act simply submit that every company director must act in such manner so that his acts are accompanies in good faith, for proper purpose and in the best interest of the company. If the acts are in contradiction of the elements of section 181, then, the director has violated the duty even if he actually believes that the elements are fulfilled. Violation by Adler The act of seeking loan from HIHC by PEE without disclosing the same to the board of HIHC and PEE is nothing but an act by Adler to bring self interest at the cost of both PEE and HIHC. Adler was the major shareholder in HIHC and is also the controller of PEE, so, it is paramount duty to act in the best interest of the companies, but, his acts were totally carried out in bad faith and not for proper purpose thereby violating section 181 of the Act.[9] Breach of section 182 of the Act Section 182 of the Act simply submits that every company director must act so that he does not misuse his position to his own benefit and which is detrimental to the interest of the company. Violation by Adler Adler has misused his position. When he took loan for PEE, at that time he does not disclose that the loan has been taken. Also, the loan amount is used to buy HIH shares so that it prices shoot up and thus enhance the market image of the company. It was desired by Adler that his own company will then sell the shares of HIH thereby making handsome amount of profit. Adler was the director in PEE and he sought capital of unlisted nature from Adler Corporation and that too at cost price. There was no separate valuation for the same. No permission was sought from the HIH investment committee prior providing loan to PEE considering the fact that Adler was the shareholder in HIH. Thus, Adler was in grave breach of section 182 of the Act. Breach of section 183 of the Act Section 183 of the Act imposes an obligation on the directors of the company that any information that is acquired by them must not be used by them to bring advantages for themselves and disadvantages to the company. Violation by Adler When the loan f $10 million was approved by HIHC to PEE at that time both HIHC and HIH are having huge financial crunch and this fact was in the knowledge of Adler. Knowing the sad fact, Adler tried to continue with the loan process which has ultimately brought benefit to him. It was obvious that of the loan would have been provided then it will result in the fall of HIH which in fact actually took place. Considering all the internal information, Adler still intent to keep mum and continue with the process and thus breached his statutorily duty under section 183 of the Act[10] Section 206 of the Act. Section 206 of the Act submits that no company is permitted to provide finance to any person so that he can buy shares in the same company or any of its subsidiaries. But, if the purchase is not prejudice or not hampering the position of shareholders or creditors or if permitted by shareholders or is exempted, then, the financial grants are permitted. Violation by Adler The fact reveal that PEE was controlled by Adler. HIHC was the subsidiary of HIH and HIH is also controlled by Adler as he was one of the major shareholders of HIH. Now, Adler actions resulted in seeking loan from HIHC (a company controlled by Adler ) to PEE ( a company controlled by Adler ). Thus, a loan was provided by Adler to himself, that is, HIHC to PEE, so, there is complete violation of section 206 of the Act. The main intent of Adler was that by purchasing the shares of HOH and thereby increasing its prices and later selling them before PEE, he will make huge profits. Conclusion It is submitted that the leading case has laid down one defined point that the company directors must always carry out their duties in a particular manner so that proper corporate governance can be carried out which ultimate benefit the company as a whole and not an individual profit to directors who are in violation of their directorial duties. References Books/Articles/Journals Baxt, Robert (2005) Duties and Responsibilities of Directors and Officers, AICD. Campbell, Christian (2007) International Liability of Corporate Directors [2007] I, Lulu.com. Cassidy, Julie, Concise Corporations Law, (2006) Federation Press. Plessis, J, Hargovan, A and Bagaric, Principles of Contemporary Corporate Governance, 2010 Cambridge University Press. ASIC v Adlerand 4 Ors [2002]NSWSC 171; ASIC v Vizard[2005] Buzzle Operations Pty Ltd(in liq)v Apple Computer Australia Pty Ltd(2011) 81 NSWLR 47 Salomon vASalomon Co Ltd [1896] UKHL 1 Online material Hickey, M and Lam, V, Jumping at shadows shadow and de facto directors (2015) https://webcache.googleusercontent.com/search?q=cache:yLtl_hn7-2cJ:www.sparke.com.au/insights/jumping-at-shadows-shadow-and-de-facto-directors/+cd=1hl=enct=clnkgl=in. The Law Teacher, Case summary ASIC v Adler (2017) https://www.lawteacher.net/free-law-essays/company-law/case-summary-asic-v-adler-law-essays.php [1] Salomon vASalomon Co Ltd [1896] UKHL 1. [2] Buzzle Operations Pty Ltd(in liq)v Apple Computer Australia Pty Ltd(2011) 81 NSWLR 47. [3] M Hickey and V lam, Jumping at shadows shadow and de facto directors (2015) https://webcache.googleusercontent.com/search?q=cache:yLtl_hn7-2cJ:www.sparke.com.au/insights/jumping-at-shadows-shadow-and-de-facto-directors/+cd=1hl=enct=clnkgl=in. [4] ASIC v Adlerand 4 Ors [2002]NSWSC 171. [5] The Law Teacher, Case summary ASIC v Adler (2017) https://www.lawteacher.net/free-law-essays/company-law/case-summary-asic-v-adler-law-essays.php. [6] J, Plessis; A, Hargovan and Bagaric, Principles of Contemporary Corporate Governance 2010, Cambridge University Press. [7] Robert Baxt, Duties and Responsibilities of Directors and Officers, (2005) AICD. [8] Christian Campbell, International Liability of Corporate Directors [2007] I, Lulu.com. [9] Julie Cassidy, Concise Corporations Law(2006), Federation Press. [10] ASIC v Vizard[2005]