Implementation of Responsible Business Strategy

Question: Discuss about the Implementation of Responsible Business Strategy. Answer: Introduction: Mr. Harburn was the director of Harburn Group Australia Pty (Harburn Group). The company dealt with financial, mortgage broking and share broking services. The sole shareholder of the company was Harburn Investment Pty Ltd. In the year 2007, Mr. Harburn sold the financial service client list of the company to reduce the workload. In July 2007, Mr. Harburn decided to buy a boat for his wife, Ms Chivers. On 19th of July 2007, Ms Chivers entered into a contract to purchase the boat, which was worth $385,219.35. The Harburn Group paid the purchase price of the boat in four installments for the entire months of July and August 2007. On 5 August 2007, Ms Chivers became the sole registered owner of the boat. In 2008, Mr. Harburn sublet the Harburn business and shifted to another country and in 2011; the Harburn Group went into liquidation. The liquidators brought a legal action against Mr. Harburn and his wife on the grounds of violating his directorial duties under sections 181 and 182 of the Corporations Act 2001 Act and irrational director-oriented transactions. Is Mr. Harburn liable for the breach of sections 181 and 182 of the Corporations Act 2001? Is Mr. Harburn liable for exercising unreasonable director-oriented transactions? A transaction is said to be director-related transaction if: Any transaction of payment is made by the company (S 588 FDA (1) (a)) (Murray 2014). Director of the company makes the payment (S 588 FDA (1) (b)) (Klettner, Clarke and Boersma 2014) The payment is made to a close relative of the Director of the company (S 588 FDA (1) (b)) (Knepper et al 2015). A reasonable person would not have entered into the transaction in similar situation (S 588 FDA (1) (c)) According to the section 181 of the Corporation Act 2001, a director of a company must discharge the directorial duties with good faith (Bird and Gilligan 2016). The transactions must be in the best interest of the company and for a valid purpose. This section is subject to civil penalty under section 1317 E of the Act (Bruce 2013). According to section 182 of the Corporations Act 2001, the Directors, employees and other officers must not use their positions for their own advantage or advantage of some other person (Dhaliwal et al. 2014). The directors, employees and other officers must not take undue advantage of their position or cause damage to the company (Gerner-Beuerle, Paech and Schuster 2013). Section 588 FDA (1) (c) states that a reasonable person in a company would not enter into any such transactions that is detrimental to the company (Hedges et al 2016). It is the primary duty of the Directors, employees and other officers of the company to act in the best interest of the company; to enter into transactions that are beneficial to the company (Fleischer 2015). According to section 588 FDA (3)(a), a transaction is said to be unreasonable director-related transactions irrespective of the fact that a creditor is or is not a party to the transaction of the company (Hayne 2014). In Kalls Enterprises Pty Ltd v Baloglow, (2007), where the transaction involves risk, the interest of the creditors must be taken into consideration. The court emphasized on the fact whether the payments made by the company for the boat were unreasonable director-related transactions or not under section 588 FDA of the act. The section was considered by the court as it mentions the factor that amounts to unreasonable director-related transactions. In his defense, the respondents claimed that in order to determine whether a transaction is a voidable issue, on part of the directors of a company, the particular transaction and the parties to the same must be identified under section 588 FDA (1) (a) and (b) of the Act. Under part (a) of the Act, the company must be a party to the transaction and under part (b) of the Act, the other party must be the person to whom the payment is made by the company (Keay 2014). Accordingly, the first respondent Mr. Harburn purchased the boat for the second respondent Ms. Chivers. Although both the respondents entered into the contract, only the second respondent signed the contract and became the sole registered owner of the boat. The reason that the payments were made by the company is to exempt the second respondent from the liability to pay the price of the boat. Therefore, Mr. Harburn was not a party to the particular transaction. The contention was rejected by the court on the ground that the since the company made the payments to exempt the second respondent from paying the purchase price, it is payment made to a close relative of the director on his behalf which amounts to unreasonable director- related transactions. Moreover, the transaction instead of being beneficial was more detrimental to the financial status of the company. In fact, the second respondent was neither a director nor an employee; or a creditor or a shareholder of the Harburn Group. Yet she was in a more advantageous state than the company was as she was discharged from her liability to make payments for the boat at the cost of the company. She was Mr. Harburn tried to convince the court that the payments made for the boat were made from his dividends. The court rejected his contention on the ground that no sufficient evidence was adduced to support the fact that any such dividend was paid. The respondent, Mr. Harburn, claimed that there was no obligation to consider the best interest of the creditors just because of the financial status of the company. He also claimed that his own interest is the same as the interest of the company. This contention was rejected as well, on the ground that there was no sufficient evidence to prove the fact that the sole shareholder of the company had given his consent to the payment of the purchased boat. The court was of the opinion that the respondents involvement and awareness about the transaction also did not imply the consent of the shareholder. To this, the court stated that the administrators of a company responsible for the management must not use the property of the company as its own. Section 182 of the Act lay down that directors of a company must not take undue advantage of their position for their own benefit or for the benefit of any other people. The court observed that the payments made for the boat was a lump sum amount and the amount was drawn out of the company funds. Moreover, the sole shareholder of the company did not give his consent to the payment for the purchased boat. The court observed that Mr. Harburn has committed the breach of his directorial duty to discharge his duties and exercise his powers for a valid and proper purpose under section 181(1) (b) of the Act. At the time of purchasing the boat, Mr. Harburn was very well aware of the commercial and financial conditions of the company. Despite his knowledge about the circumstances, he made such lump sum payment out of the company fund. This was clearly a breach of his directorial duty to act in good faith and in the best interest of the company as stated under section 181 (1) (a) of the Corporations Act, 2001. Furthermore, Mr. Harburn has taken advantage of his position for his wife, Ms. Chivers that caused damage to the financial and commercial status of the company, thus, infringing the right to act in a way that is not detrimental to the company mentioned under section 182 of the Act. Mr. Harburn also failed to adduce evidence to support his contention regarding the shareholders assent to the payment made by the company for the purchased boat. After perusing the evidences adduced, the court ordered the second respondent, Ms. Chivers to pay a sum of $385,219.35 along with the interest amount, under section 588 FF. The section deals with the unreasonable director-related transactions. The interest amount shall be calculated from the date of the liquidators demand until the date of the Judgment. The court ordered Mr. Harburn to pay a sum of $385,219.35 in the form of compensation to the company. In addition to that amount, the court ordered him to pay the interest amount as per section 1317 H as a penalty for infringing the directorial duties mentioned under section 181 and 182 of the Corporations Act, 2001. The evaluation of the compensation and the interest amount shall be from the date the payments were made out of the company funds until the date of judgment. The liquidators of the company adduced evidence regarding the liabilities and incomes of the company. The court was of the opinion that the time when the company was making payments for the purchased boat, its financial circumstances were uncertain. The commercial circumstances were so uncertain that it could easily give rise to the question of insolvency of the company. In the case of Slaven v Menegazzo (2009), at the time of transaction the financial condition of the company was not determinable. Mr. Harburn tried to convince the court that he was not obliged to consider the interest of the creditors. The court rejected his contention based on the case of Kinsela v Rusell Kinsela Pty Ltd that stated where the question of insolvency is involved the interests of the creditors must be taken into consideration (Tan, L., 2013). The liquidators alleged Mr. Harburn on the grounds of unreasonable Director-related transactions. The factors that determine the unreasonable director-related transactions are mentioned under S 588 FDA. In Buzzle Operations Pty ltd v Apple Computer Australia Pty Ltd (2011) and re employ Pty ltd (2013), it has been stated that voidable transactions occur when a Director makes any payment from the company fund in favor of someone who is a close relative of the director. In New Cap Reinsurance corp ltd v renaissance reinsurance Pty ltd, other officers of the company received no benefit because of the voidable transactions. Mr. Harburn was alleged to have infringed his statutory duties as the director of the company under sections 181 and 182 of the Corporations act 2001. The company suffered financial loss due to the lump sum payments it had to make for the purchased boat (McCarthy 2013). The precedent followed regarding this allegation was the case of Wardley Australia Ltd v The state of Western Australia (1992) wherein the company suffered significant loss on the date of payment. Reference List Bird, H. and Gilligan, G., 2016. Deterring corporate wrongdoing: Penalties, financial services misconduct and the Corporations Act 2001 (Cth).COMPANY AND SECURITIES LAW JOURNAL,34(5), pp.332-359. Bruce, M., 2013.Rights and duties of directors. Bloomsbury Publishing. Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. 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