Mudule 3 Part A Flashcards
Corporation
Corporation are artificial person that have most of their rights and obligation on real people.
Companies are separate legal entity from their owner
Most companies have limited liabilities, meaning their owners cannot be held responsibilities for company’s debts
Small and Large proprietor companies
Small proprietor company
Cannot ask for fund from public.
1. must be limited by shares and unlimited companies with share capital
2.<50 shareholders
3. revenue under $50mil
4. Gross assets under $25 mil
5. fewer than 100 members
Large proprietor company
1.1. must be limited by shares and unlimited companies with share capital
2. > 50 sharesholders
3. revenue more than $50mil
4. Gross assets over $25 mil
5. more than 100 members
Public companies
- more than 50 member
- consists of unlisted and listed public companies
Listed companies:easy to buy and sell the shares
companies keeps on trading
public companies are usually limited by shares and limited by guarantee
Who can be a director
- you must be at least 18yrs old
- you must not be bankrupt
- you have not convicted of offences like fraud or breaching your duties as an office holder
Directors Identification Number
In Nov 2021, ASIC introduced directors identification numbers.
It is managed by Australian business registry services (ABRS), a new entity of Australian Taxation Office.
This is to prevent a false or fraudulent director identities
Duties of directors
- Avoid conflicts of interest
- Act in good faith and best interest of corporation
- exercise powers for proper purposes
- retain discretionary power and avoid delegation of their duties
- act with care and diligence
- remain informed about corporation’s operation
- prevent insolvent trading
- apply professional scepticism
Duty to avoid conflict of interest
Potential conflicts may to at expense or benefit to corporation.
The law requires that the directors of large corporation (public and listed corporation) should not be involved in any decision where potential or actual conflicts of interest has been identified.
This law can be bypassed, if such conflicts of interest has been fully disclosed and approved by other directors and shareholders.
If not disclosed, the directors will result in civil liabilities, criminal prosecution and even jail
Types of conflicts of interest
- relationship or circumstances that create conflicts of interest
- bribes, secret commission and undisclosed benefits
- misuse of corporation fund
- taking up corporate opportunities
- using confidential information
- competing with corporation
- using position in corporation improperly
Duty to exercise power for proper purposes
a) act within their power
b) do not abuse their powers
The difficulty arises when powerful interest group appoint nominee directors. Nominee directors are appointed by third-parties to represent their interest on board of directors.
These directors are loyal to majority shareholders or class of shareholders or corporation. Their loyalty is divided between interest of nominators and corporation
Duty to retain discretionary power
Directors powers are laid down in legislation and corporation’s constitution
Directors are not supposed to delegate their powers to another person where they are supposed to act by themself
If they delegate and if corporation is at loss either by action or inaction by person to whom the power is delegated, the director is held liable.
The director must not let a non-director to carry out their duties
The directors should not accept the directions from others while voting at board meetings
The directors can delegate the powers if the delegates are appointed by boards
Duty to act with care and deligence
Standard of care may differ between two different directors of same organisation
1. Director with professional qualification - CFO will have high responsibilities due to their high level of skills and knowledge. They also receive high remuneration
2. Non-executive directors - Not involved in day-to-day business but need to exercise duty with care.
Duty to remain informed about company operation
The director should apply professional scepticism and ask appropriate questions to company officers and auditors to be informed to take professional judgement
The board and directors need to disclose to ASX, when reasonable amount of ppl are affected by the price or value of entity’s security
Duty to prevent insolvent trading
The basic duty of director is to ensure that companies debts are paid out
The directors should have reasonable grounds to believe that the company is in a position to pay it’s debts when due
The directors should not trade when a company is insolvent
The directors are protected
1. At a reasonable time after the directors have suspects that the company may become insolvent, take reasonable action for better outcome for company
2.The debts are incurred either directly or indirectly during the course of such action from the start of this action and ending at earliest of below time
a)end of reasonable period
b)when person ceases to take any course of action
c)when such action ceases to lead betterment of company
d)appointment of administrator, liquidator of the company
Director Independence
Independent director is a director who is not aligned with interests of management or substantial holders and bring independent judgement before the board and act in best interest of entity as a whole
Safe harbour rule or business judgement rule
Protects the judgement of directors against the liabilities
1. Good faith
2. No conflict of interest
3. Appropriately informed
4. Third party test
