Corporate Entities Companies Act - 1993

Question: Discuss about the Corporate Entities for Companies Act, 1993. Answer: (a). (i) Section 128 of the Companies Act, 1993[1], says that a companys affairs and business are to be administered by the board of the company. It further states that the board has the all the powers that are needed in doing so. Section 130[2] of the act holds that the board can delegate its powers to a director, committee or an employee subject to certain conditions. The board stays responsible for such acts. As per section 138[3] of this act, the directors can rely upon reports, statements (or other information) which have been prepared by experts or professionals. The decisions taken by directors in a board meeting have to be based on the deliberations and discussions between the directors. These directors are the members of the Board. Any person who is not a director cannot take part in such meetings (exception section 130). The discussions of board are confidential in nature. Section 145[4] of this act states that a director should not disclose any such information, which is not available to the director or public in the normal course. Keeping in mind the above provisions, the presence of WSBPLs directors in Fancys board meetings would result in breach of confidential information by the directors. The affairs of Fancy have to be administered by the board of Fancy and any interference from the board of the WSBPL would result in contravention of this section. Further, taking inference from Section 130, Fancy can delegate its powers but that has not been done here. Moreover, a disclose of confidential information of Fancy would be done if WSBPL attends such board meetings. In such a case, director would have performed a contravention of responsibility to function in good faith as per Section 138A(1)[5]. (ii) In case where the WSBPLs directors were not present at Fancys board meetings and the board was simply relying on the recommendations of the report, the matter would be covered under Section 138 of the Companies Act, 1993. As stated above, this section gives directors the liberty to use information or statements prepared by professionals or experts in matter where the directors believe such expertise is necessary. This section is applicable only when a director of the company performs in good faith and carries out thorough investigation (if necessary). In this case, only reliance was made on the report and the meeting of the board was held properly, so the directors would not be liable for any breach. And no offence would have been committed. (b). (i) Section 145 of the Companies Act, 1993 holds restrictions for utilization of company data. As per this section, a director or an employee of a company cannot disclose or use any information unless it is required by the company or law. This means that the sensitive information of a company cannot be used by a director or an employee for their personal benefits. This has been famously held in the matter of Pacifica Shipping Co Ltd v Andersen Ors[6]. The cases of Kawhia Offshore Services Ltd v Rutherford and Marine Mooring[7] and Industrial Development Consultants Ltd v Cooley[8] further affirm the judgment of Pacifica v Andersen case. In all these cases, the central theme of the decision of the judge stated that a director is not allowed to take advantage of the possible business opportunities or benefits available to the company. These cases further hold that the economic benefits may be negligible or nil. Even in such cases, a director is prohibited from using the information of the company for his personal benefits. Here, Dunstan and Swindle are two directors of the company and there are two employees of the professional firm hired to write the report. These people had thorough knowledge about the financial condition of the company. They also had confidential information relating to various aspects of Fancys business. Most importantly, these people are aware about the expansion opportunity available with Fancy and also the huge demand of Fancys products in Canterbury. These parties are also aware about the profitability of Fancy which has exceeded the companys expectations in the last ten years. The actions of the four individuals would result in a contravention of the fiduciary duties of a director. Under section 131 of the act, it is the fiduciary duty of the directors of Fancy to act in good faith and best interest of the company. Forming a new company would prove them guilty of contravention of this section. It is the duty of the director of Fancy to act as a responsible director. Also, sect ion 145 dictates that the information be used in diligent manner, and here formation of new company results in direct violation of this section by both the directors and the employees. And as a result he would have committed an offence as stated under Section 138A(1). (ii) In order to avoid being held accountable for their actions they must fulfill certain conditions. These conditions have been stated as a test by the judge (Davison CJ) in the case of Pacifica Shipping Co Ltd v Andersen Ors[9]. The judge stated a test which the parties would have undertake to prove that the information used by them was public and not confidential. Secondly, they must prove that the information was freely communicated and there was no secrecy or confidentiality duty. Lastly, they can show that the use of information has caused no harm to Fancys business or otherwise. This last point is the most advantageous point for these parties and from the view of the company this is the most disadvantageous one. In order to show that the use of particular business has caused harm to the company, a link between the information and damage has to be clearly established. The parties can prove that there was no direct link. They dont have to go to the hassle of proving that there was a direct link that is the responsibility of the company. These parties can simply show that there was no interconnection and that the points are mutually exclusive. A notable case in this matter is Holden v Architectural Finishes Ltd[10] where the judge held that director used the information which was public knowledge and not confidential in nature. The judge also held that no special opportunity was utilized by director. (c). (i) Section 138 of Companies Act, 1993 states that a director can, in order to fulfill his duties, make a reliance upon reports or statements or other information prepared by an employee of the company who is competent in the related matters. A director can also rely on such persons professional advice. But this section further says that a director has to do so in good faith and has to make necessary inquiry where needed to use such information or advice. Also, the director has to make sure that there is no reason to decline such information or advice. In case the directors is aware that such reliance may prove harmful for the company, he should not use such information or advice In the given case, the directors of Fancy have access to the accounts of the company. They also have knowledge about the PAYE and GST being unpaid and that cheques of the company have been dishonored. Despite this the accountant and the general manager of the company have advised for continuation of operation of business. The directors should not let the company continue its trading. Though the advice has been received from professionals/experts on the matter (being an accountant) but everything is in front of directors and they are aware of the weak financial conditions. The Act through section 131[11] contains that it is the duty of the directors to perform acts in good faith and in foremost interests of the company. Section 135[12] of this act holds that the directors must not allow the business to be continued when there is a considerable risk of major loss to the creditors of the company. The act through section 137[13] holds that directors should exercise due diligence, care and skill while performing their duties. A director is supposed to be loyal to the company they work for. Section 131 of the Act indirectly points towards the fiduciary duty of any director to be loyal to the company. This was famously held in the matter of Regal (Hastings) Ltd v Gulliver[14]. The directors were held responsible for breach of their duties by failing to capitalize an opportunity which would have resulted in reasonable profits. To further answer this question, a reference must be made to the case of AWA Ltd v Daniels[15]. The judge of this case held that a director has to have the basic knowledge about the companys business. The judge also held that the director has to make sure that he is intimate with the foundations of the business of the company. In case of Norman v Theodore Goddard[16], it was held that a director should exercise due diligence, care and skill while performing their duties in such a way as a normal person may undertake his own sake. In this case, if the directors continue the operations, they would be held as having committed an offence stated under Section 138A(1). (d).(i) In order to promote transparency and accountability, the law requires every company to maintain certain records. Section 189[17] of the Companies Act, 1993 contains the requirement of keeping company records. As per this section, the company has to keep certain documents at the registered office of the company. This includes the company constitution; the minutes of every meeting plus the shareholders resolutions (last seven years); register of interests; minutes of every meeting of directors plus the resolutions passed by directors committees and the directors (last seven years); certificates provided by the directors (last seven years); details of directors including their names and addresses in full; duplicates of the written transmissions to shareholders (last seven years) with the annual reports; duplicates of financial statements (last seven years); the accounting records of ongoing accounting period (last seven years complete financial statements); and the share register. Section 87[18] of the Companies Act, 1993 states that a share register must be maintained by a company. This register should record the issue of share by the company. The register should clearly state if the constitution of the company applies any restriction on transfer of shares. And it should also contain how the documents containing such restrictions can be inspected. As per sections 200[19] and 201[20] of Companies Act, 1993, every large company has to compile financial statements annually[21]. Such financial statements should be compiled within five months of the date of the balance sheet and have to be signed (and dated) by the directors of the company. Also, these financial statements are to be compiled by following the generally accepted accounting practice. (iii) Section 194[22] of Companies Act, 1993 contains the legal obligations of Fancys board to ensure accounting records are kept. This section states that the board of company needs to make sure that the accounting records are retained at any and all times; and that the records rightly document the companys deals. The board also has to ensure that, the records clearly show that, the financial statements of the company have been complied as per the accounting practices which are accepted generally. Lastly, it is also required from directors to ensure that the statements can be audited properly and at any instance. This section requires the directors to form and sustain adequate system of control of the accounting records. The section further requires that the records/ documents must be retained in English or in a language which can be easily and readily be converted into written form in English. Section 195[23] of the Companies Act, 1993 contains that such accounting records can be retained at a place other than New Zealand. In case where the accounting records are not kept in the country, the company has to make certain that the conditions stated in section 195(2)(a)[24] are fulfilled. Also, a notice stating where the accounting records have been kept has to be provided to the Registrar. (iv) As per section 194 this act, if companys board is unable to fulfill the essentials covered in this section, every director is considered to have committed an offence. Such director(s) is also liable to the penalties stated in section 374(3) of this act. Such penalties are applicable only if the director is held responsible and is convicted under the sections of this act. Section 374[25] of the Act contains the provisions regarding penalties that can be imposed on the directors where the board is unable to fulfill the provisions of this act or where the company is unable to fulfill the provisions of this act. As per section 374(3)[26] of Companies Act, 1993, a director convicted of an offence in this Act is culpable to a penatly. The value of such penatly, in this given case, cannot exceed $50000. In the present case, if Fancys board fails to fulfill the terms contained in section 194, each director would have committed an offence. And as a result, each director of Fancy would be liable to penalty of upto $50000. References Cases New Zealand Pacifica Shipping Co Ltd v Andersen Ors [1986] 2 NZLR 328; (1985) 2 NZCLC 99,306 Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260, 976 at 261,027. Kawhia Offshore Services Ltd v Rutherford and Marine Mooring HC Hamilton CP61-99, 24 April 2002 Australia AWA Ltd v Daniels (1992) 7 ASCR 759; 10 ACLC 933 at 101 United Kingdom Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 Norman v Theodore Goddard (1991) BCLC 1027 Statutes New Zealand Companies Act 1993. Other sources Maintaining and keeping records (30 March 2015) New Zealand: Companies Office https://www.business.govt.nz/companies/learn-about/compliance-requirements/maintaining-keeping-records#accounting-records