QUESTION

TOPIC

The regdulatory authorities in Australia simkkply do not understndjjusthyow difficult it is for ddirectors to run companies. As a result, ASIC’s prosecution opfAustdraslian company directors for breaches of dutries has reached the stage where iut is downright opressive.  The 2009 procecution of the directors and offdicedrs of James haried industries Ltd is a tyupeexaple.  Discuss.

INTRODUCTION

Tell the reader where youi are going to take the reader in this paper, why and how.

Clear the decks.

Definitions.

Defdine ASIC etc.

Scope of this paper

This paper is not a paper on James Hardie.  James Hardie is merely an illustration of a problem.  This paper is in fact a paper on the role of directors and their responsibilities.

WHAT IS ASIC?

The Role of ASIC

The need to attract capital to Australia.  If ASIC was not carrying out its role, it would in breach of the ASIC Act.

The Enforcement Role

Insider trading

Phoenix companies

THE ROLE OF DIRECTORS

Duties of directors

Where did they originate from and what is their function

!98A(1) and A(2)

The onus of running the company

198C

The importance of MDs,.

DIRECTORS ON INTERNATIONAL STAGE

CONCLUSION

BIBLIOGRAPHY

SOLUTION

Introduction:

We have seen in recent times there is a very competitive business environment prevailing in the world as the world moves closer with the developments there is a need to provide transparent and honest legislations which increase fair trade in the market. Australia as a developed nation has always aimed to improve its business environment by imposing legislations aimed at increasing good corporate governance standards and increasing fair trade in the country. But as we see everything comes with few impediments and naturally there are certain norms in the legislations which are often been criticized by the business community. Moreover we have seen that the enforcement authorities are also inclined to promote a strict business regime which is somewhat right in some sense as it does encourage better business environment but due to this there were instances where the business environment have suffered due to the arbitrary attitude of the authorities.

As we have seen approach of the authorities have been sometimes very stringent as they have tried to promote the regime that they think would promote a business environment that would set an example and the reputation of Australia would improve in the world to attract business form other jurisdictions.

In the instant paper the researcher will look into the aspects as per the legislations prevailing in Australia which will focus on the governance of the company, role and responsibility of the directors in governance of the company, approach of the regulatory authorities, the role of the regulatory authorities, comparison with the other international jurisdictions and the scope for improvement.

The scope of the paper would be to make the readers aware of the legal regime that is prevailing the country related to the functioning of the organisation. The paper is aimed at giving knowledge to the readers to the processes and the regulations prevailing in Australia related to the governance of corporations and the role of enforcement authorities in carrying out the business regime prevailing in the country.

Definitions:  

In this section of the paper for the sake of the readers the people responsible to carry out the business regime will be defined like the enforcement authorities, the directors etc.

Australian Securities and Investment Commission (ASIC):

It is the Australia’s corporate, markets and financial services regulator and is an independent government body established by a statute. It is formed by the legislation in 2001 known as Australian Securities and Investment Commission Act 2001. The act is aimed at establishment of the commission and defines the ASIC as a body corporate which will be carried out by perpetual succession, will have common seal, may acquire, hold or dispose of properties, will have power to enter into contracts and may sue and be sued in its corporate name[1]. The main purpose of the establishment of this organization is act as a company regulator and to act as a protector of investors, creditors and consumers.

The area of responsibility of ASIC are as stated below:

(i)              To manage corporate governance;

(ii)            Regulate financial markets;

(iii)          Control securities and derivatives market;

(iv)          Look after Insurance matters

(v)            Provide consumer protection; and

(vi)          Spread financial literacy

The properties which the organisation could hold and the money which the organisation receives are all on behalf of the Commonwealth and the act does not give the power to the organisation to receive or hold anything on trust.

Directors:

As per the Corporation Act 2001 which is the fundamental legislation regulating functioning of the companies. Directors are defined as any person who is appointed in the position of a director, alternate director or any person who acts in the position of director[2].

Officers:

As per the Corporation Act 2001 officers of a company are defined as any director of the company or any other person who acts and participates in the business of the company, or on whose instruction the directors are accustomed to act or has a standing in the financial matters of the company or receiver or an administrator of the corporation or has power to administer compromise between the company and any other person[3].

Company or Corporation:   

The act defines a company as any company which is registered as per the provisions of this act. The act also clarifies any company registered under this act may be limited by guarantee or limited by shares[4].

ASIC Structure, Role and Functions:

In this section of the paper the researcher will try to explain the role, structure and duties of the ASIC which is the supreme regulatory body for the corporations in Australia. The section is aimed to make the readers aware of the functioning of the body, its regulatory powers and enforcement mechanisms which is followed by them.

As we see this organisation was formed with the purpose to regulate the business and business environment of the country. It has been given powers under the act to regulate and enforce its decisions upon the company which would be binding. The ASIC has been given the role to regulate the business environment of the country by regulating the market participants to be fair and transparent so that investor and consumer confidence in the market is maintained.

The organisation began operating in 1991 as the Australian Securities Commission (ASC) replacing the National Companies and Securities Commission (NCSC) and the Corporate Affairs offices of the states and territories.

In 1998 the organisation took on responsibility for consumer protection in superannuation, insurance and deposit taking and was renamed the Australian Securities and Investments Commission.

In 2010 ASIC took on additional responsibilities for regulating trustee companies, consumer credit and finance broking and for supervising trading on Australian licensed equity, derivatives and futures markets.

The statute gives the power to this body to maintain a transparent financial system, promote investor confidence, administer and enforce the required laws for the purpose and keep the public informed about the companies whenever it is practicable[5].

As an administrator the ASIC has been given powers to administrate the following laws:

• Corporations Act 2001
• Australian Securities and Investments Commission Act 2001
• Insurance Contracts Act 1984
• Superannuation (Resolution of Complaints) Act 1993
• Superannuation Industry (Supervision) Act 1993
• Retirement Savings Accounts Act 1997
• Life Insurance Act 1995
• National Consumer Credit Protection Act 2009
• Medical Indemnity (Prudential Supervision and Product Standards) Act 2003[6].

Powers of ASIC:

To regulate the business environment of the country the organisation has been given various powers which include:

• The companies in Australia are registered with ASIC and it’s a mandatory provision to be followed. ASIC also act as a manger to all the investment schemes in Australa.
• ASIC acts as an agency to grant licences to grant Australian financial services Australian credit licences
• The auditors and liquidators are registered with it
• ASIC grant relief from various provisions of the legislation which it administer
• It is a depository and maintain publicly accessible registers of information about companies, financial services licensees and all credit licensees
• It ensures integrity of the financial markets and make rules aimed at ensuring the integrity of financial markets
• It is ASIC’s duty to stop the issue of financial products under defective disclosure documents
• It also has to investigate suspected breaches of the law and in doing so require people to produce books or answer questions at an examination
• It also issue infringement notices in relation to alleged breaches of some laws
• It can ban people from engaging in credit activities or providing financial services
• It can also seek civil penalties from the courts
  • Commence prosecutions – these are generally conducted by the Commonwealth Director of Public Prosecutions, although there are some categories of matters which it  prosecute itself.

Apart from regulating the business environment of the country the organisation also provides services to the consumers through its various techniques like promoting consumer education, making the consumer aware of their consumer rights, teaching financial literacy to the consumers and making them aware with the business environment of the country.

The organisation operates in a three tier structure consisting of:

(i)              Senior Executives:

In this division the chairman along with the deputy and the commissioners are included who take important decisions for the organisation to promote effective functioning of the organisation.

(ii)            External Advisory Panel:

After the strategic review of the organisation it was decided to form an external advisory panel which assists the organisation to gain deeper knowledge of the financial markets so that the ASIC will function better to regulate issues affecting capital markets, consumer financial services, international money flows and stability of the financial system.

(iii)          Financial Literacy Board:

This board is appointed by the government for a term of 3 years to increase financial literacy among the consumers so that they have a better knowledge of the markets and financial instruments available in the market.

Operation of the ASIC:   

The organisation operates under the direction of six full-time Commissioners appointed by the Governor-General on the nomination of the Treasurer. The ASIC, reports to the Commonwealth Parliament, the Treasurer and the Parliamentary Secretary and to the Treasurer.

The Responsibilities and Powers of Directors

The directors of the company have to ensure that company functions in compliance with all laws applying to a company’s operations and they are also fulfilling all their obligations towards the shareholders. But in case of those companies which are insolvent or under debt then the duty of directors extends towards all the creditors as well. The director is the most important functionary of the company and a company can sink if the director is not vigilant enough whereas the same company can touch the sky under the guidance of a prudent director. The duties of a director of a company are derived from the Corporations Act 2001 and the Company Constitution:

• Duty of care and diligence: director is required to act like a prudent person and be properly informed about the financial position of the company
• Duties should be exercised in good faith always taking decisions which are in the favour of the company
• Position of director should not be misused to cause disadvantage to the company
• The information gathered because of the position of director should not be used to gain advantage to cause disadvantage to the company.
• It is a duty of a director that company should not function if it has become or insolvent or there is a reasonable presumption that will soon declared insolvent.
• Director should make sure that all financial record of the company are properly maintained and company acts in accordance with the established law.

There are certain powers that directors can use to achieve and fulfill the above mentioned dutied and these powers are:

• Directors of the company have a power to execute negotiable instruments. They can sign, endorse, draw, accept or execute in any other way negotiable instruments.
• 198 A of the Corporation Act 2001 states that a company is run under the direction of the directors of the company and the directors have all the rights to exercise all the powers that are vested in them by the Corporation Act 2001 and by the company’s own constitution if the company has a constitution.
• 198 C of the Corporations Act 2001 deals with the right of the directors to confer or transfer any of their own powers to the managing directors and these powers of the managing directors can be revoked or altered.
• In accordance with section 198D directors have the power to delegate as well. The director can delegate his powers to a committee of directors, any other director, employee of the company or any other person he deems fit for the purpose.
• A single director or a shareholder of proprietary companies can issue shares, borrow money and can also issue debentures and can also execute negotiable instruments.
• Director has access to all the records and information of the company and can inspect the records.

Directors on International Stage

With the expansion of markets directors have to carry out their business on the international stage. The international stage is no more just a battleground of few developed countries but many developing countries are carrying their businesses to the international platform.

Competition has crossed the boundaries of countries and has become global these days. This international character of competition is a good sign because competition acts as a motivator to countries to do their best so that they can excel in the international arena. More than a hundred nations have formulated their own national antitrust laws to address concerns arising out of competition in the market which were just 20 in number in the late 1980s and many more are moving in this direction.

Various small or large firms from different countries are joining hands to achieve their objectives, for example some join together for technological advancement, some for sharing risks and product cost and others just to enter the market of a different territory. These alliances are making the presence of companies global beyond the borders of their own countries.

The present picture of businesses crossing the boundaries of countries has drawn attention towards the international behavior of directors. Different countries have their own different domestic laws to address company issues with respect to their political, economical and legal growth. As in these types of alliances different countries are involved there is a basic requirement of directors to be aware of the laws and policies of the involved countries which is a required but daunting task to achieve.

Australian companies and directors are required to act in a global manner and context. This expansion of market has great positive effects and those include:

• Improved investments both internationally and domestically
• Promotion of growth at all levels
• Access to capital and markets worldwide

There are many positive but at the same time there are a few negatives as well some of them being too much exposure to international competition, interference in domestic matter of a company, law and regulations of the other country may be different and understanding those laws can be a troublesome process.  This globalization brings with it more responsibilities for directors of the company and to face these challenges successfully directors are required to do the following:

• Understanding of the global environment, cultures and values of other countries: it is an utmost requirement to be a global successful director then only the director will be able to manage affairs of his company which has offices in other countries as well.
• Director should be farsighted and be in a position to anticipate the market fluctuations:  a successful director is one who can take his company towards profit making enterprises and be able to decide the outcomes of his act well in advance.
• Director should work towards improving relations with the international regulators: when more than one country is involved in any transaction and the laws of countries and regulatory bodies are different then it becomes very important for directors to develop maintain relations with all these regulatory bodies.
• Directors should keep themselves fully aware of the trends in the world markets and study growth pattern of other prospective partner countries: being aware of as to what is happening in the world around is as important as anything else. Directors if are aware of world market trends then only they can gauge the situation whether it is favourable to them or not

Case Study: James Hardie Industries Limited

James Hardie was in the business of manufacturing asbestos products and was responsible for consuming atleast 70% of the asbestos in Australia. Inhaling asbestos can be very dangerous and lead to various diseases like asbestosis and lung cancer.

Question that was raised in this case by ASIC was as to whether the directors of James Hardie Industries Limited have breached any of the responsibility that was laid on them particularly the duty of care and diligence as per section 180(1) of the Corporations Act 2001 with respect to the media statement given to ASIC that was commenting on company’s corporate restructuring and its ability to meet future asbestos liabilities.

Supreme Court held that there was breach of duty of care and diligence as laid in Section 180(1) of the Corporation Act 2001 by letting a media statement be released and published which was a false statement, misleading and deceptive in its nature and was quite capable to have negative effects on the company as well as on the market,

This case demonstrates as to how much important it is for a director to perform his duties diligently and due care as a person of reasonable prudence would do if he would have been in his position. This case laid a focused concentration on the duty of care and diligence as laid in section 180 of the Corporations Act 2001 and changed the mindset of all the directors that it is mandatory for them to be completely involved and knowledgeable about the matters of the company and not just be like passive managers but like active propellers of the company. In today’s fast paced world and business crossing all the boundaries it has become very important for a director to be very active so that all the affairs of a company can be managed efficiently and in a proper way conforming to all the laws, rules and regulations of the country.

Conclusion

A company is an entity which needs to be properly registered and all its functions need to conform to all the established rules of law prevalent at the time. ASIC has been formulated with that purpose only so that it can act as watchdog and regulate all the markets and businesses of a country. Directors of a company are the most important position of a company and they are the main on the shoulders of whom all the functions actually are dependent. In Australia the Corporations Act of the year 2001 is the main statute governing responsibilities of the directors and outlining their powers. Responsibilities of a director have become even more significant in time now where there is so much globalization.

References

1. http://www.asic.gov.au
2. http://www.austlii.edu.au/au/legis/cth/consol_act/toc-C.html
3. http://www.companydirectors.com.au/
4. Australian Securities and Investment Commission Act, 2001
5. Corporations Act 2001
6. Hargovan, A, Corporate Governance Lessons From James Hardie