Major Assignment

LAW OF ASSOCIATION

Name: Dollies Darsana (2013116468)

Sharlin Lata (2013113004)

Unit code: LAW603

Due Date: 25/11/2014

Trimester: 3
 TITLE:
DUTIES OF
DIRECTORS
AND OTHER
OFFICERS
1

TABLE OF CONTENTS

TITLE 1

TABLE OF CONTENTS 2

AIM 3
 OBJECTIVES 4

METHODOLOGY 5

ABSTRACT 6

INTRODUCTION 7

LITERATURE REVIEW 8-9

RESEARCH FINDINGS 10-14

DISCUSSION 15-16

CONCLUSION 17

REFERENCE 18

AIM

The aim of this research was firstly to find out the duties of the directors and other officers.
And secondly, to outline the steps involved in forming a limited liability company.
 3

OBJECTIVES

The overarching goal is to provide for a better understanding of certain important drivers of
directors' behaviour duties and responsibilities and in why they need to fulfil their duties and
responsibilities.
 4

METHODOLOGY

Two methods of data collection were used:

1. Primary Data- Personal interview- in person. The interviews will include on the duties the
directors need to follow and why.

2. Secondary data:
i) Internet research
ii) Library research

ABSTRACT
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INTRODUCTION

Company law in Fiji will change significantly during 2013 with the introduction and
commencement of an entire new body of law. The new legislation completely replaces the
old regime and adopts significant reforms which may, among other things, make it easier for
foreign investors to set up companies in Fiji. There are many other legislation such as the
Capital Markets Development Authority Act and the Income Tax Act to name just two which
impose duties and responsibilities on company officers. However to cover the whole range
of specific legislation that create liabilities for company officers would take too much time
and space and is best left to be dealt with separately on another occasion. The legislation and
the common law governing companies and in particular duties and responsibilities of
directors and secretaries is very complex. In Fiji, to some extent, the Act has consolidated
the law relating to incorporation, regulation and winding up of companies. However a large
portion of the law relating to duties and responsibilities of company officers is still common
law based.

There's no doubt that directors’ legal duties are onerous and the penalties for breaching them
can be stiff. But it is important to remember that there is no expectation of perfection or
infallibility. The overriding legal requirement is to act honestly, competently and
conscientiously. Provided directors have a proper understanding of their role and take basic
protective measures, the risks of committing a breach of duty can be kept to an acceptable
level.

The first part of this paper will focus on the duties and responsibilities of directors and other
officers and the second part will focus on the steps involved in forming a limited liability
company.

LITERATURE REVIEW

Most companies in Fiji are limited by shares. Each of the shareholders are owners of the
company and may also be referred to as members. The activities of the company are
primarily governed by the Memorandum and Articles of Association. The Memorandum is
the company’s constitution which governs its relationship with the outside world. The objects
clause within the Memorandum is what defines the powers of the company. All directors of
companies should be familiar with the scope of these powers as they may be held personally
liable for any activities undertaken which are outside the objects clause and which may be
found to be ultra vires. The company’s Articles regulate the internal organization of the
company. The standard Articles are set out in Schedule A of the Act. The directors derive
their powers from the Articles. Article 80 of Schedule A vests the management of the
company to the directors. The shareholders in a general meeting only have residual
reversionary powers to act derived inherently under Common Law as incorporators of the
company. It is always prudent to check on the Memorandum and Articles of Association of a
company when considering the powers of company directors. There are many instances of
heavily amended Memorandum and Articles of Association which require special
consideration. A major principle of company law following on from the “veil of
incorporation” is the doctrine of ultra vies. Companies are artificial legal persons and early
common law considered it necessary to restrict their powers to specified objects to protect
shareholders and third parties. An ultra vies contract has been held not to be binding on the
company. Nor is it able to become intra vies by reasons of estoppels, lapse of time,
rectification, acquiescence or delay (York Corporation v Harry Latham & Sons Limited
(1924) 1 Chancery Reports 557 at 573”).

In the Companies Act Sections 7, 8 and 10 of the Act deal with objects of the company.
Section 10 of the Act now enables a company by special resolution to alter the provisions of
the Memorandum with respect to its objects and powers. Section 7 implies to every company
certain ancillary and incidental powers in addition to those already contained in their
Memorandum unless expressly excluded or modified. Section 8 deals with ultra vires
transactions and states that they are not invalid by reason only of the fact that the company
was without capacity or power to do the act. However any such lack of capacity or power
can only be asserted or relied upon in a proceeding against the company by a member of the

company, a debenture holder or on a petition by the Attorney General to wind up the

company. This Section has modified the harshness of the common law to some extent for
third parties.

The current statutory regime concerning directors has been derived from the development of
the common law as it related to companies in the United Kingdom in the 19th century. This
common law has been preserved in Fiji. The Act passed in 1983 is not a code on duties and
responsibilities of company officers. The common law still needs to be considered as it
applies to the fiduciary nature of the directors’ responsibilities to companies. Directors are
entrusted with the assets of the shareholders. There is a paramount duty to act in good faith
and in the best interest of the company. Company here means the shareholders of the
company. Directors should not place themselves in a position of conflict between personal
and company interest. A director should try to avoid any personal interest in contracts entered
into by the company and where such an interest exists, the director is required to make
disclosure to the board of directors. Directors are agents of the company and to that
relationship most of the ordinary principles of agency apply. These principles are at the core
of the fiduciary duties of directors. Good faith simply means honesty. Negligence is not
sufficient for bad faith. Short of honesty something like gross recklessness would be needed.
A failure to make a genuine attempt to do what a careful director could do would be an act of
bad faith. There are a great number of cases where the pursuit by directors of their own or
their family’s interest rather than the company’s had led to a finding of a breach of the duty to
act in good faith in the company’s interest. The second limb of the duty requires directors to
act in the best interest of the company. A director would be made liable where a decision to
enter into a transaction was one which no reasonable person in his position could have made
in the company’s interest. In the leading case of Charterbridge Corp v Lloyds Bank Ltd
(1970) 1 Ch 62 at 74 Pennycuick J had this to say on the common law duty:

“The proper test, I think must be whether an intelligent and honest man in the position of a
director of the company, could, in the whole of the existing circumstances, have reasonably
believed that the transactions were for the benefit of the company”.

RESEARCH FINDINGS

The legislation and the common law governing companies and in particular duties and
responsibilities of directors and secretaries is very complex.

In Fiji, to some extent, the Act has consolidated the law relating to incorporation, regulation
and winding up of companies. However a large portion of the law relating to duties and
responsibilities of company officers is still common law based. Most companies in Fiji are
limited by shares. Each of the shareholders are owners of the company and may also be
referred to as members. The activities of the company are primarily governed by the
Memorandum and Articles of Association. The Memorandum is the company’s constitution
which governs its relationship with the outside world. The objects clause within the
Memorandum is what defines the powers of the company. All directors of companies should
be familiar with the scope of these powers as they may be held personally liable for any
activities undertaken which are outside the objects clause and which may be found to be ultra
vires.

The fiduciary duties of directors as gleaned from case laws are briefly summarized into 10
principles.

(a) Duty of good faith. This duty requires directors and other officers to act honestly in the
best interests of the corporation. It means that directors will be honest and loyal in their
dealings with other directors and with the corporation. For example, directors who are acting
in good faith will not make a decision for their own personal self-interest but in the best
interests of the corporation as a whole. A breach of this duty may lead to civil liability or
criminal liability if the breach is reckless or intentionally dishonest.

(b) The duty to acquaint themselves with their powers and functions

(c) The duty to act in accordance with the Memorandum and Articles of the Company.

(d) The duty to exercise their powers for a proper purpose. However the strictness of the
duty of fiduciary care under common law as it has developed out of the law of trust has been
modified for company directors. Directors of companies are required to act in the best interest
of the company as a whole and not for any specialized interest of specific shareholders or

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family members. They will not be liable for bad judgment or mere negligence.

(e) The duty not to fetter the discretion or the powers that they have. Not only must a director
exercise his own independent judgment in relation to the powers which are vested in him but
he must also exercise it on behalf of the company. This also means that company directors
are not permitted to delegate their powers to others. They must exercise their powers and
functions themselves.

(f) The directors must avoid conflict of duty and interest in their exercise of their powers and
responsibilities towards the company. If directors are in a situation where they may be in
actual or potential conflict of interest they are obliged to disclose their interest to the board or
the shareholders of the company.

(g) The directors are obliged to act bona fides and must not make a profit or take an
advantage for themselves as a result of their position in the company. This duty requires
directors and other officers to act properly in their position. This means that directors must
not improperly use their position, or use information obtained as a director, for any purpose
other than the business of the corporation. For example, directors cannot use their position or
information obtained in their role as a director for their own personal advantage or to the
detriment of the corporation. To do so may incur civil liability or criminal liability if the
breach is reckless or dishonest.

(h) Duty to not trade while insolvent. This duty means that directors must not allow their
corporation to trade when the corporation is insolvent or if there are reasonable grounds to
suspect insolvency. Insolvency means not being able to pay debts when they become due and
payable. If a director authorises a transaction or makes a decision which makes a corporation
insolvent, and is aware or should have been aware that this would happen, then the duty is
breached. The duty applies to each director individually and together as a group. Directors
should always know and understand the corporation’s financial position to make sure they
know it’s not insolvent.

(i) Directors must exercise ordinary care and skill and if possessed of special knowledge or
experience they must use it in the affairs of the company. Also duty of diligence- The duty of

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diligence requires a director to attend meetings and to become as fully informed as possible
regarding all aspects of the corporation, including any issues that affect the corporation.
The duty of diligence has a number of practical implications. Directors should:

 ensure that the board of directors meets regularly;

  attend meetings of the board of directors whenever reasonably possible;
 be thoroughly informed about any decisions the board has to make and ensure that
they are provided in a timely manner before the board meeting with all relevant
documents including agreements, financial reports and information, legal opinions
and other information necessary to make knowledgeable and informed decisions at
the board meeting.

(j) Finally, above all they must have a duty of loyalty to the company.

The duty imposed upon a fiduciary is a strict one. The only way directors can avoid liability
for any conduct that tantamount to a breach of fiduciary duty is if that conduct was
undertaken with the informed consent of the shareholders to whom fiduciary duty was owed.
An action in respect of a breach of a common law or statutory duty can be brought by the
company as a whole. The shareholders in a general meeting of the company can also bring
about the removal of a director who has not carried out his duties to their satisfaction.

Directors are required to exercise their power with competence (or skill) and diligence in the
best interests of the corporation. They owe what is called a "fiduciary duty" to the
corporation. The duty is a "fiduciary" duty because the obligation to act in the best interests
of the corporation, at its core, is an obligation of loyalty, honesty and good faith. Modern
corporation’s statutes governing business corporations provide a concise formulation of the
fiduciary obligation owed by directors.

Directors' fiduciary duties can be divided into two main branches:

a) duty of care; and

b) duty of loyalty.

The duty of care imposes on directors a duty of competence or skill - i.e., a requirement to act

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with a certain level of skill; and a duty of diligence. The duty of skill and diligence must be
performed to a certain "standard of care".
The duty of loyalty requires that a director act honestly and in good faith in the best interests
of the corporation. The duty of loyalty is a personal duty and cannot be delegated (the "no-
delegation rule"). Among other implications, it means that a director is not allowed to profit
from his or her office (the "no-profit rule") and must avoid all situations in which his or her
duty to the Corporation conflicts with his or her interests (the "no-conflict rule").

Directors and members are not generally, personally liable for the contracts and torts of the
corporation. When a director properly signs a contract on behalf of the corporation, only the
corporation is bound, not the director. As a general rule, when an employee of a corporation
commits a tort, only the corporation, (as employer), and the employee, are responsible, not
the director.

Directors are responsible, however, for breaches of their fiduciary duty to the corporation.
They can also be held personally liable for breaches of a growing number of statutory
provisions that impose responsibility on them as directors. Directors are also liable for the
torts that they commit themselves, even if committed while executing their responsibilities as
a director. In general, if directors commit a tort, the fact that they were acting as directors
when doing so will not be an excuse.

Duties of other officers

The board of directors can appoint persons to the position of officer, such as president, vice-
president, secretary or treasurer, in accordance with the bylaws.

Officers are individuals appointed by the society’s directors. They perform duties to
effectively manage the society’s corporate activities and affairs.

Corporate officers are judged against the same standards of conduct as the directors of the
society. However, since the delegation of certain powers to the officers of the society is
prohibited, their potential liabilities may not be as broad as that of the directors.
When you accept an officer position, you are agreeing to be a member of a group of people
who are responsible for the management of the society.
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You also agree that you will perform your duties to the best of your ability, with the best
interests of the society in mind.
Officers can also be held personally liable for breaking laws that impose responsibility on
them as officers. Officers are liable for their own wrongdoings, even if they are committed
while executing their responsibilities as an officer.

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DISCUSSION

PART B
A limited liability company, commonly called an "LLC," is a business structure that fits
somewhere between the partnership or sole proprietorship and the corporation. Like owners
of partnerships or sole proprietorships, LLC owners report business profits or losses on their
personal income tax returns.

Steps involved in forming a limited liability company

1. Choose an LLC name.

The name of your LLC must comply with the rules of your state's LLC division. (Typically,
this office is combined with the corporations division within the secretary of state's office.)
While requirements differ from state to state, generally:
 the name cannot be the same as the name of another LLC on file with the LLC office

 the name must end with an LLC designator, such as "Limited Liability Company" or
"Limited Company," or an abbreviation of one of these phrases (such as "LLC,"
"L.L.C.," or "Ltd. Liability Co."), and

 the name cannot include certain words prohibited by the state, such as Bank,
Insurance, Corporation or City (state rules differ on which words are prohibited).

 Your state's LLC office can tell you how to find out whether your proposed name is
available for your use. Often, for a small fee, you can reserve your LLC name for a
short period of time until you file your articles of organization.
 Besides following your state's LLC naming rules, you must make sure your name
won't violate another company's trademark.
Once you've found a legal and available name, you don't usually need to register it with your
state. When you file your articles of organization, your business name will be automatically
registered.

2. File articles of organization.

Prepare and file "articles of organization" with your state's LLC filing office. Typically, you
must provide only your LLC's name, its address, and sometimes the names of all of the
owners -- called members.
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3. Create an LLC operating agreement.

The LLC operating agreement contains rules for the ownership and operation of the business
(much like a partnership agreement or corporate bylaws). A typical operating agreement
includes the members' percentage interests in the business, the members' rights and
responsibilities, and information on voting, management, and profits and losses.

4. Obtain licenses and permits.

Before you begin doing business, you need to obtain the required licenses and permits that
anyone needs to start a new business. Among the licenses and permits you may need to
obtain are a business license and, if your LLC will sell products, a seller's permit.

5. Retain your limited liability.

To retain your LLC's status as a separate entity, LLC owners (members) must observe certain
formalities, such as keeping detailed financial records and recording minutes of major
decisions

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CONCLUSION
The many powers which directors have must be exercised bona fide and in the best interests
of the company. Their powers usually include the powers of raising capital, applying the
assets of the company, allotting shares, making calls on shares, approving transfers of shares
and granting compensation payments or pensions to employees or directors.
They must all be exercised with the broad principle in mind. The associated fiduciary duty of
directors to exercise their powers for proper purposes is discussed in a later chapter. These
two duties do overlap, but they can differ. A director can act honestly in what he believes is
the company’s best interest, yet he may still have exercised his powers as a director for
improper purposes. The important fiduciary duty to act in the best interests of the company is
not codified in Australia. It exists only in general law. A director shall act at all times in what
he believes to be the best interests of the company as a whole so as to preserve its assets,
further its business, and promote the purposes for which it was formed .

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REFERENCE
Commonwealth of Australia 2008. Duties of directors and other officers. Available at:
www.oric.gov.au [accessed 19 November 2014]

Kapadia, V. 2009. Duties and Responsibilities of Company Officers available at:

https://www.linkedin.com/in/virenkapadia [Accessed 20 November 2014]

Langridge.C. 2007. Directors Must Do Their Duty. Available at:

http://www.director.co.uk/magazine/2007/1%20Jan/bp_directors_duty_60_6.html [Accessed
14 November 2014]

Laurence.B. 2006. Steps taken to form Limited Liability Company. Available at:
http://www.nolo.com/legal-encyclopedia/form-llc-29459.html [Accessed 10 November 2014]

Northwest territories Justice 2010 Handbook for Directors, Officers and Members of
Societies in the Northwest Territories available at:
http://www.justice.gov.nt.ca/CorporateRegistry/documents/SocietiesHandbook.pdf [accessed
on 17 November 2014]

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