Question

The three directors of Masks R Us Pty Ltd, successfully negotiate a contract worth $150, 000, on behalf of the company, to supply masks to a large retail chain of stores. Tom and Dick then incorporate a new company, Masks Suppliers Pty Ltd, and cause the new company to perform the supply contact.  Harry is unhappy about this development and contacts ASIC.

Advise ASIC of its options under the Corporations Act and the legal consequences of those options.

Answer 1

Answer :-

One of the options available to the ASIC is file criminal charges against Tom and Dikk for contravention of their duties as company directors as specified under section 184 of the Corporations 2001 Act (Cth). The directors' act of incorporating a new company (Mask Suppliers Ltd) to execute a supply contract entered by Masks R Us Pty Ltd exemplifies conduct that contravenes director's conduct as specified required by law.

.

Legal Consequences: The maximum penalty for the offence filed against Tom and Dikk i.e., contravention of Section 184 of the Corporations Act 2001 (Cth) is a fifteen (15) years sentence.

.

Option 2: The ASIC can also bring up civil proceedings against Tom and Dikk under Section 180-183 of the Corporations Act 2001 (Cth). Section 182 of the Act imposes a civil obligation on directors and officers of a company to avoid conflict of interest in the discharge of duties. In particular terms, Section 182 prohibits a director or any company officer from using their position to gain an advantage for themselves or a third party; or cause detriment to the corporation. Tom and Dikk's act of forming a new company to execute a contract on behalf their employer exemplifies a clear conflict of interest.

.

Legal Consequences: While the Corporations Act 2001 (Cth) imposes a civil obligation, the violation of its provisions can attract civil penalties. If the Court rules that Tom and Dikk have indeed breached their duties as directors to Masks R Us Pty Ltd, then the Court can impose a pecuniary penalty as provided for under section 1317E of the Corporations Act 2001. The directors may also be forced to compensate the corporation for its loss. The Court may also invoke Section 206C of the Corporations Act 2001 (Cth) which gives the Court the power to disqualify a person from managing corporations for a specified time-period.

Step-by-step explanation

Option 1: Criminal Proceedings

One of the options available to the ASIC is file criminal charges against Tom and Dikk for contravention of their duties as company directors as specified under section 184 of the Corporations 2001 Act (Cth). The directors' act of incorporating a new company (Mask Suppliers Ltd) to execute a supply contract entered by Masks R Us Pty Ltd exemplifies conduct that contravenes director's conduct as specified required by law.

.

Under the Corporations Act 2001 (Cth), it is an offence for a director(s) to act dishonestly in the discharge of roles and duties. It is equally an offence to act against the best interests of the corporation. Section 184(2) expressly states that a director or any other officer to a company commits an offence if they use their position dishonestly. Section 184(2a) specifically makes it an offence for directors to act dishonestly with the aim of directly or indirectly gaining an advantage for themselves, or for third-parties, or causing detriment to the company. In the context of the case, Tom and Dikk's act of incorporating a new company (Mask Suppliers Ltd) typifies an act of dishonesty and wrongful use of their position to cause gain advantage for themselves as well as cause immense financial detriment to the company they act as directors for, Masks R Us Pty Ltd.

.

Legal Consequences: The maximum penalty for the offence filed against Tom and Dikk i.e., contravention of Section 184 of the Corporations Act 2001 (Cth) is a fifteen (15) years sentence.

.

Option 2: Civil Proceedings

The ASIC can also bring up civil proceedings against Tom and Dikk under Section 180-183 of the Corporations Act 2001 (Cth). Section 182 of the Act imposes a civil obligation on directors and officers of a company to avoid conflict of interest in the discharge of duties. In particular terms, Section 182 prohibits a director or any company officer from using their position to gain an advantage for themselves or a third party; or cause detriment to the corporation. Tom and Dikk's act of forming a new company to execute a contract on behalf their employer exemplifies a clear conflict of interest.

.

Legal Consequences: While the Corporations Act 2001 (Cth) imposes a civil obligation, the violation of its provisions can attract civil penalties. If the Court rules that Tom and Dikk have indeed breached their duties as directors to Masks R Us Pty Ltd, then the Court can impose a pecuniary penalty as provided for under section 1317E of the Corporations Act 2001. The directors may also be forced to compensate the corporation for its loss. The Court may also invoke Section 206C of the Corporations Act 2001 (Cth) which gives the Court the power to disqualify a person from managing corporations for a specified time-period.