#7388 - Directors' Duties - Corporations Law

Topic 8 and 9: Directors Duties

NB: If there is a breach of director’s duties, link to 232 (oppressive conduct)

Corporate governance is: “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised.” ASX Corporate Governance Council, Corporate Governance Principles and Recommendations with 2010 Amendments (2nd Edition)

Duties:

• Duty to prevent insolvent trading

• Duty to act in good faith and in the best interests of the company

• Duty to use powers for proper purposes

• Duty to retain (not fetter) discretions

• Duty to avoid actual and potential conflicts of interest

• Duty to use care, skill & diligence of a reasonable person in like circumstances

Introduction

1. Identify who is subject to the duties on the facts:

   1. Under statue 9 both directors (includes de facto and shadow) and officers can be liable

   2. Extends to errors and mistakes and is not confined to procedural irregularities

      1. Director: person validly appointed to position of D 9(a)(i)

      2. Officer: another person who makes/participates in making decisions which affect the whole or a substantial part of the company’s business 9(c)(i) or a person who makes decisions that affect financial standing 9(c)(ii)

      3. Employee: also liable in limited circumstances

2. Identify the legal basis of the duty

   1. ASIC/company can bring a claim both at general law and under statute as the two claims operate side by side 185

   2. Whilst the general law and statutory duties govern similar conduct, statutory duties are more favourable for several reasons

      1. The statutory duties are wide in scope as they apply to employees, officers and directors

      2. The statutory consequences are broader because ASIC has the power under statute to seek remedies under 1317E, such as disqualifying a director and can attempt to impose criminal liability 184 whereas X is restricted to compensation orders at general law (but can take advantage of equitable principles such as tracing)

      3. Statutory breaches cannot be ratified, so D’s have less scope to avoid liability

   3. However, you should still look at both given the difference in remedies available

Duty to Act in Good Faith in the Best Interests of the Company

1. Statutory and fiduciary duties are exactly the same. Acknowledge that it has two different sources

   1. Statutory: owed by directors and officer to the company

   2. Fiduciary: owed by people in a position of trust to beneficiaries of that trust

2. First question: is this person a director, de facto director, shadow director or officer? 9

   1. A director will breach their duty if they permit or allow the corporation to contravene the act and: ASIC v Maxwell

      • They company’s interests were jeopardised

      • The risks to the corporation outweighed any potential countervailing benefits and

      • There were reasonable steps that could have been taken to avoid those risks

3. Nature of the duty

   1. Civil offence s181: (1) A director or other officer of a corporation must exercise their powers and discharge their duties:

      • (a) in good faith in the best interests of the corporation;

   2. Criminal offence s184(1) A director or other officer of a corporation commits an offence if they:

      • (a) are reckless; or

      • (b) are intentionally dishonest; and fail to exercise their powers and discharge their duties:

      • (c) in good faith in the best interests of the corporation

   3. Fiduciary duty

      • Fiduciaries ‘must exercise their discretion bona fide in what they consider — not what a court may consider — to be the interests of the company, and not for any collateral purpose’ Re Smith and Fawcett Ltd (1942)

4. Good faith (bona fide)

   1. Whether something was in good faith is an objective test: Directors must subjectively think it, but it must be a belief that another director would reasonably hold. ASIC v Adler

   2. The objective overlay is to overcome the:

      • Dishonest director

      • Amiable lunatic: “Bona fide (good faith) cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying its money with both hands in a manner perfectly bona fide yet perfectly irrational Hutton v West Cork Railway Co

   3. Surrounding circumstances (objectively viewed) could lead one to doubt, discount or not accept a director’s assertion he/she has acted in good faith Bell Group Ltd (in liq) v Westpac Banking Corporation

   4. What is motivating the accused? Is it the interests of the company or something else?

      • Bring in evidence of this wrongful intention e.g. non-disclosure, failure to follow normal procedure, causing material prejudice to company Adler

5. Best interests of the corporation: What are the interests of the company?

   1. Look at the CC: It may state the company’s interests. Whitehouse

   2. Corporation:

      • shareholders as a collective group Greenhalgh v Ardene Cinemas Ltd

      • Can consider the interests of other people/groups (stakeholders) provided doing so also benefits the company

        • But if shareholders’ interests and interests of other groups conflict, shareholders' interests are paramount Darvall v North Sydney Brick & Tile Co Ltd (1989)

        • Employees: no duty is owed, only to the extent that it will maximise company value Parke – where there is a conflict between the interests of shareholders and employees, shareholders will prevail

      • Examples of actions that are not in the interests of shareholders:

        • Insolvent trading Bell Group Ltd (in liq) v Westpac Banking Corporation

        • Converting unsecured loans into secured loans, putting the best interests of the parent company and bank ahead of shareholders Bell Group Ltd (in liq) v Westpac Banking Corporation

      • However exception when company is insolvent:

        • where the company is in financial difficulties, the creditors’ interests become increasingly important Kinsela v Russell Kinsela Pty Ltd

        • does not confer a right of action on creditors to being an action for breach Spies v R

      • Individual shareholders:

        • directors owe fiduciary duties to the company and not individual shareholders Percival v Wright (1902)

        • UNLESS: there is a direct and close relationship of trust, confidence and specific dependence (most likely in small; family companies) Examples:

          1. Director makes representation to shareholders about accepting an offer Coleman v Myers; Brunninghausen

             1. This case contained: family character of the company

             2. High degree of insider knowledge

             3. Manner in which D went about persuading shareholder to sell

          2. Transaction is between a director and shareholder, rather that the company and a third party Brunninghausen

             1. Where offer is made, D must not us knowledge to his benefit over another. Requires the D to promote loyally the joint interests of all shareholders.

        • W while directors are required to act in the interests of the company, if they are also shareholders, they cannot reasonably be expected to disregard their interests Mills v Mills

      • Interests in a corporate group:

        • Generally Ds cannot act in the interests of other companies in the group, only in the interests of that particular company Walker

        • Exception: If it a wholly owned subsidiary, Director may act in the interests of the HC where:

          1. CC of subsidiary expressly authorised D to act in the best interests of the holding company 187(a)

          2. D acted in good faith and in the best interests of the holding company 187b

          3. Subsidiary is not insolvent at the time D acts (and has not become insolvent from that act) per 187(c)

        • Exception: applies if not a wholly owned corporate group:

          1. Per Equiticorp (obiter) it was suggested that the interests of the related company may be taken into account where acting in the interests of other group members, objectively viewed, may be for the benefit of their own company (or no consequence would follow) despite a technical breach of duty

      • Nominee directors:

        • Might have a contractual interest to act in the best interests of the company that nominated them. Will have to find a way which satisfies both duties

        • Where the interests of a holding company and the subsidiary’s minority shareholders do not coincide, NDs appointed are bound to put the interests of the subsidiary’s shareholders ahead of the majority shareholders Scottish Co-op Wholesale Soc Ltd v Meyer

        • If they can't simultaneously satisfy them, they must resign one of their commission or run the risk of breaching the duty

        • Company’s constitution may permit a nominee director to act in interests of nominator Levin v Clark (1962)

6. Conclusion: if statutory duty is satisfied, so is fiduciary

Duty to act for a proper purpose

1. Statutory and fiduciary duties are exactly the same. Acknowledge that it has two different sources

   1. Statutory: owed by directors and officer to the company

   2. Fiduciary: owed by people in a position of trust to beneficiaries of that trust

   3. The onus of establishing that the directors acted improperly rests with those alleging the breach of duty: Australian Metropolitan Life Assurance v Ure

   4. A director may be in breach even though they are not involved in a particular transaction: The duty is breached if the director disclosed a conflict of interests and abstained from voting but knew of the improper purpose of the other directors and failed to take steps to prevent the transaction from proceedings. They are under a positive duty ...