#10841 - Directors’ Duty To Avoid Conflicts - Business Associations 1

S 182 Use of position – civil obligation

1. A director, secretary, other officer or employee of a corporation must not improperly use their position to:

   1. Gain an advantage for themselves or someone else; or

   2. Cause detriment to the corporation

2. A person who is involved in a contravention of (1) contravenes this subsection

(These are civil penalty provisions)

S 183 Use of information – civil obligations

1. A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

   1. Gain an advantage for themselves or someone else; or

   2. Cause detriment to the corporation

2. A person who is involved in a contravention of (1) contravenes this subsection

S 79 Involvement in contravention

A person is involved in a contravention if, and only if, the person:

1. Has aided, abetted, counselled or procured the contravention; or

2. Has induced, whether by threats or promises or otherwise, the contravention; or

3. Has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to the contravention; or

4. Has conspired with others to effect the contravention

• Another director’s duty is to avoid situations where the director’s personal interest conflicts or may conflict with their duty to the company – without prior consent of the company

• This is expressed by a number of specific rules including those:

  • That apply to transactions between a director and their company and to other transactions with the company in which the director is directly interested

  • Concerned with the liability of directors to account for profits made from such transactions touching their office and to restore to the company property acquired under such a transactions

  • Concerning residual applications of the obligation

There are three such tiers:

1. The equitable principle enjoining conflict avoidance that makes transactions voidable at the suit of the company irrespective of the fairness of the transaction and so long as it is possible to restore the status quo ante

2. Provisions of company constitutions modifying the equitable rule or its consequences – usually by relieving against its rigour

3. Statutory duties imposed by the Act

• Equitable rules generally contain either permission or an absolute prohibition with respect to conduct rather than judicial determination of a state of affairs

  • Cf the US position [436.4]

• Replaceable rule s 194 can perform the function of validating transacitons that would otherwise be invalidated y the equitable principle because of the director’s interest in them

• S 191(1): A director of a company with a material personal interest in a matter relating to the affairs of the company must give other directors notice of the interest

  • Disclosure is required for interests in contracts or proposed contracts, offices and property but may be even wider than this

• S 191(2): A director need not give notice of the interest if:

  • The interest falls within an exempted category

  • The company is a proprietary company and the other directors are aware of the nature/extent of the transaction and its relation to the affairs of the company

  • The director gave standing notice of the nature and extent of the interest (standing notice will expire if a new director is appointed who isn’t given notice

• S 191(3): Notice must include the nature and extent of the interest AND the relation of the interest to the affairs of the company at a director’s meeting as soon as practicable after they become aware of it

• S 191(4): Details must be recorded in the minutes of the meeting. A director’s contravention of s 191 doesn’t affect the validity of the transaction

• S 193: These provisions do not displace the operation of equitable rules about conflict of interest and constitutional provisions restricting directors from interests or offices involving such a conflict

  • Apparently they don’t effect constitutional provisions which attenuate the effect of equitable rules either - one such rule is that provided by the Act:

    • S 194: If a director of the company has a material personal interest in a matter relating to the affairs of the company and they disclosure it or need not disclose it under s 191 then:

      • They can vote on matters relating to the interest

      • Any transaction relating to the interest can proceed

      • The director can retain benefits under the transaction despite the interest

      • The company can’t avoid the transaction just because of the interest

• The interest that attracts the obligation under s 191(1) must be:

  • Personal – which includes pecuniary interests but also those arising from personal, especially family, interests (Costain Australia’s Case).

  • Material – the standard looks to the showing of a substantial likelihood that, under all the circumstances, the interest would have assumed actual significance in the deliberation

    • E.g. director of a public company contracts with another company he is director of (Transvall v New Belgium)

• Such a conflict can arise through intermediate companies through which a controlling interest is held (Devereaux Holdings)

• S 195(1) : A director of a public company that has a material personal interest (MPI) in a matter being considered at a directors meeting must not be present while it is being considered or voted on

• S 195(2): This doesn’t apply if the interest is exempted from disclosure under s 191(2) or if the directors who do not have a material personal interest pass a resolution that:

  • Identifies the director, the nature + extent of their interest in the matter and its relation to the affairs of the company

  • States that those directors are satisfied that the interest shouldn’t disqualify them from voting or being present

• S 195(3): They can participate with ASIC approval in the case of want of quorum or urgency or other compelling reason

• But if a director with a material personal interest also possesses confidential information relevant to the matter, board disclosure and non-participation may be insufficient to discharger the duty – PBS v Wheeler