#7398 - Directors’ Duty To Avoid Conflicts - Business Associations I

Class 13 Directors’ duty to avoid conflicts

Corporations Act ss 182, 183.

CORPORATIONS ACT 2001 - SECT 182

Use of position--civil obligations

Use of position--directors, other officers and employees

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

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Note: This subsection is a civil penalty provision (see section1317E).

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

Note 1: Section79 defines involved .

Note 2: This subsection is a civil penalty provision (see section1317E).

CORPORATIONS ACT 2001 - SECT 183

Use of information--civil obligations

Use of information--directors, other officers and employees

(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:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Note 1: This duty continues after the person stops being an officer or employee of the corporation.

Note 2: This subsection is a civil penalty provision (see section1317E).

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

Note 1: Section79 defines involved .

Note 2: This subsection is a civil penalty provision (see section1317E).

Redmond [7.340]-[7.380].

• The director’s fiduciary obligation includes the duty to avoid situations where without the consent of the company, the director’s personal interest conflicts or possibly conflicts with their duty to run the company.

• The interest that attracts the statutory disclosure obligation in s 191(1) must be both personal and material.

• Not limited to pecuniary interest. Personal interests may include interests arising from close personal relationships especially family relationships [R v District Council of Victor Harbour; Ex parte Costain Australia Ltd (1983)],

• The standard of materiality in related contexts looks to the showing of a substantial likelihood that, under all the circumstances, the interest would have assumed actual significance in the deliberations.

• Where the director of another company which is contracting with the public company, the materiality would ordinarily be satisfied so that disclosure is required.

• Generally for purposes of disclosure, an interest need not be director but may be held through intermediate companies in which a controlling interest is held.; Devereaux Holdings Pty Ltd v Pelsart Resources NL (unreported, 1985)

• Main Principles

  • Chan v Zachariah: A person in a fiduciary relationship cannot put himself in a position where his interests and duty conflict. This prevents a person from being swayed by personal interests and misusing his position. This includes positions where there is a “significant possibility” of conflict.

[7.360] Aberdeen Railway Co. v Blaikie Bros (1854):

• A director should not enter into engagements in which he has or can have a personal interest conflicting, or which may conflict, with the interests of those whom he is bound to protect.

Scenario

Frieda owns the property so she wants the highest price but being director she would want the lowest price for the land.

It doesn’t matter what price it is being sold for – do not consider the price.

The mere fact that she is just the one – makes the resolution invalid and the transaction voidable.

The remedy is restitution

Curing Conflict: Disclosure of the Interest

• Where the director discloses the interest and abstains from voting, depending on the articles, this will usually be sufficient to avoid an equitable breach.

Material personal interest:

• S191(1): A director who has a material personal interest in a matter that related to the affairs of the company must give the other directors notice of the interest unless s191(2) states otherwise.

• S191(2): When notice is not required

• R v District Council of Victor Harbour: A personal interest includes but is not limited to a pecuniary interest; it may arise from close personal relationships.

Notice requirements:

• S191(3)(a): The notice required by s191(1) must give detail of (i) the nature and extent of the duty and (ii) the relation of the interest to the affairs of the company; AND

• S191(3)(b): Be given at a directors meeting as soon as practicable after the director becomes aware of their interest in the matter.

• Gray v New Augarita Porcupine Mines: The amount of detail disclosed in the notice must depend on the nature of the contract or arrangement proposed and the context in which it arises.

Effect of disclosure (Proprietary Companies only):

• s194: If a director has a material personal interest and

1. discloses the nature and extent of it (per s191) or

2. doesn’t need to disclose (per s191(2)), then

3. s/he may vote on matters that relate to the interest and

4. any transactions relating to the interest may proceed. Also,

5. the director may retain benefits under the transaction and

6. the company cannot avoid transaction because of the existence of the interest.

Restrictions on Voting (Public Companies only):

• s195: A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not:

1. be present while the matter is considered at the meeting, or

2. vote on the matter

• These restrictions will not apply if interest is exempt under s191(2) (s195(1A)(b)) or directors pass a resolution identifying the director, nature and extent of interest and its relation to the affairs of the company (s195(2)(a)) and the directors are satisfied that the interest should not disqualify the director from voting or being present (s195(2)(b)).

Who should disclosure be made to:

• Imperial Mercantile, Transvaal: Where provided, full disclosure to the board may be sufficient.

• Qld Holdings: In other circumstances, full disclosure to a disinterested board may be sufficient.

• Imperial Mercantile: Otherwise, disclosure should be made to the general meeting who must approve the transaction by ordinary resolution.

Step 1

Consider the General Meeting

Step 2

There will be an article which says that you can get around this problem by disclosing to the directors – based on the articles of association. This is because this is approved by the General Meeting

• s203D(1) – Removal by Members – public companies only

  • If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed.

Note; there is a difference between:

• Conflict of duty and duty - (the kind of circumstances which are found in Aberdeen Railway, Imperial Mercantile Credit – where the director has another equitable duty - in that case, there is not a conflict of interest simply, there is a conflict of duty and duty

  • 2 lots of disclosures are required – therefore more difficult to manage.

• Conflict of duty and interest - The other kind of conflict, the one more universally referred to and the one that comes up more often today, and is often easier to fix up – it is the conflict of duty and interest- the director relates to the company as a director and in his own personal account as a principal e.g. wishing to sell an asset to the company.

  • Director can disclose the nature of their interest to the company and the Board can consider the nature of the conflict and whether it is still in the interest of the company to go ahead. Details of disclosure will have to be looked into.

• Articles are important as they are a fairly comprehensive contractual modification of the general law.

Director Sitting on 2 Boards – duty to avoid conflict

[7.360] Aberdeen Railway Co. v Blaikie Bros (1854)

Facts:

• A railway company contracted to purchase iron chairs from a partnership. The partnership sued for performance of the contract. The company sought to avoid the contract on the ground that, at the time of contracting, one of its directors, Blaikie, was a member of the partnership.

• Lord Cranworth LC: It is a rule of universal application that no-one can enter into engagements in which he/she has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect.

• This principle is so strict that no question can be raised as to the fairness or unfairness of the contract to be entered into.

• The inability to contract depends not on the subject matter of the agreement, but on the fiduciary character of the contracting party.

• [The rule arises from the principle that the company is entitled to the independent deliberation of all its directors.

• Note this original formulation, requiring merely “possibility” of conflict, is a strict formulation]

• Present case: In this case, B’s duty to the company imposed on him the obligation of obtaining the chairs for the lowest possible price while his personal interest would induce him to fix the price as high as possible. Therefore there was a conflict between his interests and his duty.

• The individual is a partner of the partnership. They are both individuals but have fiduciary duties to the partnership. Duty v duty situation.

Court of Appeal in Chancery

Facts:

• Coleman was a stockbroker in a partnership and a director of the association. As a broker he contracted with a company to procure subscriptions for...