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#8567 - Checklist Directors’ Duties - Business Associations

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Directors’ Duties: Checklist 1

Checklist of all the duties 1

DD duty of care 2

DD Duty not to Fetter Discretions 4

DD duty to act in good faith and for proper purposes (s 181) 5

Duties:

  1. Duty of Care, Diligence and Skill

    1. Breach of statute? S 180(1):

    2. Breach under general law? Ordinary prudent person in co circumstances and director’s position (ASIC v Adler)

    3. Exception for business judgment rule?

  2. Duty to prevent insolvent trading: s 588G

  3. Duty to act in good faith

  4. Duty to individual members

  5. Duty to avoid conflict

  6. Duty not to derive a secret profit

  7. Related party transactions (for a public company)

Where there is a possible conflict of interest or a financial transaction with a related party – consider the following possible breaches:

Is D liable because of an interest D had in a transaction with their Co?

  1. Breach of statutory disclosure obligations in ss 191, 195? Director of a co who has a MPI in a matter that relates to affairs of co must give the other directors notice of the interest unless s 191(2) applies. Consider implications for Criminal liability under s 195 (McGellin; Camelot; Adler)?

  2. Breach of fiduciary duty to avoid conflicts? (Perhaps changed by company’s constitution)? (Chan; Phipps)

Is D liable because he/she profited or harmed company from fiduciary position?

  1. Statutory duty of disclosure in ss 182 (regarding use of position), s 183 (use of information), and s 184?

  2. Breach of equitable duty to avoid conflicts?

    1. Duty applied?

    2. Consent?

    3. Consequences

  3. Breach of any requirements from co’s constitution?

D breach other no conflict duties

  1. Breach of related party transactions law (public co) ( ss 207-230)

  2. Breach by not fettering board discretions rule: Thorby v Goldberg

  3. Breach by competing with company: Mashonaland

Other issues to consider:

  1. Breach of duty to take reasonable care, skill and diligence: s 180; GL

  2. Breach of duty to prevent insolvent trading: s 588G
General law Statute
Duty of Care, Diligence and Skill Daniels v Anderson; Wheeler; Adler; McDonald; Healey (Centro decision) – business judgment exception in s 180(2) S 180, 189, 190, 198D
Good faith in best interests, for proper purposes

(Re Smith and Fawcett; Harlowe’s Nominees; hogg v Cramphorn; Teck; Howard Smith v Ampol; Whitehouse v Carlton; Equiticorp ; Adler; Bell Group)

  1. When in corporate group: (Charterbridge; equiticorp; Bell)

Duty to act in good faith in best interests of co and for proper purposes: s 181, 184

Criminal – s 185

  1. When in corporate group: (Charterbridge; equiticorp; Bell)
Duty to avoid conflicts Imperial Mercantile creditor; Transvaal; Thorby v Holdberg; Mashonaland; Zacharia; Adler; Hospital Products;) Duty not to improperly use position or information for advantage or detriment of company: Ss 182, 183
Disclosure obligations

Ss 191, 195

(Mcgellin v mount king; Camelot)
Duty not to fetter discretion
Duty not to
Duty to prevent insolvent trading: s 588G
For public cos, related party transactions

Breach?

Remedies

  • Breach of duty of care, diligence and skill: (Both CL and statutory duties are owed by individual directors and officers personally liable for breach)

    • If breach of statute: compensation proceedings can be founded upon contravention of s 180(1) under s 1317H (Words ‘resulted form’ in s 1317H are words by which in their natural meaning only the damage which as a matter of fact was caused by the contravention can be the subject of an order for compensation).

      • S 180(1) is a civil penalty provision (see section1317E).

    • If breach of general law of duty: Remedy under s 598

  • Breach of duty of good faith which requires directors to act bona fide for corporate interest: rescission remedy – set aside a board decision taken in breach of duty of care or restrain action pursuant to such a decision.

  • Depending on type of company:

    • If solvent – primary remedies under contract or breach of general law duty of care. Can also seek compensation if breach of s 180(1) irrespective of whether a civil penalty order has been sought in relation to contravention: s 1317H.

    • If insolvent – remedies also include: action under part 5.7B founded for contravention of s 588G (insolvent trading); compensation proceedings based on

Duty of care

s. 180(1)

Care and diligence

A director or other officer of a company must exercise his/her powers and discharge his/her duties with the degree of care and diligence that a reasonable person would exercise if s/he:

(a) were a director or other officer of a company in the company’s circumstances, and(b) occupied the office held by, and had the same responsibilities within the company as, the director or officer. Civil penalty: see s. 1317E.

Common Law

Duty of care

 The director must exercise reasonable care and skill in performing his/her duties (Daniels v Anderson).This has been extended to care, diligence and skill: reasonable care is measured by the care an ordinary man might be expected to take on his own behalf (Re City Equitable Fire Insurance).

Equitable

Duty of care

 Duty to exercise reasonable degree of care and skill, but not a fiduciary obligation (Permanent Building Society v Wheeler).

N.B. Same Standard

 Mention all three sources of the duty, but the standard of care of all of them is now essentially the same (Vines v ASIC).

Exceptions:

s. 180(2)

Business judgment rule

A director or other officer will not breach s. 180(1) or his/her common law or equitable duties if s/he makes a business judgment and:

  1. makes the judgment in good faith for a proper purpose, and

  2. does not have a material personal interest in the subject matter of the judgement, and

  3. informs him/herself about the subject matter of the judgement to the extent that s/he reasonably believed to be appropriate, and

  4. rationally believes that the judgement is in the best interests of the company.

The belief that the judgement is in the best interests of the company is a rational one unless it is a belief that no reasonable person in the director’s or officer’s position would hold: s 180(2)

s. 189

Reliance on information and advice

A director’s reliance on information or advice is taken to be reasonable, unless the contrary is proved, if all of the following three elements are satisfied:

(a) the director relies on information, or professional or expert advice, given or prepared by:

(i) an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned, or

(ii) a professional advisor or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence, or

(iii) another director or officer in relation to matters within his/her authority, or(iv) a committee of directors on which the director did not serve in relation to matters within the committee’s authority; and

(b) the reliance was made:

(i) in good faith, and

(ii) after making an independent assessment of the information or advice, having regard to the director’s knowledge of the company and the complexity of the structure and operations of the company; and

(c) the reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part (Pt. 2D.1) or an equivalent general law duty.
Delegation

s. 198D

Power to delegate

(1) Power to delegate: Unless the company’s constitution provides otherwise, the directors of a company may delegate any of their powers to:

(a) a committee of directors, or(b) a director, or(c) an employee of the company, or (d) any other person.

(2) How powers are exercised: The delegate must exercise the powers delegated in accordance with any directions of the directors.(3) Effect of delegated powers: The exercise of the power by the delegate is as effective as if the directors had exercised it.
S 190 responsibility for actions of delegates

(1) Director responsible: If a director delegates a power under s. 198D, s/he is responsible for the exercise of the power by the delegate, as if s/he had exercised the power him/herself. (2) When director not responsible: A director is not responsible under (1) if:

(a) the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the company’s constitution (if any), and(b) the director believed:

(i) on reasonable grounds, and(ii) in good faith, and(iii) after making proper inquiry if the circumstances indicated the need for inquiry,

that the delegate was reliable and competent in relation to the power delegated.
S 199C Contravention

Anything that purports to indemnify or insure a person against a liability, or exempt a person from a liability, is void to the extent that it contravenes s. 199A or s. 199B.

  • When the legislature confers a power on a company, it is implied that the company cannot destroy that power by agreement (Russell v Northern Bank Development Corp Ltd [1992] BCLC 1016).

  • Due to the fiduciary relationship between directors and the company, the board must retain all its discretions. Any purported delegation that would exclude the board from exercising the same power is ineffective as being beyond the authority of the board.

The duty to retain discretions does not prevent directors contracting to exercise their...

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