Someone recently bought our

students are currently browsing our notes.


Restrictions On Indemnities Notes

Law Notes > Business Associations Notes

This is an extract of our Restrictions On Indemnities document, which we sell as part of our Business Associations Notes collection written by the top tier of University Of New South Wales students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Business Associations Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:


1 15 Restrictions on Indemnities, exemption and insurance: s 199A - 199C Table of Contents

1 1


2 Intro

1. 2.

3. 4.

1. Rules Exemption from liability as officer or auditor Indemnification against liability as an officer or auditor Directors and officers insurance Ways in which directors / officers can secure release from liability arising from doctrines: a. May be released by general meeting resolution ratifying their breach of duty or otherwise validating the transaction resulting from it. b. Board can be empowered to release one of its number from duty or the consequences of its breach: Queensland Mines c. Court is empowered to grant relief in particular circumstances under s 1318. d. The company's constitutions can indemnify them against liabilities arising from their office. Rule: Officers/auditors may not be exempted at all by their company for a liability incurred as officer/auditor of company; but indemnification and payment of insurance premiums are permitted in circusmtacnes other than those expressly prohibited. i. Provisions do not authorize anything that would otherwise be unlawful: s 199C(1) ii. Anything that purports to indemnify or insure an officer or auditor against liability or exempt them from a liability is void to the extent that it contravenes these provisions: s 199C(2).

1.Ways in which directors/officers can secure release from liability arising from doctrines (a) general meeting consent It may suit a company to allow a director to receive a personal benefit from some transaction involving the company. The company may believe that "it is better to have directors who may advance the interests of the company by their connection, and by the part which they themselves take in large money dealings, than to have persons who would have no share in such transactions as those in which the company is concerned": Imperial Mercantile Credit Assn v Coleman. Unless the constitution provides otherwise, the company in general meeting can with full knowledge of the director's interest:



authorise an interested director to act in what would otherwise be a breach of duty; or ratify a completed act in breach of duty: Regal; Furs v Tomkies

The disclosure required before the consent of the company in general meeting can be said to be informed must be of both the nature and extent of the conflicting interest or duty or the profitmaking opportunity. There should be disclosure of information which the "average commercial man in the street" would think the members should have, remembering that there are problems in presentation, in that too much information can pose difficulties for members as much as too little information: Buttonwood Nominees

2 2


3 When the company in general meeting considers giving consent, can the interested director use the voting power of any shares held by the director? There is old authority allowing the director to vote, provided there is no improper dealing with the company's property: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 ; Burland v Earle [1902] AC 83 . However, the legislature, ASIC and the ASX have thought it appropriate in recent times to exclude interested parties from voting at shareholders' meetings. The circumstances in which this occurs are discussed at [10.040] , where it is suggested that Australian courts may ultimately move towards treating the controlling shareholders in general meeting as fiduciaries. If this were to occur, the controlling shareholders would not be able to use their voting power in a self-interested way. Consequently directors who were also controlling shareholders would be subject to similar fiduciary constraints in each capacity. But Australian law has not yet taken this step. Nevertheless, the power of shareholders to vote in a self-interested way is subject to some constraints. Shareholders cannot vote in such a manner as to perpetrate a fraud on the minority, and Pt 2F.1 provides a statutory remedy in cases of oppression, unfair prejudice or unfair discrimination. At least on occasion an attempt by shareholders to authorise or ratify a breach of fiduciary duty would constitute fraud on the minority or oppression or both. The clearest case of an invalid attempt to authorise or ratify a breach of duty would be where the breach is tantamount to theft of the company's property, contrary to the misappropriation rule. It is arguable that breaches of this kind cannot be condoned even by a unanimous decision of shareholders. Conversely, the Regal (Hastings) case and Furs v Tomkies tell us that certain kinds of breach of duty are ratifiable by ordinary resolution. It may be relevant that in these cases the fiduciaries were acting honestly, believing that their conduct would not harm the company. It may also be relevant that in neither case did the directors misappropriate any company property. Cook v Deeks cannot be confidently reconciled with these principles. In that case the Privy Council held that a purported ratification of the directors' conduct by majority resolution of the shareholders was ineffective, on the ground that the contract which the directors had acquired for their own benefit "belonged in equity" to the company. If the case was truly one of misappropriation of property, it would be easy to understand the conclusion that the breach was not ratifiable. But the contract as an item of property came into existence only pursuant to the breach, just as the profit of the Regal directors arose out of their breach. Perhaps Cook v Deeks is best explained as a case where the court regarded the circumstances as extreme enough that they should substitute their opinion of fairness for the opinion of the majority shareholders, making (in effect) a value judgment of the kind described by Jacobs J in Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240 at 244 . See the discussion at [10.060]ff . An important limit on the power of shareholders to ratify breaches of duty is that shareholders cannot ratify breaches of the statutory duties imposed upon directors: Angas Law Services; Forge v ASIC (2004). However, it may be that a court can take the opinion of shareholders into account in determining whether to make orders under Pt 9.4B where there is a breach of a statutory duty imposed upon a director and also in considering whether to relieve a director from liability under s 1317S. There is also an open issue as to whether different considerations may apply to authorisation given by shareholders in advance of the action taken by directors as opposed to ratification following the action taken by directors. There is further discussion of these issues and of ratification generally at [8.370]-[8.395].

3 3


4 Listed companies ASX Listing Rule 10.1 requires the prior approval of shareholders in general meeting for certain substantial transactions between a listed company, or any entities with which it is associated, and directors: TNT Australia Pty Ltd v Poseidon Ltd (No 2) (1989) 15 ACLR 80 .

(b) board consent?

The consent of the remaining disinterested directors will not suffice to remove the company's right to complain of a breach of duty on the part of the interested director. The reason is that the director owes his or her duty to the company, and the company is entitled to have the unbiased advice and participation in the decision of every director: Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431; 9 ACLC 539 . Co-directors can, however, be authorised by the constitution to consent to a director being interested in a transaction or acting while having a conflict of duties. When disinterested directors are so authorised they have a duty to scrutinise the particular transaction to ensure that it is fair to the company. That is in addition to their duty to check that the transaction will advance the interests of the company. A purchase of property by the company from a director may be at a fair price, but the disinterested directors have also to determine whether it is beneficial to the company to acquire that property for the company's business. Although a board cannot, without authority in the constitution, consent to what would otherwise be a breach of duty by one of its number, a board may, depending on the particular facts, have authority, under its management mandate, to renounce on behalf of the company a particular business opportunity, even though that leaves the opportunity available to a director who exploits it. The conflict is removed by the board putting the opportunity outside the scope of the fiduciary relationship in circumstances where the company cannot exploit it. That happened in Queensland Mines Ltd v Hudson (1978) 18 ALR 1; 3 ACLR 176; (1977-78) CLC [?]40-389 . The facts of Queensland Mines may be considered exceptional in that the company was in the nature of a joint venture and in joint ventures directors are identified more closely with factions of shareholders than in ordinary companies. One shareholder of Q company (the company which was alleged to have renounced the opportunity exploited by one of its directors, H) was F company, which held a 51% interest in Q company. F company was controlled by S company, which in turn was controlled by K and his family. K was a fellowdirector of H. The Privy Council's finding that K, as a director of Q, agreed to H taking the opportunity may also, in the special circumstances, have been a finding that K's approval was tantamount to approval by a majority in a general meeting. Activity of the kind undertaken by the board in the Queensland Mines case would be relevant to the court's determination, under ss 182 and 183 , of whether the director's subsequent profitmaking conduct constituted "improper" use of his or her position or information.

4 4

Buy the full version of these notes or essay plans and more in our Business Associations Notes.