DIRECTORS DUTIES

Question 1

WHAT/WHO IS A DIRECTOR

Answer 1

• S 9 of the Corporations Act defines ‘director’ to mean:
  (a) a person who is appointed to the position of director regardless of the name that is given to their position (de facto director)
  (b) a person who is not validly appointed a director but acts in the position of a director (de facto director), or
  (c) a person who is not validly appointed a director but the directors of the company are accustomed to act in accordance with the person’s instructions and wishes (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors of the company) (shadow director)
• Definition could include others who aren’t necessarily given the title director.
  › S 180 duty of care and diligence applies to directors and other officers.

Question 2

WHO CAN BE A DIRECTOR

Answer 2

• There is a statutory requirement for all companies to have at least one director: 201A
  › Only a natural person, over the age of 18 can be appointed as a director of a company: s 201B(1) A person consent to that appointment (s 201D) and not be disqualified from being a director (s 201B(2))

Question 3

DE FACTO DIRECTORS

Answer 3

 Not officially appointed but acts like one.
 Resigned but kept active role

Question 4

SHADOW DIRECTORS

Answer 4

 Not officially appointed, but directors accustomed to acting on their instructions.

Question 5

EXECUTIVE DIRECTORS

Answer 5

 Both director, and a full time employee – CEO.
 Finance director.
 Apart of senior management, and will also be a member of board of directors.

Question 6

ALTERNATIVE DIRECTORS

Answer 6

 Director absent board meeting/unable to tend to company business. Temporary substitute.

Question 7

NOMINEE DIRECTORS

Answer 7

 Person appointed to represent interests of a particular group (group of shareholders, employees).

Question 8

NON-EXECUTIVE DIRECTORS

Answer 8

 Not employees, will attend board meetings.
 Usually bring some special skill or knowledge to the company.

Question 9

STATUTORY DUTIES - WHO

Answer 9

› ‘Officer’, see s 9 and ASIC v King [2020] HCA 4
 Anyone providing they have the capacity to impact significantly the financial standing, regardless whether they have an formal position in the company.
 Consultant and other advisors – not unless they involved with management of company and can ensure advice is taken.
› Employees i.e. ss 182 and 183

Question 10

WHAT DO DIRECTORS DO

Answer 10

• The functions undertaken by the directors of a company vary depending on the size and type of company and the role of the director in it
  › In a small business, the director or directors may manage the business in the sense that they work in the business and manage the day-to-day decisions in running the business
  › In a large company, directors may assume a more supervisory role, with day-to-day decision-making left to the company’s executive management
  › In larger companies, the role of the directors may be to concentrate on setting strategic goals for the company, appointing managers to implement strategies to meet those goals, supervise managers and review progress towards goals
• A director can be a member (shareholder) but does not need to be

Question 11

APPOINTMENT OF DIRECTORS - PROPRIETARY

Answer 11

› Appointment of directors – check constitution or Replaceable rules (RR). If RR, Board may appoint but members must confirm appointment: RR s 201H
› Members may appoint by ordinary resolution: RR s 201G
› Removal of directors – check constitution (may allow board or members to remove)
› If RRs apply, members may remove by ordinary resolution: RR s 203C

Question 12

APPOINTMENT OF DIRECTORS - UNLISTED PUBLIC COMPANY

Answer 12

› Appointment of directors – check constitution or Replaceable rules (RR). If RR, Board may appoint but members must confirm appointment: RR s 201H
› Members may appoint by ordinary resolution: RR s 201G
› Separate resolution required for each director unless all members agree: s 201E
› Removal of directors – members may remove by ordinary resolution: s 203D
› Board cannot remove a director: s 203E

Question 13

APPOINTMENT OF DIRECTORS - LISTED COMPANY

Answer 13

› Appointment of directors – check constitution. If Board may appoint, members must confirm at the next AGM: ASX Listing Rules.
› Separate resolution required for each director unless all members agree: s 201E
› All directors (other than CEO) must stand for re-election every three years: ASX Listing Rules
› Removal of directors – members may remove by ordinary resolution: s 203D
› Board cannot remove a director: s 203E

Question 14

REQUIREMENTS OF DIRECTORS MEETINGS

Answer 14

› Procedural rules for board meetings are typically contained in the company’s constitution
› For companies governed by the RR, check the appropriate section of Corporations Act
› Who can call a directors’ meeting?: Company constitution OR if RR apply, any of the directors can call a board meeting: s 248C
› What are notice requirements?: Company constitution OR if RR apply, ‘reasonable notice’ must be given to each director: s 248C
› What is the quorum requirement?: Constitution will specify number of directors who must be present in order for there to be a quorum. If RR apply, s 248F provides unless directors decide otherwise, the quorum for a meeting of directors is two directors and the quorum must be present at all times during the meeting
 A resolution passed at a meeting at which there is no quorum is void
› Minutes must be kept of resolutions passed at board meetings: s 251A(1)

Question 15

SOURCES OF DIRECTORS DUTIES

Answer 15

1. General law (GL): common law duties and equitable fiduciary duties
2. Statutory duties under the Corporations Act, see s 185
   › Cf approach in the United Kingdom, ss 170(3) and (4) of the Companies Act 2006 (UK)
   › These don’t replace the general law duties, they reflect them – s 185.
3. Contract, see s 140(1)
4. Statutory duties under other legislation – competition & consumer law, taxation laws, environmental protection law and OHS laws

Question 16

THE DUTIES

Answer 16

› Care & diligence
 Duty of care, skill & diligence (GL; s180)
 Duty to prevent insolvent trading (s588G)
› Loyalty & good faith
 Good faith & proper purpose
* Duty to act in good faith & best interests of company (GL; ss 181, 184)
* Duty to act for proper purposes (GL; s181)
* Duty to retain discretion (GL)
 Conflict of interest
* Duty to avoid conflicts (GL)
o Requirement to disclose MPI (ss 191, 195)
o Related party transaction; fin. Benefits (ss208, 228)
* Duty not to profit from position as fiduciary (GL)
o Duty not to make improper use of position & information (ss182, 183)
o Insider trading (ss1043A, 205G)

Question 17

FIDUCIARY DUTY

Answer 17

› Director and their company.
› Loyalty, not to profit, conflict.
› Only recognise them on a prohibitive nature.
› Won’t judge if they acted in best interest, but will judge if they’ve acted in interests against company in favour of themselves.

Question 18

WHO OWES THE GENERAL LAW DUTIES

Answer 18

› Owed by the following people to their company:
 Directors, senior executive officers, who, like directors, can be regarded as fiduciaries

Question 19

WHO OWES THE STATUTORY DUTIES

Answer 19

› Applies to directors; however, some of the statutory duties also apply to company officers
› Additionally, s 182 and 183 – not to make improper use of position or information – also apply to employees
› De facto and shadow directors
› However, still, some statutory duties only apply to directors and not other officers (for example s 588G and s 191)
- These duties are owed to the company

Question 20

ENSURING LOYALTY TO THE COMPANY

Answer 20

2 BROAD CATEGORIES OF DIRECTORS DUTIES
- CARE, SKILL AND DILIGENCE
- LOYALTY AND FAITH

Question 21

DUTY TO ACT WITH CARE AND DILIGENCE

Answer 21

• Investors provide funds to a business on the basis of certain assumptions, one being that the managers will use the funds for the purposes of running a successful business
• The expectations on the performance level of directors raises the question of how the law keeps directors and other officers accountable for the level of effort they put into running a business
• Also, given that many Australians are economically exposed to the success or failure of major corporations through a government policy of compulsory superannuation, there are legitimate community expectations that corporations will be managed with an appropriate level of due care and diligence
• The law does not, however, impose liability for mere mistakes or for decisions that turn out badly
• The law provides a protective and accountability mechanism by imposing a legal duty on directors and officers to act with reasonable care and diligence

Question 22

WHERE DOES DUTY TO ACT WITH CARE AND DILIGENCE ARISE

Answer 22

• › S 180 Corporations Act
  › A contract between the director (or other officer) and the company
  › The general law
• S 180(1) states:
  › (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
  (a) were a director or officer of a corporation in the corporation’s circumstances; and
  (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer
• Whether a person has breached the statutory duty of care is determined by considering the circumstances of the company and also the person’s position and responsibilities in the company

Question 23

WHAT STANDARDS ARE APPLIED

Answer 23

• The standard of care expected of a director is the same regardless of whether the duty arises under the general law or the Corporations Act
• How does a court determine whether a director has breached the statutory duty of care?
  › The court examines the actual amount of care and diligence exercised by the director and compares this with the degree of care and diligence that a reasonable person would exercise if they were a director of a similar company and had the same responsibilities as the director
• What are the standards?
  › Care, skill, diligence and delegation and reliance

Question 24

STANDARD OF CARE

Answer 24

› The common law duty of care, skill and diligence that is expected by the courts has traditionally been set very low: initially subjective test
 Re City Equitable Fire Insurance Co [1925] Ch 407 introduced objective component
 Test modified by Corporate Law Reform Act 1992 (Cth)  now objective test
* AWA Ltd v Daniels (1992) 7 ACSR 759, Rogers CJ
 Standard of care = objective
* Daniels v Anderson (1995) 37 NSWLR 438, in particular the majority judgment of Sheller and Clarke JJA
* Objective standard of care firmly established

Question 25

REASONABLE CARE

Answer 25

› A director must exercise reasonable care: Daniels v AWA Ltd (1995) 13 ACLC 614 In s 180, this is expressed as a director being required to exercise a degree of care that a reasonable person would exercise in the company’s circumstances and with the same responsibilities

Question 26

SKILL

Answer 26

› This will depend on several factors, including whether the person is an executive or non-executive director, whether they have special qualifications, etc.
› All directors must possess the skill necessary to have a basic understanding of the business and its financial status

Question 27

DILIGENCE

Answer 27

› S 180 requires a director to exercise the degree of diligence that a reasonable person would exercise if they were a director of a company in the company’s circumstances and had the same responsibilities as the director

Question 28

S 180 - CARE

Answer 28

• It would seem that the standard of care is that of an ordinary prudent person (ASIC v Rich (2009) 75 ACSR 1)
• The duty of care, skill and diligence may involve raising matters with the board that they might consider obvious to the board – but is either being ignored or under-appreciated: Morley v ASIC (2010)
• Duty of care of a chairperson – ASIC v Rich, AWA v Daniels (1992) 7 ACSR 759 [867]

Question 29

S 180 - DILIGENCE

Answer 29

• There is a minimum standard of diligence – see Daniels v Anderson (1995) 37 NSWLR 538, 501-505
• Directors have to at the very least
  › become familiar with the fundamentals of the business of the company;
  › keep informed about the company’s activities;
  › monitor, generally, the company’s affairs;
  › maintain familiarity with the financial status of the company by reviewing the company’s financial statements and board papers, and to make further inquiries into matters revealed by those documents where appropriate; and
  › have a reasonably informed opinion about the company’s financial capacity. Downey v Crawford (2004) 51 ACSR 182 ; [2004] FCA 1264 at [174].

Question 30

DELEGATION AND RELIANCE

Answer 30

• The extent to which directors may delegate certain functions to others and rely on those people to perform those functions properly
• S 198D provides for directors to delegate their powers (unless the company constitution provides otherwise)
• The person who is given the powers by the directors must exercise the powers in accordance with any directions of the directors
• If directors delegate a power under s 198D, the directors are still responsible for the exercise of the power by the delegate (personally liable for the exercise of powers by the delegate in a negligent way): s 190

Question 31

EXCEPTIONS TO LIABILITY OF DIRECTOR WHEN DELEGATING

Answer 31

directors will not be responsible if:
› The director believed on reasonable grounds that the delegate would exercise the powers in accordance with the duties imposed on the director and the company’s constitution (if it has one), and
› The director believed on reasonable grounds, in good faith and after making proper enquiry (if the circumstances warranted one) that the delegate was reliable and competent in relation to the power delegated.

Question 32

SECTION 180(1)

Answer 32

• Care and diligence—civil obligations only
  › A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
   were a director or officer of a corporation in the corporation’s circumstances; and
   occupied the office held by, and had the same responsibilities within the corporation as, the director or other officer.

Question 33

STANDARD OF REASONABLENESS

Answer 33

› Objective standard for the performance of directors’ duties, see ASIC v Mitchell (no 2) [2020] FCA 1098
› Determining reasonableness, see ASIC v Mariner Corporation Ltd (2015) 241 FCR 502 at [440] and [441]

Question 34

CONTENT OF THE DUTY OF CARE AND DILIGENCE

Answer 34

› Determined according to director’s actual responsibilities, see ASIC v Rich (2009) 236 FLR 1 at [7202] and Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465, [18]

Question 35

FORESEEABLE RISK OF HARM

Answer 35

› Duty must be understood with reference to foreseeable risk of harm to the company, see Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 449 to 450
› Balancing foreseeable risk to company with potential benefit, see ASIC v Mariner Corporation Ltd (2015) 241 FCR 502 at [449] to [452]
› What do we mean by harm to the company? See ASIC v Cassimatis (No 8) (2016) 336 ALR 209 at 298 to 305 [461]-[495]

Question 36

WHAT IS THE BUSINESS JUDGEMENT RULE

Answer 36

• When courts are required to determine whether a director has breached their duty, they have stated that they do not review the merits of business judgments made by directors and do not substitute their own business judgment for that of directors
• Courts recognize that not all decisions made by directors will turn out to be good decisions
• The principle that courts will not review the merits of business decisions made by directors is called the business judgment rule

Question 37

S 180(2)

Answer 37

 S180(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Question 38

ELEMENTS OF S 180(2)

Answer 38

 There must be a ‘business judgment’ – a decision in respect of a matter relevant to the business operations of the corporation.
* What does ‘relevant to the business operations of the corporation’ mean?
o Narrowly interpreted
o See ASIC v Rich [7272]-[7274]
o Unlikely to include decisions relating to legal compliance, corporate governance or stock exchange disclosure, see ASIC v Vocation Ltd (in liq) (2019) 371 ALR 155
o Disclosure re terms of major contract? ASIC v FMG Ltd (2011) 190 FCR 364

Question 39

PURPOSE OF BUSINESS JUDGEMENT RULE

Answer 39

 Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1999 (Cth)
* Facilitate responsible risk-taking
* No liability for directors where acting in good faith and with due care
 Evidentiary onus? ASIC v Mariner Corporation Ltd (2015) 241 FCR 502; ASIC v Fortescue Metals Group Ltd (2011) 81 ACSR 563 [197]
* Section 180(1) – plaintiff bears onus
* Section 180(2) – defendant director bears onus, information exclusively within their knowledge

Question 40

RELEVANT CONSIDERATIONS FOR BUSINESS JUDGEMENT RULE

Answer 40

(2) A director or other officer of a corporation who makes a business judgment is taken …
(a) make the judgment in good faith for a proper purpose refer to s 181 and related commentary; and
(b) do not have a material personal interest in the subject matter of the judgment refer to s 191 and related case law; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate, see ASIC v Rich (2009) 236 FLR 1 at [7283] and [7284]; and
(d) rationally believe that the judgment is in the best interests of the corporation, ASIC v Rich (2009) 236 FLR 1 at [7290]-[7291].

Question 41

DUTY TO PREVENT INSOLVENT TRADING

Answer 41

• In some respects, s 588G of the Corporations Act can be viewed as related to the duty of care because it requires directors to continually monitor the financial status of their company (to make sure it is not trading while insolvent)
  › Only directors, not other officers.
• The objective of s 588G is to protect creditors that deal with companies; This duty is imposed on directors only (including de facto and shadow directors); it does not apply to officers other than directors
• Not all creditors require the protection of s 588G; many can contract to protect themselves against the risk that their loan will not be repaid
• Under s 588G the company must be insolvent when it incurs the debt, or become insolvent by incurring the debt
• Several presumptions of insolvency noted in s 588E

Question 42

S 588G

Answer 42

• Even if a company is insolvent when it incurs a debt, this does not automatically mean a breach of s 588G for directors; there must be reasonable grounds for suspecting insolvency
• Whether there are reasonable grounds for suspecting that the company was insolvent when it incurred the debt is to be judged according to a director of ordinary competence who is capable of having a basic understanding of the company’s financial status: Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756
• Suspecting insolvency?
  › The High Court has said that it is more than mere speculation; a ‘positive feeling of actual apprehension’ that there is insolvency: Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303

Question 43

PROTECTION AND DEFENCES FOR INSOLVENT TRADING

Answer 43

• Safe Harbour protection in s 588GA(1); four defences s 588H
  › Safe harbour – restructuring.
  › Four defences
   Reasonable groups to expect solvency
   Reasonable steps to prevent incurring of debts.
   Reasonable reliance on advice.

Question 44

Provisions that are allied to the duty of care

Answer 44

• S 189 explains when directors are entitled to rely on information or advice
  › Reliance made in good faith
  › Reasonableness of reliance
• S 190 deals with directors’ responsibility for the actions of their delegates (responsible as if it was exercised by them, unless they had reasons to believe the delegate was reliable and competent and that they would act in good faith etc.). S 198D authorizes directors to delegate any of their powers to:
  › A committee of directors;
  › A director;
  › An employee of the company, or
  › Any other person

Question 45

DUTY TO ACT IN GOOD FAITH IN THE BEST INTERESTS OF THE COMPANY

Answer 45

• 2 Questions:
  (1) What is good faith?
  (2) What are the company’s interests? Or put another way, to whom are the directors’ duties owed?
• 2 Answers:
  (1) A director must act honestly.
  (2) Depends. Normally answered as ‘to the company as a whole’.
  › However, a company has many stakeholders and those stakeholders have many interests in the company. Are the interests of the company those of the members (shareholders)? The creditors? The employees, customers, suppliers, community?
  › Directors need to know what is meant by interests of the company so they do not breach this duty.

Question 46

WHAT ARE THE COMPANY’S INTERESTS

Answer 46

• The basic principle is that the interests of the company are those of its members (shareholder primacy rule)
• Courts have said that directors must act in the interests of the company ‘as a whole’: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 at 291
• Meaning that directors must balance the interests of majority and minority members while acknowledging that, in most cases, the interests of the company will be those of the majority of its members
• Majority shareholders cannot discriminate against or oppress minority shareholders: s 232

Question 47

MEMBERS AND THE BEST INTERESTS OF THE COMPANY

Answer 47

• Owen J considered the principle stated in Greenhalgh in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1; [2008] WASC 239 at 4393:
  › ‘…(the principle stated in Greenhalgh) does not mean that the general body of shareholders is always and for all purposes the embodiment of ‘the company as a whole’. It will depend on the context, including the type of company and the nature of the impugned activity or decision…In my view the interests of the shareholders and the interests of the company may be seen as correlative not because the shareholders are the company but, rather, because the interests of the company and the interests of the shareholders intersect.’
• Duties are owed to the collective body of shareholders (not to individual shareholders): Percival v Wright [1902] 2 Ch 421
• Exceptions have arisen where the nature of the relationship between particular directors and particular shareholders have been said to be fiduciary in nature: Coleman v Myers [1977] 2 NZLR 225; Brunninghausen v Glavanics (1999) 46 NSWLR 538 (Court of Appeal)

Question 48

CREDITORS AND THE BEST INTERESTS OF THE COMPANY

Answer 48

• When a company is solvent, directors are required to make decisions that are in the interests of the company’s members
• However, the notion of benefiting ‘the company as a whole’ has at various times been found to include an obligation upon directors to take into account the interests of creditors, namely when the company is insolvent or nearly insolvent
• When a company is insolvent, or nearly insolvent, the interests of the company become those of its creditors rather than its shareholders: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215
• When the interests of the company turn to those of creditors rather than shareholders, directors still do not owe a duty directly to those creditors; the duty is owed to the company: Spies v The Queen (2000) HCA 43
  › Indirect rights only.

Question 49

CORPORATE GROUPS AND THE BEST INTERESTS OF THE COMPANY

Answer 49

• Each company in a corporate group is to be treated as having its own interests even if the company in question is a wholly owned subsidiary: Walker v Wimborne (1976) 137 CLR 1
• s 187 of the Corporations Act provides that a director of a company that is a wholly owned subsidiary of another company is to be taken to act in good faith in the best interests of the subsidiary if:
  › The subsidiary’s constitution expressly authorizes the director to act in the best interests of the holding company, and
  › The director acts in good faith in the best interests of the holding company, and
  › The subsidiary remains solvent.
• If s 187 does not apply, the directors of the subsidiary must act in the best interests of the subsidiary and not the holding company (or any other company) in the corporate group
• Directors of the subsidiary will not automatically be in breach of their duty to act in the interests of the company if they make decisions that have the effect of benefiting another company in the group
• It is common for directors of subsidiaries to consider the interests of the holding company when making decisions for the subsidiary
• Where there is no evidence of actual consideration of the subsidiary’s interests, the directors may be found to have acted properly provided that:
  › ‘an intelligent and honest person in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the decision was for the benefit of the company’: Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74

Question 50

Employee, Customers, Suppliers & the Community AND THE BEST INTERESTS OF THE COMPANY

Answer 50

• Company law requires that, as a general rule, the interests of employees and other stakeholders should not be given priority by directors over the interests of company members
• Yet in practice directors will in the course of undertaking their duties consider the interests of many other stakeholders in the company
• There will be specific laws (other than the Corporations Act) that require directors to consider those stakeholder interests, such as industrial relations legislation for employees, and consumer protection legislation for customers/consumers
• The Corporations Act also requires directors to specifically consider the interests of employees: for example, Pt 5.8A (s 596AB) ‘Employee Entitlements’

Question 51

How Should The Concept Of ‘Good Faith’ Be Characterised?

Answer 51

› (1) did the director genuinely believe they were acting for the best interests of the company?; and
› (2) is the decision so unreasonable that no one in their position, giving proper consideration to the company’s interests, could have arrived at it?

Question 52

SECTION 181

Answer 52

DUTY TO ACT IN GOOD FAITH IN THE BEST INTERESTS OF THE COMPANY AND THE DUTY TO ACT FOR A PROPER PURPOSE

Question 53

WHAT ARE PROPER PURPOSES

Answer 53

• Directors (and other officers) must exercise their powers for a ‘proper purpose’: s 181
• A director’s power will depend on how the company’s constitution (if it has one) allocates the powers between directors and members
• S 198A(2) is a RR which states that directors may exercise all the powers of the company except any powers reserved for the company to exercise in a general meeting of its members
• The general rule is that directors, as fiduciary agents of the company, are required to exercise their powers only for the benefit of the company
• Any use of power by directors that is not undertaken for the benefit of the company may be an improper use of that power and therefore a breach of the fiduciary duty.

Question 54

Specific powers conferred on directors - ACTING FOR A PROPER PURPOSE

Answer 54

• (Some) specific powers conferred on directors to:
  › Issue shares (for the purpose of raising capital for the company)
   Shares can be issued for providing consideration to purchase property; for renumeration for employees
  › Refuse to register transfers of shares
• It will be a breach of fiduciary and statutory duties to exercise powers for a proper purpose by issuing shares, for example:
  › for maintaining control of the company’s management; defeating a takeover bid; or creating or destroying the voting power of majority shareholders
  › Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
• Directors are under a positive duty to take steps to protect the company: Permanent Building Society v Wheeler (1994) 11 WAR 187
  › This can include disclosing the improper purposes of other directors and taking active steps to prevent transactions from proceeding against company’s interests

Question 55

Determining whether a director has acted for a proper purpose

Answer 55

› Step 1: the court will determine what is the particular power in question (for example, the power of directors to issue shares) and the court will also determine what are the legal purposes for which the power may be used
 What was the nature/purpose of the power exercised?
* Consider the constitution/replaceable rules
* Consider size/nature of company (small v listed public companies)
* Issuing shares – raising capital? defeating voting power of existing shareholders? defeating takeover? – Fords 8.210, see also Howard Smith, Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288, Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260
› Step 2: the court will examine the facts of the case and the intentions of the director and decide what was the actual purpose for which the director exercised that power
 What was the purpose of this particular exercise of power (question of fact)?
* See facts of Howard Smith and Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260
› The court then compares step 2 with step 1. If the actual purpose is not within the lawful purposes in step 1, then the director will have breached the duty to act for a proper purpose

Question 56

DIRECTORS WITH MIXED PURPOSES

Answer 56

› Directors can exercise powers both for proper and improper purposes at the same time (mixed or multiple purposes for a decision) When directors themselves are shareholders
› The court must decide which of the proper or improper purposes was most important: must be shown that the substantial purpose was improper and that, but for the improper purpose, the director would not have exercised the power
› See “substantial purpose” in Mills v Mills (1938) 60 CLR 150, 186 cf “but for” test in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 294

Question 57

CONSEQUENCES OF BREACH OF DUTY (PROPER PURPOSE)

Answer 57

• The duties to act in good faith in the best interests of the company and for a proper purpose are both statutory duties (s 181) and general law duties
• S 181 is a civil penalty provision and enforced by ASIC
• If a director has breach s 181, the court can make an order disqualifying the person from managing companies for a certain time; order to pay a penalty of up to $200,000 and/or make an order for the director to pay compensation to the company for any loss or damage it has incurred because of the breach of duty
• If ASIC believes the breach to be so serious that a criminal penalty should be imposed, it can bring criminal proceedings under s 184(1) of the Corporations Act
• Breach of general law duties allow the company to obtain a civil remedy such as compensation or damages

Question 58

DUTY TO AVOID CONFLICTS OF INTERESTS

Answer 58

• Directors and officers are in a position of power and influence, but as fiduciaries, have obligations placed on their roles from being fiduciaries
• A key responsibility of being a director is the need to avoid conflict of interests: Aberdeen Railway Company v Blaikie Bros (1854) 1 Macq 461
• This duty concerns directors’ interests in transactions with their company, specifically acting under a conflict between their duty to the company and personal interests
• The objective of the no conflict rule is to preclude directors and officers from being persuaded by considerations of personal interest
• It is common to refer to fiduciary duties as involving a ‘no conflict rule’ and a ‘no profit rule’
  › Fiduciary obligation
   Duty not to profit
   Duty to avoid conflicts of interest

Question 59

DUTY NOT TO PROFIT

Answer 59

• Breach of fiduciary obligation - director liable to account to company for profit/benefit, see Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378
• Distinct from duty to avoid conflicts, Chan v Zacharia (1984) 154 CLR 178
• Acting in bad faith not necessary
• Opportunities – see Cook v Deeks [1916] 1 AC 554, Regal Hastings and Peso Silver Mines Ltd v Cropper (1966) 58 (2d) 1
• Strictness of the rule? See Chan v Zacharia (1984) 154 CLR 178, 437-8 (Deane J) cf Warman International v Dwyer (1995) 182 CLR 544, 558

Question 60

SECTION 182 - IMPROPERLY USING POSITION

Answer 60

• Note differences between general equitable conflict duties and statutory duties – Ford textbook 9.290.3. See also s 185
• Applies to directors, secretaries, officers & employees
• Must establish improper purpose
• Santow J provides useful summary of case authorities in relation to s 182 in ASIC v Adler (2002) 41 ACSR 72 – see [458], [735] (conflict rule)
  › Advantage does not need to be actually achieved
  › Objective test, confirmed in Doyle v ASIC (2005) 223 ALR 218
  › See application of s182 in Adler case

Question 61

SECTION 183 - IMPROPERLY USING INFORMATION

Answer 61

• Elements of a contravention of s 183(1):
  1. that a person was at the relevant time an officer of the corporation;
  2. he or she acquired the relevant information by virtue of his or her position as an officer or employee of the corporation;
  a. No requirement information to be confidential, see McNamara v Flavel (1988) 13 ACLR 619
  3. he or she made improper use of the information; and
  a. Impropriety broadly the same as section 182
  4. he or she did so in order to gain, directly or indirectly, an advantage or alternatively to cause detriment to the corporation, and that advantage was obtained for either the officer or some other person.
• See eg ASIC v Vizard (2005) FCR 57

Question 62

Consequences of breaching fiduciary duties - GENERAL LAW

Answer 62

› If there is a breach of the general law duty to avoid a conflict of interest, the company may obtain a civil remedy such as compensation or damages

Question 63

Consequences of breaching fiduciary duties - STATUTORY PROVISIONS

Answer 63

› If a director contravenes s 191 to disclose a material personal interest in a matter that relates to the affairs of the company – court can order director to pay a fine, or be sent to prison, or both (see Sch 3 of the Corporations Act)
› If a director contravenes s 195, the court may impose a fine up to five penalty units
› Ss 182 and 183 are civil penalty provisions enforced by ASIC: the court may make orders such as: disqualifying the person from managing companies for a specified period; order to pay a penalty up to $200,000 and/or order to pay compensation to the company for any loss or damage it has incurred because of the breach of the section
› Further consequences noted in Corporations Act Ch 2 E, ASIC

Question 64

Director protection: indemnification and insurance

Answer 64

• On examining directors’ duties, a question arises as to how directors’ may be able to protect themselves from liability
• Section 199A(1) prohibits a company from granting a blanket indemnification to officers for breachers of duty
• A company will usually indemnify an officer for liability incurred in the proper performance of their role, however s 199A(2) prohibits an indemnity (other than for legal costs) for liability owed to the company (where the company may sue the officer for acting improperly), liabilities owed in respect of civil penalties (under s 1317G-HA) or for liabilities owed to third parties (not the company) in respect of acts not done in good faith
• S 199A(3) prohibits the company from paying for an officer’s insurance coverage in respect of liability for willful breach of duty or a contravention of ss 182 183 (directors’ and officers’ insurance policies typically will have specific exclusions to cover these types of situations).

Question 65

SS 182-184

Answer 65

DUTY TO AVOID CONFLICTS OF INTERESTS