directors duties

Question 1

where are the directors duties codified?

Answer 1

ss170-177 CA 2006

Question 2

what does it mean that these duties are not mutually exclusive?

Answer 2

more than one duty can be breached at the same time

Question 3

what are the 7general duties?

Answer 3

s171 - duty to act within powers
s172 - duty to promote the success of the company
s173 - duty to exercise independent judgement
s174 - duty to exercise reasonable care, skill and diligence
s175 - duty to avoid conflicts of interest
s176 - duty not to accept benefits from a third party
s177 - duty to declare interest in proposed transaction or arrangement

Question 4

s170 - who do directors owe their general duties to?

Answer 4

the company, not to its shareholders

Question 5

what must directors do under s171 - duty to act within powers?

Answer 5

act in accordance with the constitution
only exercise their powers for proper purposes

Question 6

how can we determine whether. a power is used for its proper purpose?

Answer 6

The substantial purpose test - 4 parts

Question 7

what are the 4 parts of the substantial purpose test?

Answer 7

1. what power is being exercised
2. the proper purpose for which the power was delegated to the directors
3. the substantial purpose for which the power was in fact exercised
4. whether that purpose was proper

Question 8

what comes under s172 - duty to promote the success of the company?

Answer 8

a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the following factors …

Question 9

what are the factors a director must have regard to when actingin a way to promote the success of a company?

Answer 9

a)The likely consequences of any decision in the long term;
b)The interests of the company’s employees,
c)The need to foster the company’s business relationships with suppliers, customers and others,
d)The impact of the company’s operations on the community and the environment
e)The desirability of the company maintaining a reputation for high standards of business conduct, and
f)The need to act fairly as between members of the company

Question 10

what comes under s173 - duty to exercise independent judgement?

Answer 10

directors must not fetter their discretion as to how they will act

S173(2) this duty is not infringed by his acting -

In accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

In a way authorised by the company’s constitution

Question 11

what comes under s174 - duty to exercise reasonable care, skill and diligence?

Answer 11

A director of a company must exercise reasonable care, skill and diligence

This means the care, skill and diligence that would be exercised by a reasonably diligent person with

The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

The general knowledge, skill and experience that the director has

Question 12

what is the objective and subjective test for the standard of care of a director - s174?

Answer 12

Objective standard – s174(2)(a) - the minimum standard that will apply to all directors

Subjective standard – s174(2)(b) - it applies when the directors have some special skill or ability (a higher standard)

Question 13

what is said about delegation by directors? - s174

Answer 13

while directors are entitled to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions

Question 14

what comes under s175 - duty to avoid conflicts of interest?

Answer 14

a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company

This applies in particular to the exploitation of any property, information or opportunity

Question 15

what is an indirect interest? - s175

Answer 15

the director does not need to be a party to the transaction or arrangement which gives rise to the conflict in order for a breach to arise

Question 16

when does s175 not apply?- conflict of interest

Answer 16

s175
3) - does not apply to a conflict of interest arising in relation to a transaction or arrangement within the company
4) duty is not infringed
a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
b) if the matter has been authorised by the directors

Question 17

how can directors avoid liability under s175?

Answer 17

by seeking informed consent of the board
full and frank disclosure is required
authorisation must be independent directors without the presence of the interested director

Question 18

how does authorisation work in private companies - s175(5)(a)?

Answer 18

authorisation may be given by the directors in a private company if nothing in the company’s constitution invalidates such authorisation and the matter was proposed to and authorised by the directors

Question 19

how does authorisation work in public companies - s175(5)(b)?

Answer 19

the constitution must include a provision enabling the directors to authorise the matter and the matter needs to be proposed to and authorised by directors in accordance with the constitution

Question 20

when is authorisation effective? (s175(6))?- conflicts of interest

Answer 20

only if any requirement as to the qurorom at the meeting at which the matter is considered is met without counting the director in question or any other interested director and the matter was agreed to without their voting or would have been agreed to if their votes had not been counted

Question 21

what comes under s176 - duty not to accept benefits from third parties?

Answer 21

a director of a company must not accept a benefit from a third party conferred bya reason of his being a director or his doing (or not doing) anything as a director

Question 22

what are the limits to s176?- benefits from a third party

Answer 22

• benefits received from the company or associated companies are exempt
• benefits not likely to give rise to a conflict of interest
• authorisation can only be given by the shareholders

Question 23

what comes under s177 - duty to declare interest in a proposed transaction or arrangement?

Answer 23

If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company he must declare the nature and extent of that interest to the other directors

Question 24

what does s177 apply to?- duty to declare interest in a proposed transaction

Answer 24

only applies to proposed transactions with the company, not third parties

Question 25

what is the duty under s182?

Answer 25

directors duty to disclose an interest in an existing transaction

Question 26

which transactions require members’ approval?

Answer 26

service contracts more than two years
substantial property transaction
loans, quasi-loans and credit transactions
payments for loss of office