Lecture 5-Company directors' and officers' duties

Question 1

What are the two types of duties?

Answer 1

-duties under general law and statutory duties

Question 2

What are the general law duties?

Answer 2

• the case law duty -divided into loyalty and good faith bit and care and diligence bit -under care and diligence you have the duty to care act with reasonable care and diligence -under loyalty and good faith there are 4 duties
  1. duty to retain discretions
  2. duty to avoid conflicts of interest
  3. duty to act in good faith in the interests of the company
  4. duty to use powers for a proper purpose

Question 3

Who owes the general law duties?

Answer 3

-directors and senior executive officers

Question 4

What is meant by an officer under general law?

Answer 4

-people the law considers could hurt the company in some way

Question 5

What is the fiduciary relationship officers and directors have with the company?

Answer 5

-have to be the best version of yourself -based on the power they exercise and the vulnerability of the company to their wrongful actions

Question 6

What are the statutory duties?

Answer 6

-governed by the corps act -sections in the Corps Act specifying what the duty of directors and officers is

Question 7

What are the two statutory duties under the general law duty to act with reasonable care and diligence?

Answer 7

1.duty to act with reasonable care and diligence s180 2.Duty to prevent insolvent trading s588G

Question 8

Who owes the statutory duties?

Answer 8

-directors as defined in the Corps Act (includes de facto and shadow) -most statutory duties apply to officers as defined in s9 (except s191 and 588G) -two statutory duties imposed on employees (s182, s183)

Question 9

What are the two sections that don’t apply to officers in the statutory duties?

Answer 9

s 191 or s 588G -s191= members of the board to tell the other board members they have conflict of interest -588G= insolvent trading

Question 10

What does s191 do?

Answer 10

-members of the board to tell the other board members they have conflict of interest

Question 11

What are the two statutory duties imposed on employees?

Answer 11

-s182= not make improper use of your position -s183=improper use of information

Question 12

To whom are the duties owed?

Answer 12

-the company -both the general law duties and statutory duties apply (only in exceptional circumstances will the duty be to a shareholder ie Brunninghausen v Glavanics)

Question 13

What are the facts of the case Brunninghausen v Glavanics?

Answer 13

-they do not owe the duty to shareholders! it is owed to the company -in exceotional: Brunninghausen v Glavanics= here director owes the duty to shareholder -Mr B. owned 5/6 of the sgares, G, owned 1/6, bith directris, G didn’t take part -B wants to buy G’s shares, B didn’t tell that third party offered to buy all the shares at higher price -G then angry and sues -court decides that B owed duty to G

Question 14

Who enforces the statutory duties?

Answer 14

ASIC

Question 15

Who enforces the general law duties?

Answer 15

the company (or liquidator if the company is being would up)

Question 16

What is the breach of a statutory duty called?

Answer 16

• “civil penalty provisions” under Pt 9.4B of the Act

Question 17

How must civil penalty provisions be proved?

Answer 17

-on the balance of probabilities, more likely than not then guilty (unlike criminal where it has to be beyond reasonable doubt -easier to prove -not criminal so do not send to jail

Question 18

What are the punishments if court decides you breached statutory duty?

Answer 18

• pecuniary penalty up to $200,000: s 1317G ! -disqualification (banning) order: s 206C - compensation to company: s 1317H

Question 19

Can breach of duty have criminal consequences?

Answer 19

-yes -not for breach of duty of care (laziness) - Yes for breaches of some other duties where done with intentional dishonesty or recklessness: s 184 -if misusing position etc.

Question 20

What is the punishment if it is a criminal offence?

Answer 20

-fine or jail time ( it is only called fine is criminal!)

Question 21

What are the sources of duty of care,skill and diligence?

Answer 21

-general law negligence cases -s 180(1) -contract of employment - for executive directors and other executive officers

Question 22

What does s180 (1) do?

Answer 22

-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.

Question 23

What does negligent mean?

Answer 23

-if any of the three breached (general law negligence cases-s 180(1) -contract of employment)

Question 24

What did it used to be like the duty of care?

Answer 24

-Originally, under the common law, the courts used a largely subjective test : -Took into account the background, skills and experience of the director concerned -A director with little knowledge of his/her company’s business, and little skill, was judged against the standard of someone with the same (poor) knowledge and skill

Question 25

What is the interpretation of s180 (1)?

Answer 25

reasonable= it depends on the facts -that is where we use the case law -the closer you are to collapse the more you have to do -the case law adds the meat to the statute bone -the cases are what gives the meaning to the statute -cases= interpret the statute and to tell the dierction of action -also related to what office you hold, non executive director= less duty than CEO -role you play affects the duty, and the cases tell us how

Question 26

What is the modern standard of care?

Answer 26

-There is no single standard for all directors and officers - The standard required of director X is the care that a reasonable person doing X’s job in X’s company would exercise (a largely “objective” test)

Question 27

What are the minimum requirements (of duty of care) under the modern standard?

Answer 27

Every director must : 1.btain a basic understanding of their company’s business 2.keep informed about and monitor the company’s activities and regularly attend board meetings 3.monitor the company’s financial position -see Daniels v AWA Ltd (that is what it’s based on)

Question 28

Do some director have higher requirements in their duty of care?

Answer 28

-Directors with special skills are held to the standard of a person professing to have those skills: ASIC v Vines -Executive directors’ greater involvement in the business of the company leads to an expectation of greater knowledge, focus and awareness -the unqualified ones have the minimum standard -CEO expected to do the most of the directors -chair of the board also expected to know more

Question 29

What are the facts of ASIC v Vines?

Answer 29

-Vines was a director but also the financial officer= held to a higher standard, expected to perform at a higher standard

Question 30

Under which section can directors delegate their powers?

Answer 30

-s198D -may delegate any of their powers to any person, unless constitution restricts delegation

Question 31

Is the director liable if the delegator is negligent?

Answer 31

-delegate is negligent, director will be liable unless requirements of s 190 satisfied (eg, director believed on reasonable grounds that delegate was reliable and competent)

Question 32

What does s190 do?

Answer 32

-directors are liable for delegators’ actions unless s190(2) is satisfied =he 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.

Question 33

What is the reliance?

Answer 33

-When a director’s reliance on information provided by employees, professional advisers, other directors or officers, and board committees, is reasonable -Set out in s 189 – good faith and independent assessment

Question 34

What does s189 do?

Answer 34

-reliance of directors on information on others, in good faith and independent assesment

Question 35

What was the major theme in ASIC

Answer 35

-Major example of breach of duty of care ! Payment by HIHC to PEE

Question 36

What is the intention of the business judgment rule?

Answer 36

-borrowed from the US -doesn’t fit the law very well -if directors have done everything carefully and properly and without any conflict of interest then forgiven for breaching s180 (General principle that courts do not substitute their business judgment for that of directors ! Statutory business judgment rule: s 180 (2) ! Says when a director is taken to have met the requirements of s 180(1))

Question 37

What is the business judgement rule?

Answer 37

-Director is taken to meet the statutory and general law duties of care in connection with a business judgment if: ! good faith and for a proper purpose ! no material personal interest in subject matter of judgment ! inform themselves ! rationally believe the judgment is in the best interests of the company -s180 (2) (it is the business judgement) -under s180 (1) have to be as careful and as dilligent as a reasonable person would -in ASIC v Rich -if you breach 180 (1) then 180 (2) is not usually available to you, you cannot fit yourself in there -cannot be used as defence much

Question 38

What does s588G do?

Answer 38

-Directors have a duty to prevent their company incurring debts when the company is insolvent or would become insolvent –means if directors realise the company cannot pay its debt they cannot trade out (borrow more) -law says no -if you cannot pay your currents debts, you cannot get more debts= that is the insolvent trading -have a duty to prevent the company incurring debts -duty to prevent incurring the debt, even by other directors

Question 39

Who is the 588G duty owed by?

Answer 39

-Duty is owed by “directors” - includes de facto and shadow directors

Question 40

What does s 588V do?

Answer 40

-when holding a holding company liable for a subsidiary insovency -if breach this then taken not liable

Question 41

When does 588G apply?

Answer 41

-Person was a director when a company incurred a debt -Company was “insolvent” at that time or became insolvent by incurring that debt -At the time the debt was incurred, there were reasonable grounds for suspecting insolvency

Question 42

What is the meaning of expect and suspect?

Answer 42

-expect= firm grounds -suspect= do not have to have that form grounds, a little feeling -making the director liable even in the absence of proof of insolvency

Question 43

What does incurring a debt mean?

Answer 43

-For certain actions, see the operative table in s 588G(1A) eg declaring a dividend; uncommercial transaction -For other debts, the debt: a) must be for a specific amount b) must be incurred voluntarily by company

Question 44

What is insolvency?

Answer 44

Section 95A : insolvency worked out using cash flow test (not balance sheet test) -not being able to pay your debt when it is due -if company asset rich but cash poor can be insolvent -but can mortgage the assets (Question is: Is company able to pay all its debts, as and when they become due and payable? So: What cash does company have? What access to finance does company have?)

Question 45

What does s95A?

Answer 45

• (1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. - (2) A person who is not solvent is insolvent.

Question 46

When is liability for insolvency imposed?

Answer 46

-s588G (2) -the director was aware that there were reasonable grounds for suspecting insolvency (subjective test), or - a reasonable person doing that director’s job in that company would have been aware that there were reasonable grounds for suspecting insolvency (objective test)

Question 47

What are the three tests in 588G (1)?

Answer 47

-person director -company incur debt -reasonable grounds for insolvency

Question 48

What are the two tests in 588G (2)?

Answer 48

-two tests in 588G 2, or= can use either one –the director was aware that there were reasonable grounds for suspecting insolvency (subjective test), or - a reasonable person doing that director’s job in that company would have been aware that there were reasonable grounds for suspecting insolvency (objective test)

Question 49

What is the possible defence against liability of insolvency? 588H

Answer 49

-Director had reasonable grounds to expect, and did expect, that company was solvent and would remain solvent ! harder to “expect” than to “suspect” - Metropolitan Fire Systems v Miller ! ignorance of company’s finances no excuse

Question 50

What is the defence in 588H (3)?

Answer 50

-Delegation and reliance on competent and reliable person

Question 51

What is the defence in 588H (4)

Answer 51

-Absence from management, due to illness or other good reason: (good reason must be really good!)

Question 52

What is the defense in 588H (5) and (6)?

Answer 52

-Director took all reasonable steps to prevent the company incurring the debt - 588H(5)+(6) -appointment of an administrator under voluntary administration (VA) provisions

Question 53

What are the consequences for breaching the duty of care?

Answer 53

-Civil penalty provision ! Pecuniary penalty, disqualification, compensation -Also, liquidator can seek compensation: s 588M - Also, an unsecured creditor can seek - Criminal liability: s 588G(3)