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Duties of Directors and Breaches
Corporate Law (MLL221)
Deakin University
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Duties of Directors and Breaches
SUMMARY
- [person] Meets s 9 director definition (shadow, de facto, executive, non executive)
- Co. appears to be duly registered under CA and can sue and be sued in their own name.
- [person] has breached care/ skill/ diligence category: a. Act with reasonable care i. Common law ii. Statutory (s 180 = general, s 588G = prevent insolvent trade)
- [person] has breached loyalty and good faith category: a. Retain discretion i. Cmn law only b. Avoid conflicts of interest i. Cmn law ii. Statutory
- Disclose info (s 191-196)
- Related party transaction (Ch 2E)
- Misuse info (s 182)
- Misuse position (s 183) c. Act in good faith and in Co. best interests i. Cmn law ii. Statutory S 181(1)(a) d. Act for proper purpose i. Cmn law ii. Statutory S 181(1)(b)
- Co./Board/Liquidator may enforce cmn law duty
- Sole director use S 236/237 statutory derivative action to enforce cmn law
- ASIC may enforce statutory duty by Civil/ criminal penalty provisions
- Members may enforce a. S 236: Statutory derivative action b. S 232 Oppressive or unfair conduct remedy c. S 461: Winding up d. S 1324: Injunction Section 1324 e. S 140 member’s personal right of action
- Defences: a. S 180(2) BJR: b. S 190(2): Delegated action defence c. S 588H(2)-(4): insolvent trading defences d. S 189: Reliance on trusted persons e. S 1317S and s 1318: Honest mistake/ Court’s general power to grant relief from breach
CMN LAW: ACT WITH REASONABLE CARE & DILIGENCE
(Daniels v AWA Ltd (1995) – standard = that of reasonable diligent director)
- S 180: Act with reasonable care & diligence ASIC v Vines; ASIC v Rich a 180(1)(a) – according to the circumstances b 180(1)(b) – according to office and responsibilities c. Higher standard for Chair (ASIC v Rich) d. Daniels v AWA i. Must acquire basic understanding of business ii. Must keep informed about company’s activities
iii. Don’t need detailed inspection of day-to-day activities, but must monitor company’s business iv. Should regularly attend board meetings v. Must be familiar with financial status of company by regular review of financial statements e. If more skilled position then higher standard Vines v ASIC (reasonably competent CFO) f. Examples i. Completely unaware of company’s financial position Sheahan v Vero [2001] ii. Failing to ensure that financial statements were consistent with director’s knowledge of the company’s affairs ASIC v Healey [2011] iii. Causing the company to enter into transactions that expose it to risks without the prospect of producing any benefit ASIC v Adler [2002] iv. Permitting the company to contravene the law ASIC v Sydney Investment House Equities Pty Ltd [2008] BREACH 2. Beach of cmn law duty a. = enforced by the board/ the liquidator. b = damages 3. Statute breach a by ASIC b = civil penalty provisions – disqualification, up to $200k penalty and/or compensation order c. Remedy = criminal penalty – up to $200k and/or 5 years prison
S 588G: PREVENT INSOLVENT TRADING (PART OF CARE AND DILIGENCE)
- Must prevent company incurring debts if reasonable grounds to suspect insolvency
- Edwards v ASIC
- Four grounds a. Person a director at time of debt incurred b. Company insolvent when debt incurred c. Reasonable grounds to suspect the insolvency d. Failed to prevent incurring the debt
- S 588G(1A): Deemed debts
When debts are incurred [operative table]
Action of company When debt is incurred
1 paying a dividend when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared
2 making a reduction of share capital to which Division 1 of Part 2J applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration)
when the reduction takes effect
3 buying back shares (even if the consideration is not a sum certain in
when the buy-back agreement is entered into
- Directors must not take corporate property, information or opportunities without permission of the company Furs Ltd v Tomkies a. Regal Hastings (Cinema Subsidiary case) i. Directors were liable to account for the profits even though: 1. Directors acted bona fide 2. Company suffered no loss 3. Transaction benefited the company 4. Company unable to make the profit itself 5. Successful action only benefited the purchaser of RH Ltd by effecting a reduction in the agreed purchase price ii. Directors could have protected themselves by a resolution (either antecedent or subsequent) of the RH Ltd shareholders in meeting b. Peso Silver Mines distinguished as director approached as a member of the public, discharged his fiduciary duties to Peso and did not use any confidential info.
- Fiduciary duty not to misuse confidential company information a. Five factors for confidential info Wright v Gasweld: i. The skill and effort expended to acquire information ii. Degree to which information is jealously guarded iii. Whether it was plainly known to the employee that the material was regarded by the employer as confidential iv. The use and practices of the industry v. Whether the employee in question has been permitted to share the information only by reason of their seniority or high responsibility within the employer organisation b. Examples of misused info: i. Artedomus v Del Casale [2006] 1. Location and source of stone of supplier was confidential considering: a. Industry practice b. Company had taken measures to impart to employees importance of information remaining confidential ii. Thomas Marshall v Guinle [1978]
- Company’s customers and suppliers iii. Riteway Express v Clayton (1987)
- Names and requirements of clients plus prices they were charged iv. Grove v Flavel (1986)
- Directors may breach duty if they misuse information about a company’s insolvency to gain advantage over other creditors
STATUTORY DUTY TO AVOID CONFLICT OF INTERESTS
- S 191: Director must give notice to other directors of a material interest that relates to company affairs a. S 191(3) Notice must: i. (a) Give details of the nature and extent of the interest and the relation of the interest to the affairs of the company ii. (b) Be given at directors’ meeting as soon as practicable after director become aware of their interest iii. Recorded in minutes b. Material interest = of some value, not just slight interest Grand Enterprises Pty Ltd v Aurium Resources
- S 191(2): Exemptions from disclosure:
a. (i) arises because a shareholder of the company
b. (ii) arises in relation to the director's remuneration as a director of the company; or c. (iii) relates to a contract the company is proposing to enter into that is subject to approval by the members and will not impose any obligation on the company if it is not approved by the members; or d. (iv) arises merely because the director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company; or e. (v) arises merely because the director has a right of subrogation in relation to a guarantee or indemnity referred to in subparagraph (iv); or f. (vi) relates to a contract that insures, or would insure, the director against liabilities the director incurs as an officer of the company (but only if the contract does not make the company or a related body corporate the insurer); or g. (vii) relates to any payment by the company or a related body corporate in respect of an indemnity permitted under section 199A or any contract relating to such an indemnity; or h. (viii) is in a contract, or proposed contract, with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the director is a director of the related body corporate; or
i. (b) the company is a proprietary company and the other directors are aware of
the nature and extent of the interest and its relation to the affairs of the
company; or
- S 192: Director may give standing notice of material interest a. Notice must: i. Detail nature and extent of interest ii. Be given at directors’ meeting or to other directors in writing (later tabled) b. S 192(6): If nature/extent of interest materially increases above that disclosed, the standing notice ceases to have effect.
- S 195(1): Director of public company cannot participate in meeting and vote if have material interest a. Exceptions: i. Other directors vote to allow director to be present ii. ASIC order allowing director to be present iii. Interest does not need to be disclosed under s.
- CA does not prohibit an interested director of Pty Co voting.
- RR S 194: Director of Pty Co makes disclosure under S 191 can vote. Can modify to prohibit.
BREACH - S 191 BREACH Court may order: - Fine of up to $1,100; - Prison of up to 3 months; or - Both
• S 195 BREACH Court may order fine of up to $
CH 2E RELATED PARTY TRANSACTIONS
- Ch 2E prohibits a public company (or entity that the public company controls) from giving a financial benefit to a related party of the public company unless: a. Financial benefit is exempt; or b. Giving of the financial benefit is approved by members of the public company (s) FORMULA:
- Is the Company a public company? Or an entity controlled by a public company? a. S 50AA: Public company controls an entity if the company has the capacity to determine the outcome of decisions about the entity’s financial and operating policies
b. Cause detriment to the company 5. S 183: Person who obtains information because they are or have been a director, officer or employee of company must not improperly use information to: a. Gain advantage for themselves or someone else; or b. Cause detriment to the company c. Improper use examples: i. Chew v R Even when they breach their fiduciary duties intending to act in best interests of co ii. R v Byrnes By affixing seal to document without authority where they believed that execution was in the best interests of co iii. R v Cook Director arranged without authority to transfer co funds to his personal account, fearing that regulator may freeze company’s account iv. ASIC v Adler Improper even though the scheme was intended to support the HIH share price v. ASIC v Soust MD bought small parcel of company shares in mother’s name to increase share price and thereby trigger a bonus payment to himself vi. ASIC v Maxwell Directors may contravene s 182 if they allow the company to breach the Corporations Act where the risks outweigh the benefits to the company and reasonable steps can be taken to avoid those risks BREACH 6. Ss 182 & 183 are civil penalty provisions 7. Breach of civil penalty provision: a. Disqualification; b. $200,000 penalty; and/or c. Compensation order 8. Criminal penalty for breach of S 184(2) or (3) a. $220,000 fine; and/or b. 5 years prison 9. Offence under S 184(2) (position) or S 184(3) (information) if director, officer or employee use position/information dishonestly: a. With intent to gain advantage for themselves or someone else or cause detriment to company; or b. Recklessly as to whether use results in gaining advantage for themselves or someone else or cause detriment to company
CMN LAW: ACT IN GOOD FAITH AND IN THE BEST INTERESTS OF THE COMPANY
- S 181(1)(a): A director or other officer of a corporation must exercise their powers and discharge their duties”: (a) in good faith in the best interests of the corporation; a. Good faith i. Act honestly ii. Genuine belief acting in best interests of company b. Company’s interests i. Means the shareholders as a whole, not just majority (Greenhalgh v Arderne Cinemas Ltd) ii. If going broke then the creditor’s interest more important (Kinsela v Russell Kinsela Pty Ltd) iii. If Co. is a subsidiary then director of subsidiary acts for that company, not the holding co (Equiticorp Finance Ltd (in liq) v Bank of New Zealand) Unless the company constitution allows it (S 187) c. Don’t owe fiduciary duty to an individual shareholder (Percival v Wright) d. But may in some instances (Coleman v Myers) e. Under s:
i. Director of a wholly-owned subsidiary will be taken to act in good faith in best interests of the subsidiary where: 1. Subsidiary constitution authorises director to act in best interests of holding company; and 2. Director in fact acted in good faith in the best interests of the holding company 3. The subsidiary is not insolvent at the time or becomes insolvent due to the act
CMN LAW: USE POWERS FOR PROPER PURPOSE
- S 181(1)(b): A director or other officer of a corporation must exercise their powers and discharge their duties: (b) for a proper purpose
- What powers do they have? RR S198A(2) – all powers of the company except any reserved by CA or the constitution for the members.
- Test: (Howard Smith v Ampol Petroleum – diluted shareholding of majority shareholder) a. What is the lawful purpose of the power? b. What was the directors purpose in suing it? c. Is the actual purpose within the lawful purpose?
- If mixed purpose then use “but for” test (Whitehouse v Carlton Hotel Pty Ltd)
- Improper purposes: a. Use of company funds to promote re-election of directors i. Advance Bank Australia Ltd v FAI Insurances Ltd (1987) b. Exercise of management powers for an improper purpose i. Causing company to purchase a property at an over-value: (PBS v Wheeler) ii. Director giving company’s assets away for no consideration: (BIM Ltd v Maxwell) c. Exercising powers for the benefit of others (Bell Group Ltd (in liq) v Westpac) d. Directors’ refusal to register a transfer of shares (Australian Metropolitan Life Assurance Co Ltd v Ure) BREACH
- S 181 is a civil penalty provision a. Enforced by ASIC b. Court may order: i. Disqualify from acting as director; ii. Penalty of up to $200,000; and/or iii. Compensate company for loss
- Where directors breach was reckless or intentionally dishonest, ASIC may seek criminal penalty a. Fine of up to $220,000; and/or b. 5 years prison
- Company can claim civil law damages and compensation for the breach
- Brunninghausen v Glavanics – rare circumstances where Director owes fiduciary duty to shareholder.
DEFENCES
BUSINESS JUDGEMENT RULE
1 180(2) BJR: Director or other officer who makes a business judgment is not liable for breach of duty of care if: a. (a) Judgment made in good faith and for proper purpose; b. (b) No material personal interest in subject of the judgment;
d. Results in personal right of a member being eliminated e. Results in misappropriation of company’s property f. Members acted for same improper purpose as the directors 4. Members can not ratify breach of statutory duty
INSURANCE AGAINST BREACH OF DUTY S 199A: Insurance of director’s (typically paid for by Co) will save them money but cannot insure for:
- Contravention of S 182 or 183 (improper use of information or position) (S 199B)
- Conduct involving wilful (i. intentional) breach of duty; or
- BUT: if officer successfully defends the litigation the insurer/ Co. can pay their costs.
Duties of Directors and Breaches
Course: Corporate Law (MLL221)
University: Deakin University
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