LAW

atgkd153

CompanyLawLectureTopic5.1slides.pdf

Home >Law homework help >LAW

LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 5.1

Directors’ duties

Textbook – Chapters 11, 12 & 13

Topic 5.1 Directors’ duties AIM: At the end of this topic you should be able to:

•  Identify a director of a company and their appointment, role & responsibilities

•  Outline the directors’ powers •  Explain the directors’ duties under equity, common

law and statute •  Explain the civil penalty provisions

Company Directors • A director must be at least 18 section 201B(1) • Pty Ltd must have at least 1 director (resident in Australia) section 201A(1)

• Public company must have at least 3 directors (2 resident in Australia) section 201A(2)

• Right to remuneration – by resolution section 202A(1) RR

Part2E.1 Related party provisions • Definition section 228 • Exceptions section 211

Extended definition of director director definition section 9 and includes: (a)  a person who is validly appointed to the position of

a director; (b)  a person who is not validly appointed as a director

if: (i) they act in the position of director de facto director (ii) the directors of the company are accustomed to act in accordance with the person's instructions or wishes shadow director

Disqualification from acting as director

Automatically following: Conviction for certain offences Declaration as undischarged bankrupt or Execution of personal insolvency agreement (Part X Bankruptcy Act); section 206B By the Court following: •  Contravention of civil penalty provision section 206C •  Involvement in 2 or more companies that become

insolvent or unable to pay debts section 206D •  Repeated contraventions of Act section 206E

Removal/vacation of office

• Retirement by rotation where the company’s constitution provides for this.

• Resignation - section 203A RR • Automatic disqualification and removal upon becoming bankrupt or upon conviction section 206A(2), section 206B(1)-(4)

• By members proprietary company section203C public company sections 203D,E

Powers of directors - section 198A RR

•  Individual director - normally no power or authority to make decisions binding on company – powers used collectively by board

•  Exception - single director companies section 198E •  Delegation of powers section 198D(1) to:

(a) committee of directors (b) director (c) employee (d) any other person

Managing director (MD)

• Directors usually have power to appoint MD section 201J RR

• Directors may confer powers on a MD section 198C RR

• MD - extensive powers to bind company • Board of directors may revoke or vary conferral of powers on MD section 198C(2)

DIRECTORS’ DUTIES

Sources of directors’ duties

Legal duties imposed on directors and officers: • Equity • Common law • Statute

Overview of directors’ duties Text 10th p 298. .

To whom are duties owed? •  ‘Company as a whole’ ‘not as a commercial entity as distinct from the corporators’ Greenhalgh v Ardene Cienmas Ltd [1951] Ch 286, 291; Ngurli Ltd v McCann (1953) 90 CLR 425, 438 Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1987) 16 NSWLR 212 •  Not individual shareholders Percival v Wright [1902] 2 Ch 421 Brunninghausen v Glavanics (1999) 46 NSWLR 538 •  Not employees Parke v Daily News Ltd [1962] Ch 927 •  Not creditors Spies v R (2000) 201 CLR 603

Relevant recent cases •  Parker, In the matter of Purcom No 34 Pty Limited (In

Liq) [2010] FCA 263 Gordon J at 68-75 •  Re S & D International Pty Ltd (No 4) [2010] VSC 388

Robson J at 269-270; 280-283; 287-288 •  Australian Securities and Investments Commission v

Macdonald (No 11) [2009] NSWSC 287 Gzell J at 667 •  Permanent Building Society v Wheeler (1994) 11 WAR

187 at 218 •  The Bell Group Ltd (In Liq) v Westpac Banking

Corporation [No 9] [2008] WASC 239 Owen J paras 4362-4368; 4374; 4457-4459; 4496; 4506; 4508-4511 4531; 4574; 4594; 4691

Directors’ Duties GENERAL LAW DUTIES •  Care & diligence •  Loyalty (Fiduciary) •  Retain discretion •  Act for a proper purpose

•  Act in best interest of company

STATUTORY DUTIES Corporations Act 2001 (Cth) Sections: •  s 180 Care & diligence •  s 181 Good faith, best interest & proper purpose

•  s 182 Avoid improper use of position for gain

•  s183 Avoid improper use of information to gain

•  s 184 criminal dishonest or reckless

Directors’ duties

GENERAL LAW CORPORATIONS ACT

CARE & DILIGENCE

Care & diligence Section 180

LOYALTY & GOOD FAITH

fiduciary Sections 181-184

DIRECTORS’ DUTIES Care & Diligence

•  exercise reasonable care, skill and diligence

•  prevent insolvent trading

Textbook Figure 11.3 page 335

Duty of care Scope of duty Duty to exercise due care, skill and diligence Derived from: •  Common law of negligence •  Equitable obligations •  Section 180(1) Content of duty same (note section 180(1) wording) Enforcement and consequences of breach differ

Duty of care Elements of liability •  Care •  Skill •  Diligence Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Section180(1) provides the statutory duty of care of a director: ‘degree of care and diligence that a reasonable person would exercise’

Section 180(1) = civil obligation only Breach of other directors’ duties may cause criminal liability; section 184

Reasonable Care

• Objective standard of care • Standard of care expected - depends on specific facts of case and varies depending on the size and business of company and knowledge, experience and skill of director

• See text p 321

Skill set

• Director should have some basic competency skills to undertake their duties

• For example, directors are expected to understand the company’s affairs including the financial statements and financial affairs

• See text p 324

What is ‘diligence’?

Directors to monitor and guide the management of the company Daniels v Anderson (1995) 37 NSWLR 438, 501 Including: • attendance at board meetings • basic understanding of the business of the company

• keeping informed about company’s financial and general affairs

See text p 333

Duty of care Defences 1.  Business judgment rule section 180(2) 2.  Relief from liability by court section 1318 common law or equitable actions Section 1317S statutory duty under section 180(1)

Business judgment rule section 180(2)

A director/officer complies with obligations under section 180(1) (and equivalent common law and equitable duties) if they:

•  make a business judgment •  in good faith for a proper purpose; •  do not have a material personal interest in the

subject matter of the judgment; and •  inform themselves about the subject matter of the

judgment to the extent they reasonably believe to be appropriate; and

•  rationally believe that the judgment is in the best interests of the corporation

ASIC v Rich (2009) 75 ACSR 1 [7248]-[7295] (Austin J)

Contravention of duty of care

Enforceable by

Consequences for director/officer Relief?

Common law Company Damages S 1318

Equity Company Equitable compensation Rescission of contract Constructive trust Account of profits Injunction

S 1318

Statute s 180(1)

Company or ASIC

Statutory injunction s 1324 Receiver appointed s 1323 Damages s 1317H Pecuniary penalty s 1317G Disqualification order s 206C

S 1317S

ASIC v Healy (No 2) [2011] FCA 1003 [79]-[97] (Middleton J)

. Textbook Figure 11.4 10th ed. page 358

Overview of directors’ duties Text 10th p 298. .

DIRECTORS’ GENERAL LAW DUTIES Loyalty & Good faith

Loyalty and good faith

Directors in a ‘fiduciary relationship’ with company. Fiduciary relationship exists where: • a person (eg, director) is appointed to or assumes to act;

• for the benefit of another person (eg, the company)

• in circumstances where the appointment gives person powers which could be exercised to detriment of other person (eg, the company)

Loyalty ‘As Australian law presently stands, the obligation of loyalty imposed upon a fiduciary is expressed in two overlapping proscriptive “themes” which govern the fiduciary’s liability to account to his or her own beneficiary.’ • Theme 1 – Avoid conflicts of interest • Theme 2 – Avoid unauthorised benefit or gain Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, 178

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 68

‘one person is obliged, or undertakes, to act in relation to a particular matter in the interests of another and is entrusted with the power to affect those interests in a legal and practical sense [and where there is a] special vulnerability of those whose interests are entrusted to the power of another’

Directors are fiduciaries.

Directors of a company are in a fiduciary relationship with the company;

‘Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power.’ Mills v Mills (1938) 60 CLR 150 at 185 (Dixon J).

Classification of fiduciary duties

The general law impose duties under equitable principles: •  to act bona fide in the interests of the company. •  to exercise powers for their proper purposes. •  to retain discretionary powers •  to avoid conflicts of interest. •  a duty not to profit

Overview of directors’ duties Text 10th p 298. .

Duty of loyalty and good faith Subcategories: •  Duty to act in good faith •  Duty to act for proper purpose •  Duty to retain discretions •  Duty to avoid conflicts of interest •  Duty to refrain from making personal benefit (without

fully informed consent of company)

Sections 181, 182 and 183 Company constitution – attentuation clauses

Duty to act in good faith in the interests of the company •  The duty requires directors to act “bona fide [in

good faith] and to act in the best interests of the company.

•  Directors also owe a duty to avoid actual or potential conflicts of interest. The duty is a strict one.

•  A director may breach the duty even though he or she acts honestly and does not stand to make profit.

Act for a proper purpose Powers conferred on directors to be exercised: •  to benefit the company and •  not any collateral purpose Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109, 137 (Ipp J) Ngurli Ltd v McCann (1953) 90 CLR 425 Whitehouse v Carlton Hotel Pty Ltd (1987) 70 ALR 251 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 835 •  Nature and limits of power •  Substantial purpose for which power exercised

Duty to Retain Discretions

General law imposes two duties on members of a board in respect of their discretions: • a duty to exercise an active discretion; and • a duty to retain their discretions. No direct statutory equivalents of these duties, but breach may also result in simultaneous breach of general law and statutory duties of care and diligence

Duty to Retain Discretions Cont. •  Scope of these duties may be fettered by company’s

internal rules •  Statutory intervention - sections 198D, 189 and 190

permit directors to delegate/rely on others. •  May provide defence to directors sued for breach

Avoiding conflicts of interest

•  Bray v Ford [1896] AC 44, 51 (Herschell L) any situation of conflict

•  Boardman v Phipps [1967] 2 AC 46, 124 (Upjohn LJ) real sensible possibility

•  ASIC v Adler [2002] NSWSC 171, [735] (Santow J)

Avoiding unauthorised benefit or gain

Regal (Hastings) Ltd v Gullivar [1967] 2 AC 134 Boardman v Phipps [1967] 2 AC 46 Cook v Deeks [1916] 1 AC 554 Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d)

DIRECTORS’ DUTIES UNDER STATUTE

Statutory fiduciary duties Section 181 requires a director or other officer to act in good faith in the best interests of the company & for a proper purpose in the exercise of their powers and the discharge of their duties. ‘improper purpose’ - an abuse of power or the doing of an act which the person in question has no authority to do: R v Byrnes & Hopwood (1995) 183 CLR 501

Sections 182 and 183 Prohibit a director, officer or employee from improperly using •  Their position section 182 •  Information section 183

in order to: •  Gain an advantage (for themselves or someone else) •  Cause detriment to the company

R v Byrnes & Hopwood (1995) 183 CLR 501 ASIC v Vizard (2005) 145 FCR 57

Directors’ disclosure requirements. •  Directors’ disclosure and voting obligations reinforce the

general law and statutory duties concerning conflicts of interest

•  They arise under:

•  general law •  Corporations Act and •  ? Under company’s constitution

•  The general law requires directors involved directly or indirectly in a contract with the company, to disclose that interest to the general meeting. If this requirement is breached, the contract is voidable at the option of the company.

Directors’ disclosure requirements •  Apply to directors of both public and private

companies. •  Directors with a “material personal interest” must

disclose that interest to the board. •  Unless the interest is exempt under section 191(2) •  Does not apply to directors of single director

proprietary companies section 191(5) •  Directors of public companies - additional disclosure

and voting obligations: if have a material personal interest, not entitled to vote or be present during a board meeting at which that matter is being considered section 195

Grand Enterprises Pty Ltd v Aurium Resources Ltd (2009) 72 ACSR 75

Remedies for a breach of fiduciary duty •  Director breaches a fiduciary duty and makes a

profit > accountable for that profit to company irrespective of whether the company suffered any loss; see Regal (Hastings); Furs Ltd v Tomkies

•  Company may also be able to seek imposition of a constructive trust on a third party who assists the fiduciary with knowledge of the breach

Civil Penalty Provisions • Statutory duty provisions ‘civil penalty provisions’

• eg sections180(1); 181(1) and (2); 182(1) and (2); 183(1) and (2); and section 588G

• List of civil penalty provisions section 1317E • Civil standard of proof - on the balance of probabilities ie ‘more probable than not that the alleged events occurred’ section 1317L

Civil and criminal provision

•  Sections 181 - 183 = civil penalty provisions. •  A criminal offence is committed re the duties not to

misuse information or position if the misuse is dishonest or reckless section 184

•  ASIC v Adler (No3) (2002) 20 ACLC 576 re a case on

the effectiveness of civil penalties involving serious breaches of directors’ duties.

Civil Penalty Provisions •  Where a civil penalty provision has been breached

ASIC may seek a declaration from the court that a civil penalty provision has been contravened section 1317E(1)

•  The court must make a declaration of contravention if it is satisfied that a civil penalty provision has been breached.

Declaration of Contravention; section 1317E(2) A declaration of contravention must specify: (a) the Court that made the declaration; (b) the civil penalty provision that was contravened; (c) the person who contravened the provision; (d) the conduct that constituted the contravention; (e) if the contravention is of a corporation/scheme

civil penalty provision--the corporation or registered scheme to which the conduct related.

Civil Penalty Provisions •  Declaration made > ASIC can seek a pecuniary

penalty order (up to $200,000); section 1317G •  OR a disqualification order, prohibiting a person from

managing a company for a period the court considers appropriate; section 206C

•  When proceedings commenced within 6 years of the contravention (section 1317K) court may also order a person to pay compensation to the company for damage suffered (as a result of the contravention); section 1317H & 1317J

Contravention of duty of loyalty & good faith

Enforceable by

Consequences for director/ officer

Relief?

Fiduciary duties(conflict of interest, acting in bad faith, improper purpose, inadequate disclosure

Company Equitable compensation Rescission of contract Constructive trust Account of profits Injunction

S 1318

Statute s 181, 182, 183

Company or ASIC

Statutory injunction s 1324 Receiver appointed s 1323 Damages s 1317H Pecuniary penalty s 1317G Disqualification order s 206C

S 1317S

KEY POINTS

•  Who are directors? •  Directors’ duties Loyalty & Good faith

•  General Law (fiduciary). •  Corporations Act.(ss181-184)

Care & Diligence •  General Law (care, skill & diligence •  Corporations Act (s180)

•  Breach of Civil Penalty Provisions

Topic 5.1 Directors’ duties AIM: At the end of this topic you should be able to:

•  Identify a director of a company and their appointment, role & responsibilities

•  Outline the directors’ powers •  Explain the directors’ duties under equity, common

law and statute •  Explain the civil penalty provisions

Next week

Lecture Topic 5.2 Management (Continued) Tutorial Attempt Activities 5.1.4 & 5.1.5.