Directors’ duties
1.Two sources of rules: a. General law
b.Statutory provisions (e.g. ss180 – 183; 191, 195,588G)
2.Generally speaking, directors’ fiduciary duties are owed to the company rather than
individual shareholders: Percival v Wright [1902] 2 Ch 421.
3.However, A director may be treated as a “fact-bad” fiduciary of an individual shareholder
if the facts of the ca warrants this conclusion: Brunninghaun v Glavanics (1999) 46
NSWLR 536.
4.The best interest of the company when the company is insolvent: the interests of the
creditors. Kinla v Rusll Kinla (1986) 4 NSWLR 722:
5.Care & diligence: s180
Duty of care, skill, and diligence: s180(1)
-Obligagee: directors and other officers
-Standard of care
Fluid but objective: 1. Reasonable person in the def endant’s position
2. responsibility within the company, etc
In determining the standard of care and diligence, Tort principles applied, how careful a
director should be in making decisions: ASIC v Vine
The standard of care is determined by:
-The magnitude of the risk of harm and the probability of it occurring
-The riousness of the loss that would result if the harm occurs;
-And the expen, difficulty and inconvenience of taking alleviating action
Causation
-Where a compensation order under s131H is sought, as was in Gold Ribbon, there is a need for the plaintiff to prove that loss or damage has been caud by the defendant through her breach of a civil penalty provision (s180 is a civil penalty provision)
-Whether the plaintiff will suffer the loss becau of the defendant breached the duty of care?
-
‘Business judgment rule’ defence: e s180(2)
-Cas: Gold Ribbon (accountants) Pty Led v Sheers
6.Good faith and proper purpo: s181
Share issuance: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. Permanent Power to enter into transactions on behalf of the company: Building Society (in liq) v
Wheeler(1994) 12 ACLC 674
The power to register share transfer: Re Smith & Fawcett Ltd [1942] Ch 302
Other cas: PBS V WHEELER; ASIC ADLER
7.Improperly using of position: s182
Improperly: R v Byrnes: TB[13.3.130]
Gaining advantage for lf or others OR causing damage to the company
Ca: ASIC v soust; Adler, etc.
Conflict of interests: Sections 182, 191, 194, 195
➢Recall the Gildford Motor ca;
➢Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488 Constitution: art 98:
Directors or the firm where a director is a partner (“member”) can contract with the company, provided proper disclosure is made.
Profits from office: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
8.Improperly using of information: s183
ASIC V Vizard
R v Byrnes
Chew v R
9.Insolvent trading: s588G
-Obligagee: Directors: s588G(1)(a)
-Circumstances where this head of duty may become an issue (the company’s state of solvency and reasonable grounds for suspecting, etc.: s588G(1)(e)
-The circumstances in which the company is not permitted to incur a debt
a.The co is insolvent or becomes insolvent by incurring a debt s 588(1)(b), and
b.There a reasonable ground for suspecting that the company is insolvent or would so
become insolvent. S588G(1)(c)
-The director will be personally liable for the company’s debts if he/she has breached the duty to prevent the company from trading when it is insolvent
-Cas: Metropolitan Fire System Pty Ltd v Miller
-Insolvency
a.Cash flow test: s95A : 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: s95A(1). A person who i s
not solvent is insolvent: s95A(2)
b.Presumption of insolvency: s588E
Continuance of proved insolvency: s588E(3): when the company is being wound up and it has been proven that the company was insolvent at a point of time during the 12
months ending on the filing of the winding up application – the company is presumed to be insolvent
through that period.
c.ASIC v Plymin (factors indicating the company’s state of solvency)
-The ‘physical element (failure to prevent, etc)’: s588G(2)
a.The contravening act. Failure to prevent the company from incurring a debt while the
company is insolvent or to cau the insolvency.
b.Example:
•where a director acquiesced in the company continuing trading while
insolvent(Lipton et al, 13.5.165)
•Where a director refud to concur with the majority of the board but failed to take all practical steps to prevent the company from trading while insolvent: Statewide
Tobacco Services Ltd Morley (1990)
•Where a director allows the company to continue to trade wile insolvent: Metropolitan Fire
c.How to prevent?
•To stop the company from trading.
•To take steps to have an administrator appointed (s588H(6))
•To take steps to have the company wound up: Statewide Tobacco
-‘Mental elements (be aware OR… ‘would be so aware’)’ : ss588G(2)(a), (b)
a.The director must be aware at the time of the relevant transaction that there are
grounds for suspecting, etc (s588G(2) (a), OR
b. A REASONABLE PERSON IN THE LIKE POSITION IN A COMPANY IN THE COMPANY’S
CIRCUMSTANCES WOULD BE SO AWARE (s588G(2)(B))
c.Actual awareness: subjective awareness. Harder to prove
d.Objective awareness: To illustrate: In Metropolitan Fire, Mr Miller had knowledge about
the facts listed above under ‘reasonable suspecting’. A reasonable person in Miller’s
position would have been aware that.
-Defences: s588H
a.Reasonable grounds to expect company solvent. (s588H(2))
•Expecting something requires a higher threshold of knowledge or awareness than to suspecting it. Expecting something implies a measure of confidence
•Reasonable grounds – indicating factors
(1)Whethe r the company’s creditors had already taken aggressive attitude towards
the undischarged debts
(2)Whether creditors have already taken enforcement actions
(3)The likelihood that either the company or its directors to rai significant funds
in short order
b.Reliance on information from others (s588H(3)(a))
•The defendant has reasons to believe:
(1)That a competent and reliable person was responsible for the provision of
adequate information about whether the co is solvent; and
(2)That the person was fulfilling that responsibility (s588H(3)(a))
•And expected that the company was solvent at the time and would remain solvent if it incurred that debt, etc (s588H(3)(b))
•The defendant made no reliance if:
(1)The defendant’s opinion on the company’s solvency was formed on the b asis of
his own obrvation – he did not rely on information provided by others.
(2)No evidence shows that ‘other person’ has provided the defendant with any
information on the company’s state of solvency –which means that ‘other
person’ has not ‘fulfilled that responsibility’
(3)The defendant did not demand information from that ‘other person’, which is
the defendant’s duty
•Director did not take part in management of co (s588H (4))
•All reasonable steps taken (s588H(5))
-Creditors’ s tanding to sue: ss588M; 588R-U
-Remedies: ss588M(3) (s 1317H IS ALSO A POSSIBILITY)
•The court’s power to issue a compensation order (to uncured creditors) for a contravention of s 588G(2): s588J
•Recovery of compensation against a defaulting director for loss resulting from insolvent trading (where the debt is wholly or partly uncured and the co is being
wound up: by the liquidator (s588M (2)) AND CREDITOR (s588M(3))
10.Duty of disclosure: ss191, 194,195
-Directors who enter into a lf-interested transaction with the company or otherwi put themlves in a conflict of interest situation which amounts to breach of their fiduciary duty must disclo the details of their personal interest and obtain the company’s full informed connt if they are to avoid liability for the breach. Examples of such conflict of interest situations include where a director:
•Makes a personal profit that aris from their position
•Diverts an opportunity from their company;
•Or misus confidential company information
-As a general rule, directors’ fiduciary obligations require them to make full disclosure of their potential conflicts of interest to the company’s shareholders at a general meeting and obtain their connt.
-Can also be reported to the board if the company’s constitution permit
-S 194: permits directors of proprietary companies to have an interest in contracts with the company
provided certain conditions are satisfied. The director must disclo the nature and extent of the interest at a directors’ meeting
-S195(1), a director of a public company who has a material personal interest in a matter before the board is prohibited from voting on the matter and must not be prent while the matter is being considered by the board meeting
Related Party transactions
1.The basic rule: s208
A public company must not give a financial benefit to a related party, and an entity
controlled by a public company must not give a financial benefit to a related party of the public company
-The obligagee: a public company or an entity controlled by a public company (controlled entity: s50AA)
-Obligation: not to give financial benefit to ‘related parties’ and an entity controlled without the connt of the general meeting
•Giving financial benefit: s229 (2)
(1)Indirectly, i.e. through 1 or more interpod entities
(2)Directly
(3)By informal agreement that does not involve paying money
•Financial benefit: s229
(1)Giving or providing finance or property;
(2)Buying an ast from or lling ast to the related party;
(3)Leasing an ast from or to the related party (Cf the Kinla ca)
(4)Supplying rvices to or receiving rvices from the related party;
(5)Issuing curities or granting an option to the related party
(6)Taking up or releasing an obligation of the related party
•Controlled entity: the capacity to determine the outcome of decisions about the cond entity’s financial and operating policies: s50AA
•Related parties: s 228
(1)Directors & their spous: s228(2)
(2)Relatives of directors & spous:s228(3)
(3)Entities controlled by other related parties: s228(4)
(4)Related party in previous 6 months: s228(5)
(5)Entity has reasonable grounds to believe it will become a related party in the
future: s228(6)
(6)Acting in concert with related party: s228(7)
2.When is giving of a financial benefit permissible (s208(1))?
-Approval by members
-Gift must be given within 15 months of approval
3.Exceptions: ss210 – 216 (where shareholder approval is not required)
-Arm’s length terms: s210
-Remuneration and reimburment: s211
-Indemnity, exemptions, insurance premium: s212
-Small amount (up to $5000): s213(1)
-Benefit to/from cloly held subsidiary (100% ownership of all voting shares): s214
-Benefits to members that do not discriminate unfairly: s215
-Court order: s216
4.Conquences of contravention of s 208: s209
-Contravention does not invalidate the transaction: s209(1)
-
The public company or entity is not guilty of an offence: s291(1)(b)
- A person involved in the contravention of s208 will contravene s 209(2), which is a civil penalty provision: s209(2)
-Such a person commits an offence if the contravention involves dishonesty: s209(3)
5.Cas: ASIC v Adler (2002) 41 ACSR 72
Members’ remedies (ss236,237; e also the supplementary notes)
1.Statutory derivative action: enables shareholders and other eligible applicants to bring
legal proceedings on behalf of a company where the company is unwilling or unable to do so itlf.
-Standing: s236(1)
The following persons may bring proceedings on behalf of a company:
