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Directors’ Duties
© Oxford University Press, 2007. All rights reserved.
Directors’ Duties
Learning Objectives:
• Understand the duties of directors and other company officers;
• Understand the liability of directors for breaches of their
statutory duties, fiduciary duties and common law duties;
• Understand the importance of directors to avoid conflicts of
interest;
• Explain the obligations of directors when the company is
insolvent
Directors’ Duties cont…
Statutory and Fiduciary Duties: Shareholders
• Solvency Test
• Interests of Shareholders
• Interests of Creditors (Insolvent or Near Insolvent)
See:- Walker v Wimborne (1976) 137 CLR 1
See:- T.Ciro The Twilight Zone Revisited: Assessing the
Enforceability of Pre-liquidation Transactions in a Corporate
Group Insolvency (2005) 20(11) Journal of International
Banking Law and Regulation 590.
Directors’ Duties cont…
Statutory Duties
• Duty to Act with due care, skill and diligence: s.180;
• Duty to Act in good faith and for a proper purpose: s.181;
• Duty to not to misuse your position to gain an advantage or
cause detriment: s.182;
• Duty not to misuse your position to obtain and use
information: s.183 (civil);
• Duty of good faith, use of position and use of information:
s.184 (criminal
Directors’ Duties cont…
Duty to Act with Due Care, Skill and Diligence: Key
Requirements for S.180:• Objective test based on a reasonable person;
• Assessment of the requisite degree of care and diligence in light of the
company’s circumstances;
• A court will take into account all relevant considerations;
• Safe harbour for directors that satisfy the “business judgment rule”;
• Degree of care required by a non-executive director is measured
objectively;
• All directors irrespective of whether they are executive or nonexecutive directors are bound to give continuous attention to the affairs
of the company.
See: Rogers J in AWA Ltd v Daniels t/as Deloitte Haskins & Sells and
Ors (1992) ACSR 759
Directors’ Duties cont…
Duty to Act in Good Faith & Proper Purpose: S.181 Civil
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Directors and company officers must act in good faith;
Best interests of the company
Must act for a proper purpose
Must be honest and not for a collateral purpose
Look at all of the factors and circumstances of the case
Directors’ Duties cont…
Duty not to misuse your position to gain an advantage or cause
detriment: S.182 Civil
• unreasonable personal benefits on a director;
• independent director “in the dark” is strong evidence that the benefits
are unreasonable;
• conduct of a company was carried out in order to gain an advantage for
that director or someone else;
• director owes a fiduciary duty stands to gain a benefit without making
adequate disclosure of his interest, that director acts improperly within
the meaning of s.182;
• for the purposes of s.182 an objective standard applies and breach of
the section does not depend upon the director’s subjective intentions
Directors’ Duties cont…
Duty not to misuse your position to obtain & use
information: S.183 Civil
Director or company officer must not improperly use the
information to:
• gain an advantage for themselves or someone else; or
• cause detriment to the company.
See: Australian Securities and Investments Commission v
Vizard [2005] FCA 1037.
Directors’ Duties cont…
Duty of Good Faith, use of position and use of
information: s.184 Criminal
Imposes criminal liability on company directors/officers who act:• reckless or;
• intentionally dishonest
and fail to exercise their powers and discharge their duties:
• in good faith in the best interests of the company; or
• for a proper purpose.
Directors’ Duties cont…
Section 184 contains two offences:• Use of position:- Director, officer or employee who
dishonestly or recklessly uses their position to gain an
advantage, directly or indirectly for themselves or someone
else or to cause detriment to the company.
• Use of information:- Director, officer or employee who
dishonestly or recklessly uses information to gain an
advantage, directly or indirectly for themselves or someone
else or to cause detriment to the company.
See: R v Rivkin [2004] 59 NSWLR 284.
Directors’ Duties cont …
Avoiding Conflicts of Interest: Fiduciary Duty
• Fiduciary duties owed at common law including the duty
to avoid conflicts of interest.
• Conflicts can arise in many different contexts involving
directors, company officers and financial advisers.
See: T. Ciro and M. Fox, Financial Service Providers in
Australia: Managing Conflicts of Interest (2006) 17(1)
International Company and Commercial Law Review 6.
See: ASIC v Vizard [2005] FCA 1037
Directors’ Duties cont …
Related Party Transactions: Chapter 2E
• must obtain the approval of its shareholders: s.208
• a financial benefit can be direct or indirect;
• economic and commercial substance of the transaction
has priority over legal form;
• a court may disregard any consideration that may have
been provided;
• breaches of related party benefit provisions can result
in civil and criminal sanctions.
Directors’ Duties cont …
Section 229(3) provides some examples of providing a
financial benefit:• giving or providing the related party with finance or
property;
• buying an asset from or selling an asset to the related party;
• leasing an asset from or to the related party;
• supplying services to or receiving services from the related
party;
• supplying services to or receiving services from the related
party;
• issuing shares or granting an option to the related party;
• taking up or releasing an obligation of the related party
Directors’ Duties cont …
Consequences of Breach: s.209
• Civil penalties
• Criminal liability if dishonest
Arm’s length Defence: s.210
• the financial benefit would be reasonable in the
circumstances if the public company or entity and
related party were dealing at arm’s length; or
• are less favourable to the related party relative to an
arm’s length transaction.
Directors’ Duties cont …
Duties owed to Creditors: When does the duty arise?
• Test of Solvency: Current assets exceed current liabilities
• Insolvent or “near insolvency” Current Liabilities exceed
current assets
See: Walker v Wimborne (1976) 137 CLR 1.
Directors’ Duties cont …
S.588G Corporations Act
• Statutory duty to prevent the company from trading whilst
it is insolvent.
• Directors to avoid incurring further debts when the
company is insolvent including:
– Paying a dividend;
– Reducing share capital;
– Buying back shares;
– Redeeming preference shares;
– Financially assisting a person to acquire shares;
– Entering into an uncommercial transaction
Directors’ Duties cont …
Liability of Directors for Breaches of Director’s Duties
Civil penalties including:• Declaration of contravention:- s.1317E;
• Pecuniary Penalty: (up to $200,000 for each breach) - s.1317G;
• Disqualification:- s. 206 B (automatic); s.206 C & 206 D & 206 E (court
ordered); 206F (ASIC imposed);
• Compensation Order:-s.1317H;
Criminal Liability:-s.184
See: Rich v Australian Securities and Investments Commission (2004) 50 ACSR
242.
Directors’ Duties cont …
LIABILITY OF DIRECTORS FOR INSOLVENT TRADING
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Civil Penalty: Compensation
Criminal Offence: s.588G(3)
Recovery by the Liquidator: s.588M
Recovery by a Creditor
See: Elliott v ASIC (2004) 205 ALR 594.
Directors’ Duties cont …
Additional Remedies & Penalties
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Equitable damages;
Equitable compensation;
Constructive Trust;
Account of Profits;
Equitable Lien.
Criminal Prosecution by ASIC (dishonesty):s.184.