MODULE 2
INTRODUCTION TO
DIRECTORS’ DUTIES
ADB Private Sector Development Initiative
Corporate and Financial Governance Training
Solomon Islands
Dr Ann Wardrop
La Trobe University
Acknowledgement
These materials were produced by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI).
PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, Australian Aid and the New
Zealand Aid Programme.
Module 2 Outline
Directors’ Duties

Contained in:

Companies Act 2009 (sections 64−70)
 Directors
 The
of state-owned enterprises (SOEs)
State Owned Enterprises Regulations 2010 regulations
17−27 (made under the State Owned Enterprises Act 2007)
Directors’ Duties


Directors’ duties are owed to the company. This flows
from the fact that the company is a separate legal
entity.
Because the directors are the ones who are controlling
the company’s affairs, they are in a position to harm the
company and the shareholders through:
 fraud
or enriching themselves at the company’s
expense; and
 mismanagement
Directors’ Duties
Two fundamental types of directors’ duties


To act in good faith, and in a manner that the
director believes to be in the interests of the
company (the good faith and interests duty)
To act with due care: a director must exercise the
care, diligence, and skill that a reasonable person
would (the duty of care)
The good faith and interests duty

The key aspect of this duty is to act:
 honestly
 for
the company
and NOT to treat the company assets as a treasure chest
for the directors’ own personal use.
What if the directors and shareholders are all the same
people?
The good faith and interests duty
Examples of breaches of this duty:





stealing from the company
making loans to friends, family, shareholders or other
directors on favourable terms
writing off debts owed to the company for no good reason
(e.g. just so a director won’t have to repay a loan)
Acquiring a competitor of the director’s company and using
company information to assist in acquiring the competitor
hiding company assets from creditors
The good faith and interests duty

Examples of breach (cont)
 Sole
director of a company diverts company assets to a
new company the director has set up, sells the assets to
the new company at an undervalue so that the original
company is left with no assets only liabilities and the
original company then goes into liquidation;
 MD
purchases shares in the company using mother’s
share trading account, the price of the company’s
shares goes up temporarily and he is able to claim a
cash bonus (b/c his bonus was tied to the share price)
The good faith and interests duty

MD authorises a large payment to another company
that he controls, where he knows it is not clear the
payment is due, and:

he pushes through the decision to make the payment
without debate or discussion at the board meeting;
 there
is a conflict of interest and nothing is done to
protect the interest of the company from the conflict.
The good faith and interests duty

Using a power for an improper purpose is a breach
of this duty. This means:
 powers
given to the board or others cannot be used for
their own private purposes, e.g.
 Using
the power to issue shares to create a new majority
of shareholders over the old majority; or
 Changing
contracts with employees or suppliers to
discourage someone from buying the company.
Conflicts of interest


A lot of the examples above involve conflicts of
interests between the director’s private interests and
his or her duty to the company.
There are sections in the Companies Act and the
SOE Act that specifically deal with conflicts of
interest and the procedures a director must follow
when there is a conflict. This will be covered in
detail in a later training session.
Other duties specifically mentioned
in the Act




Duty to comply with the Act
Duty to comply with the company rules
Duty not to disclose information or make use of company
information unless in the interests of the company or required
by law or in some other limited circumstances
Duty to prevent insolvent trading
 Note a D can be personally liable for the company’s debts
incurred after she or he fails to call a meeting to consider
appointing a liquidator in certain circumstances
2nd fundamental duty: the duty of
care


Director must exercise or perform her or his duties
with care, diligence, and skill that a reasonable
person would exercise in the same circumstances.
The director must actively consider all decisions and
cannot sit passively by and allow other directors to
make inquiries and effectively make the decision
The duty of care

Director will be judged by what could reasonably
be expected of a person in the director’s position;
In other words, directors not required to exhibit a
greater degree of skill than may be reasonably
expected of people with the same degree of
knowledge and experience in the circumstances
Duty of care


So for example, if a director is a lawyer, she or he
would be expected to understand better the legal
implications of what the company is doing;
But, while a director’s experience is taken into
account, it is assumed a director will be reasonably
informed about the company’s financial capacity
Examples of breaches of duty of care

Directors failed:
 To
monitor management;
 Didn’t assess the company’s financial position properly
 Didn’t ensure there was a proper system to provide
accurate and reliable financial information
 To maintain enough cash to allow for liquidity
 Failed to employ a qualified finance director
Examples of breaches of duty of care


MD breached his duty of care by authorising the
company to make misleading and deceptive statements
to the stock exchange;
Directors breached duty by allowing the company to
overpay their directors’ fees
 make two loans to another director where no rate of interest
agreed or repayment terms, not in writing;
 sold assets of the company and distributed the assets to
shareholders and another director leaving the company
insolvent

Examples of breaches of duty of care

Director:

approved a payment of a dividend when the company
did not have any profits to pay a dividend;
 Approved
the company accounts knowing the profit
included certain amounts but had not made proper
inquiries as to whether the inclusion of these amounts
would result in the accounts not providing a true and
fair view of the company’s profit and loss
Directors of SOEs





Their duties are similar to the duties we have just been
discussing – to act in good faith, in the best interests of
the SOE and for a proper purpose;
Can’t allow the SOE to contravene legislation or rules
Must exercise, care, diligence and skill that a
reasonable director would exercise in the same circs (2
specific obligations that would also be a breach of the
care duty are also set out in the Act)
Must only use information for SOE purposes
Duty against conflicts and managing those conflicts
Duties of Directors
Exercise