TOPIC 5
THE LAW OF CORPORATE GOVERNANCE
READINGS
Chapters
Ford
8, 9 and 11
A.
CORPORATE GOVERNANCE RULES
(1)
Sources of corporate governance rules
The corporate constitution prior to 1998 was usually made up of two documents:
first, a memorandum of association and, second, the articles of association. The
Constitution is the document setting out most of the legal rules regulating the
internal management of a company.
The memorandum of association defined the nature of the company and usually
included descriptions of the company’s name, the company’s share capital, the
liability of the company’s members and a statement that the subscribers to the
memorandum of association were desirous of forming a company. In addition, it
was common for the memorandum of association to set out the objectives of the
company as well as its powers to carry out those objectives. Earlier companies
legislation contained draft powers which companies could adopt if they so chose.
Illustrative was the third schedule of the Companies Act 1961 (NSW). Procedures
existed under the companies legislation to add to, vary or modify the memorandum
of association.
The articles of association contained regulations for the internal government of the
company on such matters as the rights and duties of members, the appointment of
directors, the powers of the board of directions, the conduct of meetings of the board
and of the members and the manner in which the affairs of the company are to be
conducted. Most of the companies legislation that preceded the Corporations Act
contained model articles of association which could be adopted in whole or part.
Illustrative was Tables A and B contained in the fourth schedule of the Companies
Act 1961 (NSW), Schedule 3 of the Companies (NSW) Code 1981 and Tables A and B
of Schedule 1 of the Corporations Law. As a matter of practice, a company limited
by shares had its own document containing articles of association if it was not
content to have its internal relationships regulated by the model articles of
association that were set out in the then legislation.
From 1 July 1998, companies were no longer required to have a memorandum of
association and the model articles of association were no long included in the new
legislation. However, much of what was contained in model articles of association,
1
were ultimately integrated into the Corporations Act itself. These statutory
provisions are called “replaceable rules” and applied to new companies registered
after 1 July 1998 as well as to old companies which repealed their constitutions after
that commencement time: s 135.
Section 134 of the Corporations Act now provides that the internal management of a
company may be governed by the provisions of the Corporations Act that apply to the
company as “replaceable rules”, by a constitution or by a combination of both. The
Corporations Act provides that just as a company did not have to be governed by all
or any provisions of the model articles of association in predecessor legislation if it
did not want them, so replaceable rules can be replaced by other provisions.
Replaceable rules do not apply to a proprietary company while the same person is
both its sole director and sole shareholder: s 135.
Section 141 sets out a table of replaceable rules which can be adopted by companies
to regulate their internal procedures.
(2)
Legal operation of a company's corporate governance rules
Section 140 of the Corporations Act states that a company's constitution has the effect
of a contract under seal between:
(a)
the company and each member;
(b)
the company and each director and company secretary; and
(c)
members themselves.
With respect to the contractual effect of these documents it should be stressed that
such effect is confined to these situations. No rights at common law are given to
anyone in any other capacity. This was illustrated in Eley v Positive Life Assurance Co
Ltd [1876] 1 Ex D 88. Eley was appointed as solicitor to the company for life. He later
became a member of the company. His appointment was contained in the articles.
Eventually he was removed as the company's solicitor and he sued for breach of
contract. The Court held that the articles conferred no rights upon him in any capacity
other than that of a member and that these were not affected, therefore his action
failed.
At common law the articles of association were regarded as creating a contract between
the members and the company. Section 140(1)(a) codifies this view. Illustrative of the
common law position is Hickman v Kent or Romney Marsh Sheep-breeders Association
[1915] 1 Ch D 881. In this case a company's articles provided for any disputes between
members and the company should be referred to an arbitrator before court
proceedings could begin. Hickman began a court action without referring the dispute
to an arbitrator and the company successfully obtained a stay of proceedings.
2
The Court held that the memorandum and articles constituted a contract between the
company and each member - a contract which is enforceable by both the company and
the members. Astbury J added that:
"[A]n outsider to whom rights purport to be given by the articles in his capacity as such
outsider, whether he is or subsequently becomes a member, cannot sue on those articles
treating them as contracts between themselves and the company to enforce those rights
... No right merely purporting to be given by any article to a person, whether a member
or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter,
director, can be enforced against the company ...".
In addition to the constitution being regarded as a contract between the company and
members both the common law and sec 140(1)(c) of the Corporations Act
acknowledges that the constitution also created a contract between members themselves.
In Rayfield v Hands (1960) Ch 1, the plaintiff and the defendants were members of a
company. The defendants were also directors of the company. Under the articles the
directors were required to have a share qualification. Another of the articles provided
that every member who intended to transfer shares was to inform the directors who
were to take the shares equally at a fair value. The plaintiff informed the directors of
his intention to transfer the shares to them. The defendants refused to take any of the
plaintiff's shares.
The Court held that the article in question imposed an obligation on the defendants in
their capacity as members and this obligation was enforceable by the plaintiff.
Whether the statutory contract contains an implied term of mutual good faith or
how far a court may award damages or compensation for breach (see Farrar’s
Company Law, 4th ed (Butterworths, London, 1998) at 119-120) are difficult matters.
(3)
Altering the constitution and effects of alteration
Section 136 sets out a procedure for a company to amend or repeal a constitution. In
relation to amending or repealing the legislation provides that a company may modify
or repeal its constitution or a provision of the Constitution by special resolution:
Section 136(2). Note also Section 136(3)-(6).
Any alteration could be subject to a further requirement specified in the constitution
for example, by specifying that more than 75 per cent of members need to agree to the
change (sec 136(4)). The constitution may also be altered without strict compliance
with formal meeting requirements in circumstances where all the shareholders agree1.
Previously any alteration to the constitution was subject to the common law
requirement that it must have been made "bona fide and be for the benefit of the company as
1
See the "Doctrine of unanimous consent".
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a whole."2 This requirement was confirmed in Allen v Gold Reefs of West Africa Ltd [1900]
1 Ch D 656. In this case a shareholder who held both partly-paid and fully-paid shares
fell into arrears on payment of calls on the partly-paid shares and did not have enough
assets to meet those arrears. One of the articles of the company conferred a lien on
partly paid shares. However steps were taken to pass a special resolution to alter this
article. Notice of the meeting was duly sent to the particular shareholder but he had
died. Subsequently the special resolution was passed to amend the articles to give the
company a lien on fully-paid shares where necessary to meet the debt and liabilities of
shareholders. The deceased shareholder's executors challenged the resolution as a
breach of contract and an invalid alteration of the articles.
The Court of Appeal held that the company had the power under the legislation (the
Australian equivalent provision is sec 136(2)) to alter its articles by special resolution.
According to Lindley MR:
"The power thus conferred on companies to alter the regulations contained in their
articles is limited only by the provisions contained in the statute and the conditions
contained in the company's memorandum of association. Wide, however, as the
language of sec 176 Corporations Law is, the power conferred by it must, like all other
powers, be exercised subject to those general principles of law and equity which are
applicable to all powers conferred on majorities and enabling them to bind minorities. It
must be exercised, not only in the manner required by law, but also bona fide for the
benefit of the company as a whole, and it must not be exceeded...
But then comes the question whether this can be done so as to impose a lien or
restriction in respect of a debt contracted before and existing at the time when the
articles are altered. Again, speaking generally, I am of opinion that the articles can be so
altered, and that, if they are altered bona fide for the benefit of the company, they will be
valid and binding as altered on the existing holders of paid-up shares, whether such
holders are indebted or not indebted to the company when the alteration is made."
The "company" in this context means not the company as a commercial entity but
rather the shareholders as a general body.
The question whether an alteration of the constitution is made bona fide for the benefit
of the company as a whole was difficult to resolve particularly as courts are reluctant
to impose their own views for that of the company. In answering this question courts
have had to consider whether the words "bona fide for the benefit of the company as a
whole" involves subjective and objective criteria or, whether the words are to be
assessed objectively only. Unfortunately the courts have not been consistent in their
approaches. Illustrative of one view is in Shuttleworth v Cox Bros & Co (Maidenhead) Ltd
[1927] 2 KB 9 where Scrutton LJ3 noted:
"Now when persons, honestly endeavouring to decide what will be for the benefit of the
2
3
See now Gambotto v WCP Ltd (1995) 16 ACSR 1;
[1927] 2 KB 9 at 23.
4
company and to act accordingly, decide upon a particular course, then, provided there
are grounds on which reasonable men could come to the decision, it does not matter
whether the court would or would not come to the same or a different decision..."
However, in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 Evershed MR stated:
"I think it is now plain that `bona fide for the benefit of the company as a whole' means
not two things but one thing. It means that the shareholder must proceed upon what, in
his honest opinion, is for the benefit of the company as a whole."
As will be seen below, the High Court in Gambotto v WCP Ltd (1995) 16 ACSR 1 at 8
rejected as inappropriate the “bona fide for the benefit of the company as a whole test” in
Allen v Gold Reefs and held that in cases:
“not involving an actual or effective expropriation of shares or of valuable proprietary
rights attaching to shares, an alterations of the articles by special resolution regularly
passed will be valid unless it is ultra vires, beyond any purpose contemplated by the
articles or oppressive as that expression is understood in the law relating to
corporations. Somewhat different considerations apply, however, ... where what is
involved is an alteration of the articles to allow an expropriation by the majority of the
shares, or a valuable proprietary rights attaching to the shares, of a minority. In such a
case, the immediate purpose of the resolution is to confer upon the majority shareholder
or shareholders power to acquire compulsorily the property of the minority shareholder
or shareholders. Of itself, the conferral of such a power does not lie within the
“contemplated objects of the power” to amend the articles.”
With this in mind it would appear that in order to ascertain whether the alteration is
valid, each case must be examined on its own merits to see whether it is one involving
an actual or effective expropriation of shares or of valuable proprietary rights
attaching to shares. If it isn't then it will be valid if it is passed by special resolution.
If it is then different considerations apply.
The onus is on those who seek to challenge the validity of an alteration to the
constitution to show that the majority of those who voted for the change, were not
properly exercising their powers. With respect to an alteration of the constitution, a
number of attempted alterations in the context of alterations involving an actual or
effective expropriation of shares or valuable proprietary rights have appeared in
courts after the validity of the purported change was questioned. Such alterations
include:
A change of the constitution so as to remove a shareholder from the company
by compulsorily acquiring their shares.

A change of the constitution so as to remove a competing shareholder from the
company by compulsorily acquiring their shares.

A variation or abrogation of rights attaching to shares - either within a class or
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not.
(a)
Alteration of the constitution so as to compulsorily acquire a shareholder's shares
In Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch D 290, shareholders who controlled
some 98 per cent of the issued shares, wished to purchase the remaining 2 per cent of
shares from the minority shareholders. This was refused. The company at this stage
was in need of capital and the majority agreed to inject this capital in return for the
outstanding shares. An alteration to the articles was made which would compulsorily
acquire the minority's interest. The Court held that this expropriation was unjust and
not for the benefit of the company and was therefore not allowed. Even though the
injection of capital would undoubtedly benefit the company the actual taking away of
the shares conferred no benefit to the company.
In Gambotto v WCP Ltd (1993) 11 ACLC 457, similar circumstances occurred. The facts
of this case were as follows: WCP was a company limited by shares. The majority
shareholders were wholly-owned subsidiaries of Industrial Equity Limited ("IEL")
and held 9 9.7 per cent of the issued capital). The appellants were two out of
several of the minority shareholders. The shareholding of WCP was such that IEL or
any of its associated companies could not have acquired the appellant's shares
compulsorily under the then Corporations Law.
On 16 April 1992, WCP notified all its members that a general meeting would be held
on 11 May 1992 to consider an amendment to WCP's articles of association. The
amendment proposed was that a new Article 20A should be included in the articles.
The effect of the new article was to enable any member who was "entitled for the
purposes of the Corporations Law to 90% or more of the issued shares" to
acquire compulsorily, before 30 June 1992, all the issued shares in WCP, not
being shares to which the majority members were entitled, at a price of $1.80 per
share. The documentation which was sent to the members included the text of
Article 20A, a proxy form and an expert's report valuing the shares at $1.365 per
share. The appellants conceded that this was an independent and fair
valuation.
The appellants did not want to sell their shares. In May 1992, after WCP
indicated that the majority shareholders were likely to vote in favour of the
amendment, the appellants commenced proceedings seeking to prevent the
meeting being held and the resolution being passed. Those proceedings were
resolved on an interim basis. WCP gave an undertaking that, if the resolution were
passed, it would not acquire any shares under the new article until the
conclusion of the appellants' action.
The meeting on 11 May 1992 was attended by representatives of the eight majority
shareholders and a minority shareholder who also represented two other minority
shareholders. The appellants did not attend the meeting either personally or by
proxy. The chairperson demanded a poll, presumably to put the matter beyond
6
doubt, after the resolution had been passed unanimously on a show of hands. The
three minority shareholders were the only ones to vote in the poll and they all
voted in favour of the resolution.
The appellants contended that the purported amendment was invalid on the
following two main grounds:
(1)
The amendment was oppressive and thus beyond the scope and
purpose of the power of alteration of the articles conferred by sec 176 of
the Corporations Law (now section 136(2) of the Corporations Act); and
(2)
The amendment imposed restrictions on the right to transfer shares
within the meaning of sec 180(3) of the Corporations Law (now sec 140(2) of
the Corporations Act).
McLelland J had held that the amendment was invalid and ineffective because its
"immediate purpose and effect" was to permit the shares of the minority
shareholders to be expropriated by the majority shareholders. According to his
Honour, such an amendment amounted to "unjust oppression of those minority
shareholders who object".
In reaching this conclusion, McLelland J recognized that, despite the apparent width
of s 176(1) of the Corporations Law (now sec 136(2) of the Corporations Act), the
power of a company in general meeting to alter its constitution is constrained by
principles of equity. His Honour noted that the "bona fide for the benefit of the
company as a whole" test had frequently been cited as the primary restraint
since its introduction in Allen v Gold Reefs of West Africa Limited [1900] 1 Ch 656.
Importantly, his Honour also noted the inappropriateness of this test in
situations where a conflict had arisen between different classes or
descriptions of shareholders.
In the Court of Appeal, Meagher JA (with whom Cripps JA agreed) observed
that the articles of association of a company were "infinitely capable of
amendment" subject to the Corporations Law and equitable limitations. His Honour
agreed with McLelland J that the "bona fide for the benefit of the company as a
whole" test was inapt in the present case. Importantly Meagher JA expressly
rejected McLelland J's suggestion that any amendment to the articles permitting an
expropriation of minority shares under any circumstances, whether for value or
not, will always constitute an oppression on the minority. Meagher JA also added
that it could not be said that the expropriation provisions of the Corporations Law
contained (in seccs 701-702 and sec 414) constituted a code governing the
expropriation of shares. In the present case, the evidence demonstrated that there
would be considerable tax advantages and some administrative benefits for WCP if
it were to become a wholly-owned subsidiary of IEL. That fact, coupled with the
fact that the level of compensation for expropriation was fair, led Meagher JA to
conclude that the amendment was not oppressive and should have been allowed to
stand.
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Priestley JA held that the proposed amendment was not unjust or oppressive.
In the High Court, Mason CJ, Brennan, Deane and Dawson JJ who delivered a
joint judgment, saw the fundamental issue as whether the amendment to
articles was oppressive. Reference was made by their Honours to Allen v Gold Reefs of
West Africa Limited [1900] 1 Ch 656 and in particular to Lindley J's emphasis therein
upon the "bona fide for the company as a whole" test and the fact that this test
had been inconsistently applied in subsequent decisions concerning the validity of
amendments which purported to allow the majority to expropriate minority
shareholdings.
Importantly the High Court in Gambotto noted the struggle that courts have had
with respect to striking a balance between the interests of the majority
shareholders and the minority. Illustrations of such a struggle were referred to
by the High Court. In this regard the decision of Astbury J in Brown v British
Abrasive Wheel Co [1919] 1 Ch 290 to regard the test as requiring both good
faith and a tendency to benefit the company as a whole, was noted. In
contrast to this case their Honours also referred to the English Court of
Appeal's decision in Sidebottom v Kershaw Leese and Co [1920] 1 Ch 154, where
Lord Sterndale MR and Warrington U rejected the view that Lord Lindley's
statement of principle involved two distinct elements. In addition the High Court
referred to the decision of Peterson J in Dafen Tinplate Co v Lianelly Steel Co
[1920] 2 Ch 124 and to further contradictory remarks in Shuttleworth v Cox Bros &
Co (Maidenhead) [1927] 2 KB 9 where the English Court of Appeal held that the
principle denoted one condition only, namely, "that the shareholders must act
honestly having regard to and endeavouring to act for the benefit of the
company".
Importantly the High Court also referred to the decision in Peters American
Delicacy Co Ltd v Heath (1939) 61 CLR 457. In that case it was held that an
alteration of the articles which discriminated against holders of partly-paid shares
in favour of the majority shareholders did not constitute a fraud on the minority
in the circumstances. It was noted in that case that Latham CJ considered that
such an alteration must be valid unless the party complaining can establish
that the resolution was passed fraudulently or oppressively or was "so
extravagant that no reasonable person could believe that it was for the benefit of
the company". His Honour stated that the criterion of the "benefit of the
company as a corporation" could not be invoked as the sole solution to the
problem where the amendment in question affected the relative rights of
different classes of shareholders. Dixon J was also regarded as having expressed
similar sentiments in finding that the expression "benefit as a whole" was a
general expression and that the "benefit of the company as a whole test" was
"inappropriate, if not meaningless", where the amendment proposed to adjust
the rights of conflicting interests.
Commenting on these decisions, Mason CJ, Brennan, Deane and Dawson JJ in
8
Gambotto stated at 8:
"In conformity with the views expressed in Peters, the use of the expression `for the
benefit of the company as a whole' is no longer influential in the context of an
alteration of the articles designed to effect or authorise the expropriation of a
minority's shares. But the expression is still
in vogue in the context of the exercise by directors of their powers, particularly
the power to issue or allot shares."
According to Mason CJ, Brennan, Deane and Dawson JJ at 8:
"In the context of a special resolution altering the articles and giving rise to a
conflict of interests and advantages, whether or not it involves an
expropriation of shares, we would reject as inappropriate the `bona fide for the
benefit of the company as a whole' test of Lindley MR in Allen v Gold Reefs
of West Africa Limited. The application of the test in such a context has been
criticised on grounds which, in our view are unanswerable. It seems to us that,
in such a case not involving an actual or effective expropriation of shares or of
valuable proprietary rights attaching to shares, an alteration of the articles by
special resolution regularly passed will be valid unless it is ultra vires, beyond
any purpose contemplated by the articles or oppressive as that expression is
understood in the law relating to corporations. Somewhat different
considerations apply, however, in a case such as the present where what is
involved is an alteration of the articles to allow an expropriation by the majority
of the shares, or of valuable proprietary rights attaching to the shares, of a
minority. In such a case, the immediate purpose of the resolution is to confer
upon the majority shareholder or shareholders power to acquire compulsorily the
property of the minority shareholder or shareholders. Of itself, the conferral of
such a power does not lie within the `contemplated objects of the power' to amend
the articles."
Of interest was the acknowledgment by the court that the exercise of a power
conferred by a company's constitution enabling the majority shareholders to
expropriate the minority's shareholding for the purpose of "aggrandizing the
majority" is valid "if and only to the extent that the relevant provisions of the
company's constitution so provide". In this regard a distinction was made between
the inclusion of such a term in the company's constitution at the time of
incorporation and a subsequent attempt to amend the constitution in order to
confer this power. In the latter case it was noted by Mason CJ, Brennan, Deane and
Dawson JJ at 9:
"Such a power could not be taken or exercised simply for the purpose of
aggrandizing the majority. In our view, such a power can be taken only if (1) it is
exercisable for a proper purpose and (ii) its exercise will not operate oppressively in
relation to minority shareholders. In other words, an expropriation may be
9
justified where it is reasonably apprehended that the continued shareholding of
the minority is detrimental to the company, its undertaking or the conduct of its
affairs - resulting in detriment to the interests of the existing shareholders generally
- and expropriation is a reasonable means of eliminating or mitigating that
detriment."
This would mean that if it appears that the substantial purpose of the alteration is to
secure the company from significant detriment or harm, the alteration would be valid
if it is not oppressive to the minority shareholders. According to Mason CJ, Brennan,
Deane and Dawson JJ at 9:
"Expropriation would be justified in the case of a shareholder who is competing with the
company, as was the case in Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154, so
long as the terms of expropriation are not oppressive. Again, expropriation of a minority
shareholder could be justified if it were necessary in order to ensure that the
company could continue to comply with a regulatory regime governing the principal
business which it cries on ... But that is not to say that the majority can expropriate the
minority merely in order to secure for themselves the benefit of a corporate
structure that can derive some new commercial advantage by virtue of the expropriation."
Importantly the High Court stated that an appropriate weight must be given to the
proprietary nature of a share and in this regard held that notwithstanding that a
shareholder's membership is subject to alterations of the articles which may affect
the rights attaching to the shareholder's shares and their value, "in the case of an
alteration to the articles authorising the expropriation of shares, it is not a sufficient
justification of an expropriation that the expropriation, being fair, will advance the
interests of the company as a legal and commercial entity or those of the majority of
corporators". The alteration must be fair in all the circumstances. According to
Mason CJ, Brennan, Deane and Dawson JJ at 10:
"It is only right that exceptional circumstances should be required to justify an amendment
to the articles authorising the compulsory expropriation by the majority of the minority's
interests in a company. To allow expropriation where it should advance the interests of
the company as a legal and commercial entity or those of the general body of
corporators would, in our view, be tantamount to permitting expropriation by the majority
for the purpose of some personal gain and thus be made for an improper purpose. It would
open the way to circumventing the protection which the Corporations Law gives to
minorities who resist compromises. amalgamations and reconstructions, schemes of
arrangement and takeover offers."
Some guidance was given by the Court as to what amounts to fairness. According to
Mason CJ, Brennan, Deane and Dawson JJ at 10:
"Fairness in this context has both procedural and substantive elements. The first element,
that the process used to expropriate must be fair, requires the majority shareholders to
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disclose all relevant information leading up to the alteration and it presumably requires the
shares to be valued by an independent expert."
The second element, namely that the terms of the expropriation be fair, is largely
concerned with the price offered for the shares. Significantly the issue of whether
fairness requires the majority shareholders to refrain from voting on the proposed
amendment was left open. However it is for the majority shareholders to prove that
the alteration is valid because it was made for a proper purpose and that it was
fair.
In Gambotto, as the appellants did not contend that the expropriation was not fair, the
validity of Article 20A hinged upon whether the respondents had proved that the
amendment was not made for a proper purpose. Here the immediate purpose of
the amendment was to allow the expropriation by the majority of the shares held
by the minority. There was no suggestion that the appellants' continued presence
as members puts WCP's business activities at risk or that the appellants acted to
WCP's detriment. There was no suggestion that WCP sought 100 per cent ownership
in order to comply with a regulatory regime. All that was suggested was that taxation
advantages and administrative benefits would flow to WCP if the minority
shareholdings were expropriated. This, it was held, could not by itself constitute a
proper purpose for a resolution altering the articles to allow for the expropriation of
a minority shareholder's shares. Accordingly, it was held that Article 20A was
invalid on the basis that it was not made for a proper purpose.
In Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303 at 315–
16, it was held by the NSW Supreme Court that a particular amendment to a
company’s articles of association was invalid on the basis that they were not for a
proper purpose as required by the High Court in Gambotto. In that case, the company
was established to act as an auction house for various pawnbrokers. In response to
the perceived threat of a takeover of the company, it was decided to vary the
constitution of the company by adding a new article to take effect in five years time
and which provided that if a member was not actively engaged in a pawnbroking
business or a nominee of such a person, the company would be given the power to
sell the members’ shares. Young J held that this amendment to the articles fell into
the category of expropriation of shares and therefore it could only be justified as
being undertaken for a proper purpose if the continued shareholding is detrimental
to the company. His Honour found that the amendment was not for a proper
purpose for several reasons.
First, one-third of the shareholders of the company were not currently involved in
that business which suggested that the article was not needed to protect the
company.
Secondly, the operation of the article was postponed for 5 years which suggested
that the company was not facing an immediate problem.
This decision was overturned on appeal on other grounds: see Combined Auctions
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Pty Ltd v Gray Eisdell Timms Pty Ltd (Matter No Ca 40465/95 [1997] NSWSC 612 (5
December 1997).
(b)
Alteration of the constitution so as to compulsorily acquire a competing shareholder's
shares
In Sidebottom v Kershaw, Leese and Co Ltd [1920] Ch D 154, a minority shareholder was
carrying on business in competition with the company. The majority shareholders
passed a resolution changing the articles so as to empower the directors of the
company to require any shareholder who competed with the company to transfer their
shares at an assessed value to the nominees of the directors. The minority shareholder
objected to this alteration. The Court held that the alteration was valid as it felt that it
would be in the best interests of the company as the minority shareholder by
competing with the company could damage the company. The Court distinguished
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch D 290. According to Lord Sterndale
MR:
"In my opinion, the whole of this case comes down to rather a narrow question of fact,
which is this: When the directors of this company introduced this alteration giving
power to buy up the shares of members who were in competing businesses did they do it
bona fide for the benefit of the company or not? It seems to me quite clear that it may be
very much to the benefit of the company to get rid of members who are in competing
business."
In Gambotto, Mason CJ, Brennan, Deane and Dawson JJ at 9 referred to Sidebottom v
Kershaw and held that an expropriation would be justified in the case of the
shareholder who was competing with the company so long as the terms of the
expropriation are not oppressive.
(c)
A variation or abrogation of rights attaching to shares
Sometimes a company's share capital comprises different classes of shares. It is a
question of fact whether there are such classes, as often the constitution does not
specify the division. In Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240, Jacobs J
held:
"In a case where particular rights are attempted to be taken away from the holder of
particular shares then, though the act may appear in theory to be a decision or resolution
applicable generally to holders of all shares, if it appears that it affects one or a minority
in particular then it should appear that full regard has been had to the proprietary rights
involved."
In this case, Crumpton owned shares in a home unit company which entitled her to
rights of occupation of a particular unit. This occupation could not be determined
without the shareholder's consent. After a dispute, the company resolved to alter
12
certain articles dealing with leasing for more than 12 months and for determination of
the right to use the units in particular situations. The plaintiff argued that these
alterations were in effect a variation of her class rights and that, accordingly, the
procedure set down in the articles should have been followed. The Court agreed and
found that:
"[T]he groups of shares are different, the rights attaching to them are different, with the
result that the capital is divided into different classes within the meaning of [the
articles]."
Where a company has shares which are divided into different classes then the rights
attaching to those specific shares can only be altered by a resolution passed by the
holders of that class. See section 246B of the Corporations Act and Lorenzi v Lorenzi
Holdings Pty Ltd (1993) 12 ACSR 398.
In addition, an aggrieved shareholder may argue that the alteration or the proposed
alteration was "oppressive or unfairly prejudicial or unfairly discriminatory": see
section 232.
Yet determining whether rights attaching to shares have been varied is not necessarily
a straight forward task. Illustrative is the decision in Greenhalgh v Arderne Cinemas
[1946] 1 All ER 512. In this case a company had issued 21,000 preference shares of 10
shillings each and 31,000 ordinary shares of 10 shillings each. All shares carried one
vote and the articles permitted the company to subdivide the shares. Pursuant to a
debenture arrangement with Greenhalgh, the latter was issued with a number of
ordinary shares which had been subdivided into 2 shilling shares. However the shares
carried the same voting rights as the other shares.
After disagreement with Greenhalgh, the company resolved at a general meeting of its
shareholders to subdivide all shares into 2 shilling shares. This had the practical effect
of decreasing Greenhalgh's power within the company structure and it was argued
that this constituted an unauthorised variation of rights attaching to his shares.
The court held that the voting rights attaching to the shares had not been varied.
According to Lord Greene MR;
"Construing the provisions here, we must read the class rights as being confined to the
express terms of the article, which alone can restrict the power of subdivision given by
the Act and the articles ... the effect of this resolution is, of course, to alter the position of
the 2s. shareholders. Instead of Greenhalgh finding himself in a position of control, he
finds himself in a position where the control has gone, and to that extent ... [his] rights
are affected as a matter of business. As a matter of law, I am quite unable to hold that,
as a result of the transaction, the rights are varied; they remain what they always were a right to have one vote per share pari passu with the ordinary shares for the time being
issued which include the new 2s. ordinary shares resulting from the subdivision."
This interpretation was applied in White v Bristol Aeroplane Co [1953] Ch 65. In this case
13
a clause in the articles of a company prohibited, except by certain procedures, class
rights being "affected, modified, dealt with or abrogated in any manner...". The
company proposed to make a bonus issue of preference shares to ordinary
shareholders. These were to have the same rank as existing preference shares. One of
the preference shareholders objected to the proposal.
The Court held that what had happened was that the rights of the preference
shareholders had not been affected. Simply the enjoyment of those rights had been
affected. According to Romer LJ:
"The rights, as such, are conferred by resolution or by the articles, and they cannot be
affected except with the sanction of the members on whom those rights are conferred, but
the results of exercising those rights are not the subject of any assurance or guarantee
under the constitution of the company and are not protected in any way. It is the
rights, and those alone, which are protected, and for the reasons which my Lord has
given, and, in view of what I have myself said, the rights of the stockholders will not, in
my judgment, be affected by the proposed resolutions. Accordingly, I agree that this
appeal should be allowed."
The High Court found reason to examine this issue in Peters American Delicacy Co Ltd v
Heath (1939) 61 CLR 457, where the plaintiffs, who held partly-paid shares, brought an
action challenging certain resolutions passed to alter the company's articles. One
particular resolution altered the article which dealt with capitalisation. Under the new
article the company could make a distribution of new shares proportionally to the
amount of paid-up capital on the shares rather than in proportion to the number of
shares held by each shareholder which was the case under the old article.
The Court held that the power to alter the articles of a company must be made bona
fide for the benefit of the company as a whole and this power must not be exercised
fraudulently and for the purpose of oppressing the minority. According to Latham CJ:
"It follows that where the rights of members of the company depend only upon the
articles it is possible to alter the rights of members or of some only of the members by
altering the articles. The fact that an alteration prejudices or diminishes some of the
rights of the shareholders is not in itself a ground for attacking the validity of an
alteration: See Sidebottom v Kershaw, Leese & Co ... An alteration which is made bona
fide and for the benefit of the company, if otherwise within the power, will be good, but it
is not the case that it is necessary that shareholders should always have only the benefit
of the company in view. In cases where the question which arises is simply a question as
to the relative rights of different classes of shareholders the problem cannot be solved by
regarding merely the benefit of the corporation...
...The result of applying these principles is that the special resolution altering the
articles cannot be declared to be invalid merely upon the ground that the original
articles conferred special rights upon the holders of partly paid shares of which the
alteration deprived them, or upon the ground that the voting holders of fully paid shares
were interested in making the alteration adversely to the holders of partly paid shares.
14
If, however, the resolution was passed fraudulently or oppressively or was so
extravagant that no reasonable person could believe that it was for the benefit of the
company, it should be held to be invalid."
Other alterations to the constitution
In regards to other alterations to the constitution not involving an expropriation of
shares, Gambotto’s decision is authority for the proposition that such alterations will be valid where
regularly passed by special resolution unless they are of ultra vires, beyond any purpose contemplated
by the articles or oppressive. The latter would include attempts by the company to change the
constitution so as to make shareholders liable for a greater number of shares than they
have. In such circumstances the affected shareholder must consent in writing to this
alteration. This is provided for by sec 140(2) of the Corporations Law.
Similarly, a managing director may have a particular contract of service embedded in
the company's constitution. A question arises in such circumstances as to whether the
company can alter the Constitution so as to remove the managing director? Relevant
to this issue is section 140(1)(b) which provides that the constitution has the effect of a
contract between the company and each director and company secretary.
The position with respect to managing directors and their rights have caused the
judiciary a number of difficulties, in particular, before 1 January 1986, when the
predecessor to sec 140(1)(b) came into effect. These difficulties were in the main
related to how a managing director was appointed and to the acknowledged
distinction between directors who were appointed under a separate contract of service
and those appointed pursuant to the articles.
If a company decided to replace a managing director who had been appointed for a
fixed term before expiry of this term, the question is whether compensation for loss of
office must be paid. In answering this question courts distinguished between
managing directors who were appointed pursuant to the constitution and those
appointed under a separate contract of service. Where the appointment was contained
in the constitution, general law principles provided that no compensation was payable
to the managing director as the constitution could confer no rights on outsiders4 and
that there could be no unalterable article.
Managing directors may however have rights pursuant to sec 232 by virtue of sec
234(a)(ii).
If the appointment of managing director is contained in a separate service contract,
damages may be payable at general law and pursuant to sec 140. In Southern Foundries
Ltd v Shirlaw [1940] AC 701, Shirlaw was appointed managing director of Southern
Foundries Ltd (SFL) for ten years under a service contract. Control of SFL changed
and the company altered its articles giving the controlling shareholders power to
4
See Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88.
15
remove any director. Shirlaw was removed as a director and his appointment as
managing director was terminated. As a result he sued for damages for breach of
contract. The House of Lords held that Shirlaw was entitled to compensation for
breach of contract. According to Lord Atkin:
"I take it to be clear law, that the company's articles so regulating the office of director
could be altered from time to time: and therefore the continuance in office of the
managing director under the agreement depended upon the provisions of the articles
from time to time. Thus the contract of employment for the term of ten years was
dependent upon the managing director continuing to be a director. This continuance of
the directorship was a concurrent condition. The arrangement between the parties
appears to me to be exactly described by the words of Cockburn CJ in Stirling v
Maitland: `If a party enters into an arrangement which can only take effect by the
continuance of an existing state of circumstances': and in such a state of things the Lord
Chief Justice said: `I look on the law to be that ... there is an implied engagement on his
part that he shall do nothing of his own motion to put an end to that state of
circumstances, under which alone the arrangement can be operative...'
... The question that remains is whether if the removal by the company would have been
a breach by the company, the removal under the altered articles ... was a breach by the
company. ...The office of director involves contractual arrangements between the
director and the company. If the company removes the director it puts an end to the
contract: and indeed the contract relations cannot be determined unless by events
stipulated for in the contract, by operation of law, or by the will of the two parties."
A more difficult issue arises where the constitution and the contract of service are
expressed to be subject to each other. In Carrier Australia Ltd v Hunt (1939) 61 CLR 534,
Hunt was appointed managing director of Carrier Australia Ltd (Carrier) under a
contract for five years. A clause of the contract provided that "notwithstanding
anything hereinbefore contained the company shall be at liberty to terminate the term
by notice to that effect if ... the managing director ceases to be a director of the
company." Article 91 of Carrier's articles gave the company power to remove any
director from office `subject to the provisions of any agreement for the time being
subsisting ...' This article was altered by deleting these last words and Hunt was
removed as director and his position as managing director was therefore terminated.
Hunt sued Carrier for wrongful dismissal and the Supreme Court held that although
the company had power to alter its articles it was liable for damages for breach of
contract.
On appeal, the High Court was divided 2-2. This meant that the Supreme Court's
decision stood and that Carrier was liable in damages. According to McTiernan J:
"The company did not assist itself to escape from its obligation under the contract by
amending art.91. The company may thereby have armed itself with the undoubted
power of removing the respondent from its board of directors and it may be that this
power was well exercised. But the obligation of the company under the contract
remained notwithstanding the alteration of the exercise of the power. This obligation
16
was renounced by the company when it frustrated the contract by removing the
respondent from office as a director."
(4)
Membership
A person or entity can become a member of a company in a number of ways including:
1.
Acquisition by way of transfer of shares;
2.
Acquisition by allotment;
3.
Acquisition through transmission of shares;
4.
By subscribing to the constitution.
For the purposes of this course the following material should be understood in
relation to share transfers.
A share certificate is prima facie evidence of the title of a shareholder to the number
of shares specified: s 1070C(2). Pursuant to section 1070C(1), a share certificate must
state:
(a)
(b)
(c)
The name of the company and its jurisdiction of registration
The class of shares; and
The amount unpaid on the shares.
A company is bound by its own certificate: see Daily Telegraph Newspaper Ltd v Cohen
(1905) 5 SR (NSW) 520. In Re Bahia and San Francisco Rail Co (1868) LR 3 QB 584, a
person forged the name of the true owner of shares (“C”) on a transfer document
and then forwarded the forged transfer together with a stolen share certificate made
out to C onto the company. Subsequently, the company, without negligence or
fraud, issued a certificate to the forger. The court held that C as the true owner was
entitled to have his name restored to the register.
In some cases an estoppel may arise where a purported transfer of shares is later
found to be invalid. In Daily Telegraph Company Newspaper Ltd v Cohen shares had
been sold under a purported exercise of a power of attorney. The power of attorney
and associated transfer of shares were later held to be void. The original owner’s
name was then restored to the register. In the meantime, the transferee had in turn
transferred the shares to Cohen. Cohen’s name was removed from the register, but
the company was held liable in damages to him because it was estopped from
denying that his transferor was the true owner as it had previously certified.
A company is generally not liable (unless estoppel applies) where there is a forged
certificate. However if the forgery is the result of the fraudulent acts of an officer,
agent or employee of the company, the assumptions in s 129 permit an outsider to
17
assume that the certificate is validly executed and is otherwise genuine: s 128(3). In
such a case the company is bound by the share certificate even though it is forged.
This overcomes the decision in Ruben v Great Fingall Consolidated [1906] AC 439
which held that where a forged certificate or transfer is passed on it is null and void
and incapable of passing on any interest.
A proprietary company or an unlisted public company may, in its constitution,
restrict the right to transfer shares: s 1072G. If the restriction is clear and
unambiguous it will be upheld by the court: see Greenhalgh v Mallard [1943] 2 All ER
234. This is despite the fact that a seller of shares has a prima facie right to transfer
his or her shares: see Wood v W G Dean Pty Ltd (1929) 43 CLR 77.
If a company refuses to register a transfer, it must send the transferee notice of the
refusal within 2 months after the transfer was lodged with it: s 1071E and Re
Swaledale Cleaners Limited [1968] 1 WLR 1710. Breach of this requirement is an
offence and may result in the company losing the right to deny registration to the
transferee.
Most restrictions give a discretion to the directors to refuse to register a transfer or
give existing members a first option to take up the particular shares (known as preemptive purchase provisions): see Rayfield v Hands [1960] Ch 1.
If the company’s constitution does not require directors to disclose grounds or
reasons for a refusal to register a transfer, it is difficult to challenge the refusal. The
person who challenges must prove that the directors acted in bad faith or for
improper purposes: Re Smith and Fawcett Ltd [1942] Ch 304.
If the directors refuse to register a transfer of shares, the transferee may apply to the
court and if the court is satisfied that the refusal to register was without just cause,
the court may order that the transfer be registered or make such order as it thinks
just and reasonable including an order providing for the purchase of the shares by a
specified member or the company: sec 1071F. Members may also have a right under
sec 232.
In summary, where a discretion is given to directors to refuse a share transfer, only
limited grounds are available to challenge the exercise of this discretion. These
grounds include the following:

Where the directors have not acted bona fide for the benefit of the company as
a whole: see Ascot Investments Pty Ltd v Harper (1981) 33 ALR 631. The onus of
proving that the directors in exercising their power of refusal have not acted
bona fide in the interest of the company is on those challenging their decision:
see Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199;

Where notice of refusal to register a transfer has not been given within the
prescribed time: see Roberts v Coussens (1991) 9 ACLC 1403;
18

Where the Corporations Act forbids the refusal to transfer the shares;

Where sec 232 can be used by members where they consider that the refusal
was oppressive.
B.
THE BOARD OF DIRECTORS AND THE GENERAL MEETING
(1)
General Concepts
Shareholders are free to determine who will manage a company. When this
determination is made, duties and responsibilities are imposed by the general law and
statute on those managers. This legislation provides for management, in the absence
of contrary provisions in the company's constitution by a board of directors which
consists of natural persons only. Further the legislation prescribes the minimum
number of directors - one in proprietary companies and three in a public company (sec
201A).
Unless a company is under some form of financial administration or in liquidation, a
number of groups of persons can activate a company. These persons are:
(2)

the board of directors;

the company in general meeting deciding pursuant to the doctrine of
unanimous assent or by a requisite majority.
The board of directors
According to Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)
[2008] WASC 239 at para [4457].
“The board of directors is one of the constitutional organs of a body corporate. The
directors are invested with powers that stem from the constitution of the body
corporate (for example, the memorandum and articles) and from the relevant statutes.
Since the abandonment of the doctrine of ultra vires in 1984 (at least in relation to
companies incorporated under the Companies Codes and succeeding legislation)
companies have had almost unqualified capacity to act. But a director (as a
constitutional organ in the management and administration of a company) is
nonetheless required to avoid a use of her or his fiduciary powers that goes beyond the
constitutional authority of the corporation or that is otherwise an abuse of those
powers. It is in this sense that directors are said to be donees of a limited power. This
is a question of authority rather than of capacity.”
19
Companies usually give complete managerial power to the board of directors5. Such
instances of power allocation led Samuels JA in Winthrop Investments Ltd v Winns Ltd
[1975] 2 NSWLR 666 to make the following comment at 683:
"... The shareholders may have ultimate control because they can alter the articles or
remove the directors: but they cannot interfere in the conduct of the company business
where management, as here, is vested in the board ... they have no general power to
transact the company's business, or to give effective directions about its management."
An illustration of allocating power appears in section 198A of the Corporations Act
whereby the directors are given a general power to manage the company. The
decision in Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34
contains an important interpretation of an article similar to the replaceable rule in
section 198A. In this case an article gave power of management to directors "... subject
to such regulations as may from time to time be made by extraordinary resolutions."
A further article gave the board power to sell property owned by the company on
terms it thought fit.
Shareholders at a meeting purported by ordinary resolution to direct the board to sell
property and the board refused and relied on the articles. The Court held that unless
an extraordinary resolution was passed, as provided for in the articles, the
shareholders could not ignore the articles and give directions. According to Collins
MR:
"No doubt for some purposes directors are agents. For whom are they agents? You
have, no doubt, in theory and law one entity, the company, which might be a principal,
but you have to go behind that when you look to the particular position of directors. It is
by the consensus of all the individuals in the company that these directors become
agents and hold their rights as agents. It is not fair to say that a majority at a meeting is
for the purposes of this case the principal so as to alter the mandate of the agent. The
minority also must be taken into account. There are provisions by which the minority
may be over-borne, but that can only be done by special machinery in the shape of
special resolutions. Short of that the mandate which must be obeyed is not that of the
majority - it is that of the whole entity made up of all the shareholders. If the mandate of
the directors is to be altered, it can only be under the machinery of the memorandum
and articles themselves."
Other cases on this area include Gramophone & Typewriter Ltd v Stanley [1908] 2 KB 89,
Quin & Axtens Ltd v Salmon [1909] AC 442 and NRMA v Parker (1986) 4 ACLC 609.
In National Roads & Motorists' Association v Parker, the Association's articles provided
for half of its council to stand down yearly. Voting was by mail and the returning
officer had a discretion in deciding whether a postal ballot system be used as opposed
5
See McEwin RI, "Public versus Shareholder Control of Directors" (1992) 10 C & SLJ 182. In this
article, problems concerning shareholder control of directors are raised and one of the questions
which is posed is, who should be able to limit directors in their role as managers? Should it be
the market, the shareholders or a regulatory authority?
20
to publication of ballots in the Association's journal. A number of members
requisitioned a general meeting and at this meeting resolved to direct the Council to
select a particular returning officer and to instruct this officer to use a postal ballot
system.
In a challenge to the validity of the requisition of the meeting and therefore to the
resolution passed it was argued that this resolution was of a type which could not be
passed by such a meeting. The Court agreed. According to McLelland J:
"[I]t is not part of the function of the members of a company in general meeting by
resolution, that is, a formal act of the company, to express an opinion as to how a power
vested by the constitution of the company in some other body or person ought to be
exercised by that other body or person."
Directors may refer matters to shareholders for ratification or approval. Finally in
some other instances it seems shareholders may intervene, for example, where there is
a deadlock on the board or a quorum of the board is missing and the directors refuse
to act. Further if the directors refuse to take action because they are in breach of duty
then the shareholders may take action. According to Gower, "these exceptions are
convenient, but difficult to reconcile in principle with the strict theory of a division of powers.
Their exact limits are not entirely clear”6.
Normally the board has many discretions conferred by the constitution to decide
matters such as day-to-day operations, engaging staff and contractors as well as
buying and selling. Often the constitution empowers the board to exercise discretions
concerning borrowings, issuing of securities and the making of calls on shares. There
may also be discretions to register share transfers and there may be an ability to fill
casual vacancies in the board.
In regards to these discretions, members of the board have the following duties:

A duty to observe prohibitions and restrictions in the constitution;

A duty to retain discretions - a board cannot delegate without authority nor can
it fetter its future discretions. If it is empowered to delegate it is often to
committees and to the managing director.
Directors meetings are regulated by sections 248A-G.
(3)
Members meetings
Certain matters of management require the approval of members, and in these
instances, the members when deciding whether to approve will have input into a
company's management. Illustrative will be where a company attempts:
6
LCB Gower, "Gower's Principles of Company Law", Stevens, 4th ed. at 147.
21







to alter the constitution;
to alter the company's authorised share capital;
to consolidate or subdivide the company's shares;
to reduce the company's issued share capital;
to issue shares at a discount;
to alter rights attached to shares;
to alter the company's status.
Although members’ meetings are dealt with in sections 249A-251B of the Corporations
Act, particular attention needs to be drawn to the following meetings whereby matters
of corporate management and governance take place:



the Annual General Meeting;
General meetings;
Class meetings.
Annual General Meeting (“AGM”)
Apart from the first AGM held after the company is incorporated, all public
companies must hold an AGM once every year in addition to other meetings which
are held: sec 250N. The meeting must be within five months of the end of the financial
year. The period in which to hold the meeting can be extended by ASIC (see Re NBN
Ltd (1982) 1 ACLC 31 and Re Oilmin NL (1982) 1 ACLC 279) where a company applies
to ASIC for an extension of time before the expiration of the prescribed time to hold
the AGM: sec 250P(2). An extension of time will only be granted if, on balance, there
is good cause to postpone the meeting.
The business of an AGM may include the matters listed in sec 250R such as:
7

consideration of the annual financial report prepared for each financial year (sec
292)7. The contents of the annual financial report are set out in sec 295 and
comprise a financial report (sec 295) containing the financial statements for the
year, the notes to the financial statements and the directors’ declaration about
the statements and notes;

consideration of the directors’ report (sections 292, 298, 299, 299A, 300 and
300A);

consideration of the auditor’s report (sec 308);

the election (and removal) of directors;
Section 292 sets out the entities who must prepare annual financial reports. Sections 302-306
deal with half-year financial reports and directors’ reports.
22

the appointment of the auditor;

the fixing of the auditors remuneration;

declaration of dividends (s 254U).
Proprietary companies are no longer obliged to hold AGMs: sec 249A. Under this
section, where members of the company have signed a document which states that
they are in favour of a certain resolution, this will be ‘deemed’ to be a resolution of a
‘deemed’ general meeting. The fact that the members did not formally convene
together is not relevant. Where all the matters required to be covered at an AGM are
covered in the document, then the meeting will be ‘deemed’ to be an AGM of the
company and the document shall be deemed to constitute a minute of that meeting.
General meetings
All meetings other than AGMs are called general meetings. These may be convened
by directors (sec 249C and sec 249CA) or by members (sec 249D).
Members may requisition (request) the directors to convene a general meeting when
those members have at least 5% of the voting shares or, in the case of a company not
having a share capital, where they total at least 100 members. This meeting must be
held within two months of the requisition: sec 249E. If the meeting is not so held, a
power is given to the requisitionists to convene a meeting (sec 249F). Requisitionists
can be combined to make up the required percentage of issued share capital:
Dominion Mining NL v Hill.
Any reasonable expenses incurred by the members must be paid by the company.
The directors may apply for an extension of time in which to call the meeting:
sec 1322(4)(d).
The members’ right to requisition a general meeting needs to be exercised in good
faith and for a proper purpose. Further, the members’ requisition is regulated by sec
249N, which provides that:




It must be signed.
It must correctly state the objects (reasons) for the meeting. It cannot be
misleading: See Bain & Co Nominees Pty Ltd v Grace Bros Holdings Ltd (1983) 1
ACLC 816;
It must be deposited at the registered office of the company. Where it consists
of more than one document — for example, where many members have each
signed a similar document — then all the documents must be seen as part of a
single and entire activity: See Dominion Mining NL v Hill & Anor (1971-1973)
CLC 40-022;
If the meeting is not held within 21 days of the requisition being received, the
23
members may convene a meeting.
Members who hold at least 5% of the company’s issued share capital may also call a
meeting unless the articles provide otherwise: sec 249F. The court has power to order
that the meeting be convened. See Re Totex-Adon Pty Ltd and the Companies Act [1980] 1
NSWLR 605.
A failure to notify all members can be excused under sec 1322: Holmes v Life Funds
of Australia Ltd.
In summary, shareholders can call a general meeting in two ways.
requisition under sec 249D and second, under sec 249F.
First, on
Class Meetings
Where a company has issued different classes of shares procedures exist for the
holding of meetings of such classes: see sec 246B and sec 249H. See also White v
Bristol Aeroplane Co Ltd [1953] Ch 65, for a definition of "class".
(4)
Issues relating to meetings of members
The following are important when considering procedures at meetings:
Resolutions
Ordinary resolution – passed by a simple majority vote – can be used in circumstances
where a special resolution is not required.
Special resolution – is one passed by a 75% majority of the members voting either by
show of hands or proxy. Twenty-one days notice is needed: sec 249H. Special
resolutions are required to change the status of the company (sec 162); to vary the
constitution (sec 136(2)); for a selective reduction of capital: sec 256C.
Notice of meetings
As a general rule any meeting requiring the passing of an ordinary resolution needs
21 days notice to members and a company’s constitution may prescribe a longer
period: sec 249H(1). However, if the members who are entitled to 95% of the votes
agree to a shorter notice then it can be convened with shorter notice. Where a
special resolution is to be passed, 21 days notice must be given unless the members
who are entitled to 95% of the votes agree to a shorter notice.
An AGM can be called on shorter notice if all members entitled to attend and vote
agree beforehand. Where a director is being removed, 21 days notice is required.
24
Shorter notice is not permitted for the removal or replacement of a director (sec
249H(1) or the removal of an auditor.
The notice of meeting must comply with sec 249L. In some cases “special notice” is
required such as to remove an auditor (sec 329(1)) or a director of a public company
(sec 203D). Special notice requires at least 2 months notice.
(5)
Procedure at meetings
Quorum
This refers to the minimum number of members who must be present at the start of a
meeting so as to constitute a valid meeting. The company’s constitution will usually
specify this number — if not, the Corporations Act states that for a proprietary
company with a single member, the quorum is that member; whereas proprietary
company which has two or more members, the quorum is two members; the quorum
for a public company is three members: sec 249T(1). The quorum must be present at
all times during the meeting.
Unless the directors determine otherwise the quorum for a directors’ meeting is two.
If a quorum is not present within half an hour after the appointed time of a
requisitioned meeting, the meeting is dissolved. With regards to other meetings,
these are adjourned to the time and place to be determined by the directors. Where
no determination is made by the directors, the meeting is adjourned for one week:
sec 249T(3) and (4).
Note that proceedings may still be valid even if a quorum is absent: see sec 1322.
The Chairperson
See sec 249U. This is the person who takes procedural control of the meeting and is
responsible to ensure that it is conducted properly: sec 251A. A Chairperson will
have a casting vote: sec 250E(3); and can adjourn the meeting and sign minutes.
The Agenda
This refers to ‘things which are to be done’ at the meeting. It is a program for the
items to be considered and is usually sent out prior to the convening of the meeting.
It is normally the secretary who prepares the agenda.
The meeting itself
Once the quorum is present and the meeting is opened, a number of procedures
apply — commonly known as ‘rules of debate’ after procedures in the British House
of Commons. These regulate the way in which the meeting is to be conducted,
25
although they are not compulsory.
The chairman supervises and controls all aspects of the meeting including
procedural control and maintenance of order. The chairman has the power to
adjourn the meeting and to make decisions concerning procedure.
At the meeting, motions are eventually voted upon. However, there are a number of
methods whereby a vote will be cast. These include:
(a)

voices;

show of hands;

poll; and

ballot.
Voices
This method simply involves the chairman asking those in favour of the motion to
say ‘aye’ — those who are against say ‘no’.
(b)
Show of hands
The chairman asks those in favour of a motion to raise their hand — and the same
for those against it. Members have one vote: sec 250E. Proxies can vote on a show of
hands unless the constitution provides otherwise: sec 249Y.
(c)
Poll
At least 5 members or members holding 5% of the voting rights may demand a poll:
sec 250L. On a poll one share has one vote.
(d)
Ballot
In a ballot, each voter has one vote which he or she casts in writing.
(e)
Proxies
Finally, at meetings it is often the case that members who are entitled to attend do
not wish to do so. In such cases they may appoint someone to attend on their behalf.
Such a person is known as a proxy: sec 249X. With proprietary companies, the right
to appoint a proxy can be restricted by the constitution.
26
Minutes
Minutes are the official record of the business transacted at a meeting. They are in
writing and are usually prepared by the company secretary.
Section 251A(1) prescribes that minutes of all proceedings of general meetings and
directors’ meetings be entered into ‘minute books’ within one month of the meeting.
These minutes will be prima facie evidence of the proceedings to which they relate.
Members have a right to copies of the minutes: sec 251B(3) and can inspect the
minute books: sec 251B(1).
(6)
Statutory validation of irregularities
Procedural defects can render a meeting invalid. However sec 1322 of the
Corporations Act provides that some "procedural irregularities" will not have this
effect unless the court considers that they have caused a substantial injustice that
cannot be remedied by any other order.
"Procedural irregularities" are defined as including, the absence of a quorum and a defect,
irregularity or deficiency of notice or time. This means for example, if someone is not
given the correct notice and the meeting goes ahead - it will only be declared invalid if
it causes a substantial injustice to that person.
A court can be asked to make a number of orders including an order to declare the
meeting valid. Indeed, if those causing the irregularity acted honestly, where the act
was essentially a procedural one or where it is in public interest, an order will not be
made declaring the meeting invalid. In Re Canberra Labor Club Ltd (1987) 5 ACLC 84,
400 life members did not receive notice of the annual general meeting due to computer
failure. The directors thereupon put advertisements in a major newspaper and put
signs up in the club. The court held that the procedural irregularity did not cause a
substantial injustice.
In Re Adams International Food Traders Pty Ltd (1988) 6 ACLC 759, the court refused to
sanction procedural irregularities where a creditor was not given notice of a significant
change to a scheme of arrangement. See also Mitropoulos v The Greek Orthodox Church
(1993) 11 ACLC 277. In contrast in Elderslie Finance Corporation Ltd v Australian
Securities Commission (1993) 11 ACLC 787, a court extended a time period under sec
1322(4)(d) whereby the company was allowed to lodge a report six days late in
circumstances of good faith and inadvertence.
(7)
The doctrine of unanimous assent
Shareholders who have a right to attend and vote at a general meeting may
unanimously agree to do something which is within the company's powers to do. An
illustration may be alteration of the company's constitution. This decision will be
binding notwithstanding that no formal meeting was convened and that the notice
27
requirements were not complied with. In Salomon v Salomon & Co [1897] AC 22, Lord
Davey said at 57:
"[A] company is bound in a matter intra vires by the unanimous agreement of all its
members."
In Re Express Engineering Works Ltd [1920] 1 Ch 466, five directors who were the only
shareholders, resolved at a director's meeting that the company purchase property
from a syndicate in which they had an interest. Under the company's articles a
director was disqualified from voting on contracts in which they were interested. The
liquidator wanted to avoid the transaction. The Court held that the agreement of all
five directors bound the company as they were the sole shareholders and they had all
assented.
An issue which has arisen in respect of the doctrine of unanimous assent is whether a
meeting is required. An obiter opinion was expressed in Re Express Engineering Works
Ltd to the effect that such a meeting was not necessary. The decision in Parker & Cooper
Ltd v Reading [1926] Ch 975 confirmed this. In this latter case Astbury J held that a
meeting was unnecessary if all the members assented, assuming the transaction to be
intra vires and honest, especially if the transaction was for the benefit of the company.
It did not matter that assent was given at different times. Re Duomatic Ltd [1969] 2 Ch
365 is further support for this contention.
In Re Duomatic Ltd [1969] 2 Ch 365, payment of directors' remuneration was agreed to
by the company's only two shareholders who had a right to attend and vote at a
general meeting. The circumstances were such that no meeting was called and the
company's preference shareholder did not give approval. The latter shareholder had
no right to attend meetings nor vote at such. It was held the decision was binding
notwithstanding the fact that not all shareholders agreed.
C.
DIRECTORS AND OFFICERS
The word "director" is defined in sec 9 of the Act to include:

a person who is appointed to the position of a director; or

a person who is appointed to the position of an alternate director and is acting
in that capacity regardless of the name that is given to their position; and

unless the contrary intention appears, a person who is not validly appointed as
a director if:
(i)
they act in the position of a director; or
(ii)
the directors of the company or body are accustomed to act in
accordance with the person's instructions or wishes.
28
Subparagraph (ii) above does not apply merely because the directors act on
advice given by the person in the proper performance of functions attaching to
the person's professional capacity, or the person's business relationship with the
directors or the company or body.
With regards to that part of the definition of director which refers to those persons
occupying or acting in the position of director by whatever name called and whether
or not validly appointed to occupy or duly authorised to act in, the position, this
catches directors who have not been formally appointed but who act in the position
that is, "defacto" directors. In CAC v Drysdale [1979] CLC 40-505, the defendant had
continued to act as director after the term of his office had expired. He attended board
meetings, voted and generally acted in a managerial capacity. He in fact was a defacto
director. The High Court held that such a defacto director was in the same fiduciary
position as directors appointed by right and was subject to the same penalties and
liabilities. According to Mason J:
"The case of the de facto director who holds over after his appointment as a director has
terminated, accords with the assumptions which [the section makes] makes. He
continues to occupy the office of director, albeit now without lawful authority, and
discharges the duties attaching to that office. It is not incongruous that, although he is a
de facto director, he is commanded to `act honestly and use reasonable diligence' in the
discharge of those duties. There is no inconsistency in acknowledging that he should
not attempt to discharge the duties of an office to which he has no title and in going on
to say, as the sub-section does, that is he does set about discharging those duties he shall
do so in the manner described by the sub-section."
This decision was applied in Shepherd v Companies Auditors Board (1981) CLC 40-701.
See also the definition of “officer” in sec 9 of the Act and ASIC v Vines (2005) 55 ACSR
617; [2005] NSWSC 738.
Directors’ Duties
As a general rule, directors owe their duties to the company (Percival v Wright [1902] 2
Ch 421 and ASIC v Maxwell [2006] NSWSC 1052; 59 ACSR 373 at [104]) and not to
individual shareholders8. This presents difficulties for shareholders who wish to bring
proceedings against directors whom they allege have breached their duties. However,
8
See however Glavanics v Brunninghausen (1996) 16 ACSC 204 (Bryson J) and Brunninghausen v
Glavanics [1999] NSWCA 199 (Court of Appeal). See also Short v Crawley (No. 30) [2007] NSWSC
1322 at paras [951-953] and Crawley v Short [2009] NSWCA 410 at paras [99-120]. See also
Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 at [17] per Barrett J. For a further
discussion on this area, see the Companies and Securities Law Review Committee Report titled,
"Enforcement of the Duties of Directors of a Company by means of a Statutory Action". Report No 12
November 1990.
29
as will be seen, section 136 will apply to enable such shareholders to seek leave of the
court so as to commence a derivative action where there has been a breach of duty by
directors. In addition, shareholders may be able to take action personally if the breach
of duty results in a breach of sec 232 or where there have been allotments of shares for
improper purposes made by directors. See Residues Treatment & Trading Co. Ltd &
Anor v Southern Resources Ltd and ors (1988) 6 ACLC 1160.9
In some circumstances, it has been held that directors owe duties to creditors (see
Walker v Wimborne (1976) 137 CLR 6-7) and to beneficiaries (see Hurley v BGH Nominees
Pty Ltd (No 2) (1984) 2 ACLC 497).
The nature of the duties exercised by directors are summarised by Flick J in the Federal
Court in Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus
[2008] FCA 1986 at paras 52-53 in the following way:
“As a matter of general principle it was common ground that:
(a)
the duty owed by a director to his company is fiduciary in character (eg,
Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR
261 at 268 per King CJ);
(b)
the duty includes a duty to act bona fide and in the best interests of the
company (eg, Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR
260 at 270 per Kirby P; Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch
656 at 671);
(c)
the discharge of that duty may involve a right on the part of a director to
inspect those documents relevant to the discharge of the duty (eg, Edman v
Ross (1922) 22 SR (NSW) 351; Molomby v Whitehead [1985] FCA 421;
(1985) 7 FCR 541 at 550 per Beaumont J);
(d)
the discharge of the duty involves a director becoming familiar with how the
company conducts its business (eg, Daniels v Anderson (1995) 37 NSWLR
438 at 500–1); and
(e)
a director who occupies the position of chairman may have additional rights
and duties, including a duty of selecting documents to be placed before the
board for its consideration and keeping the board fully informed (cf
Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 225 per Mahoney JA).
Reference should also be made to ss 180 to 184 of the Corporations Act and to Ford’s
Principles of Corporations Law at [8-010] and [8-065]–[8-090] (13th ed, 2007). The
statutory duties imposed by ss 181 and 182 reflect, and to some extent refine,
corresponding obligations on directors under the general law: Australian Securities
and Investments Commission v Maxwell [2006] NSWSC 1052 at [99], [2006]
NSWSC 1052; 59 ACSR 373 at 397. See also: Austin R, Ford H and Ramsay I,
9
See Stapledon GP, "Locus Standi of Shareholders to enforce the duty of company directors to exercise the
share issue power for proper purposes" (1990) 8 C & SLJ 213.
30
Company Directors: Principles of Law and Corporate Governance (2005) at [7.4].
Beyond recognition of these general principles, the potential existed in the present
proceeding for submissions to descend to a level of unnecessary abstraction.”
At common law and in equity, directors are subject to a number of broad duties, some
of which are fiduciary duties10, for example;

the duty to act in the best interest of the company;

the duty to act in good faith;

the duty to exercise powers for a proper purpose;

the duty to avoid conflicts of interest;

the duty not make secret profits and make full disclosure;

the duty to retain discretions.
In Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus [2008] FCA
1986 his Honour also said the following at [70]:
"The strong weight of judicial authority is that fiduciary duties are proscriptive rather
than prescriptive; accordingly, a fiduciary does not have a positive duty to disclose
information": Australian Securities and Investments Commission v Citigroup Global
Markets Australia Pty Ltd (No 4) [2007] FCA 963 at [375], [2007] FCA 963; 160
FCR 35 at 88 per Jacobson J. Reference may also be made to one of the authorities
there referred to by His Honour, namely Breen v Williams [1995] HCA 63, 186 CLR
71. Gaudron and McHugh JJ there observed (at 113):
‘In this country, fiduciary obligations arise because a person has come under
an obligation to act in another’s interests. As a result, equity imposes on the
fiduciary proscriptive obligations -- not to obtain any unauthorised benefit
from the relationship and not to be in a position of conflict. If these obligations
are breached, the fiduciary must account for any profits and make good any
losses arising from the breach. But the law of this country does not otherwise
impose positive legal duties on the fiduciary to act in the interests of the
person to whom the duty is owed. If there was a general fiduciary duty to act
in the best interests of the patient, it would necessarily follow that a doctor has
a duty to inform the patient that he or she has breached their contract or has
been guilty of negligence in dealings with the patient. That is not the law of
this country.’
Gummow J concluded (at 137–8):
10
See Tomasic R, and Bottomley S, "The Fiduciary Duties of Directors' Duties in Corporate Australia",
Centre for National Corporate Law Research Discussion Paper 1 (1991).
31
‘Fiduciary obligations arise (albeit perhaps not exclusively) in various
situations where it may be seen that one person is under an obligation to act in
the interests of another. Equitable remedies are available where the fiduciary
places interest in conflict with duty or derives an unauthorised profit from
abuse of duty. It would be to stand established principle on its head to reason
that because equity considers the defendant to be a fiduciary, therefore the
defendant has a legal obligation to act in the interests of the plaintiff so that
failure to fulfil that positive obligation represents a breach of fiduciary duty.’
See also: Pilmer v Duke Group Ltd [2001] HCA 31 at [74] (per McHugh, Gummow,
Hayne and Callinan JJ) and [127] (per Kirby J), [2001] HCA 31; 207 CLR 165 at
197–8 and 214; P & V Industries Pty Ltd v Porto [2006] VSC 131 at [12]–[25], 14
VR 1 at 4–6 per Hollingworth J; Dempsey G and Greinke A, ‘Proscriptive fiduciary
duties in Australia’ (2004) 25 Aust Bar Rev 1.”
In addition to these fiduciary duties, there is, at common law, a duty to exercise care,
diligence and skill and some other duties which arise in certain contexts for example,
to act in the interest of creditors and to act in the interest of beneficiaries when the
company is a trustee. These duties have also been supplemented by provisions in the
Corporations Act - particularly the statutory duties imposed by sections 180, 181 and
182.
According to Gordon J in ASIC v Warrenmang Ltd [2007] FCA 973; 63 ACSR, at [22] and
(ACSR 628), the statutory duties imposed by sections 180, 181 and 182 of the
Corporations Act reflect and, to some extent, refine the obligations of the directors at
general law. Importantly, his Honour added at [22] and (ACSR 628), the following
qualifier:
“each is a duty owed by a director to the corporation. However, directors’ duties
provisions are not concerned with any general obligation owed by directors to conduct
the affairs of the company in accordance with the law generally or the Corporations Act.
Moreover, the directors’ duties provisions do not necessarily make a director liable for a
breach by the company of another provision in the Corporations Act. The corollary is
that it cannot be said that every breach by a company of the Corporations Act
necessarily gives rise to a breach of the directors’ duties provisions.
That last proposition or principle (not every breach by a company of the Corporations
Act necessarily gives rise to a breach of the director's duties provisions) is self-evident.
It is reinforced by the fact that, under section 180(1) of the Corporations Act, the
circumstances of the particular company are relevant to the content of the duty of a
director to exercise reasonable care and diligence. The circumstances may include, but
are not limited to, the type of company, the size and nature of the company's business,
the director's position and responsibilities within the company, the particular functions
the director is performing, the manner in which the responsibility for the business of the
company is distributed and, of course, the circumstances of the case.”
32
Statutory duties to act in good faith in the best interests of the company and for a
proper purpose - section 181
In relation to section 181 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; and
(b)
for a proper purpose.
It has been held at the duty to exercise powers for a proper purpose and the obligation
to act in good faith are separate duties: Bell Group Ltd (in liq) v Westpac Banking
Corporation (no 9) [2008] WASC 239 at [4456]
In Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171; 41 ACSR 72
Santow J stated the following at [735] and (ACSR 232 - 233) in relation to sec 181:
(1)
A director (as a fiduciary) is under an obligation not to promote his personal
interest by making or pursuing a gain in circumstances where there is a
conflict or a real or substantial possibility of a conflict between his personal
interests and those of the company: Hospital Products Ltd v United States
Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 per Mason J at 103.
This is both at general law and by statute (s181 and as applicable ss182 and
183). Such promotion would not be to act in good faith in the best interests of
the corporation, or for proper purposes (s181). If the director has improperly
used his position or information to gain such advantage ss182 and 183
respectively are breached.
(2)
In order to assess whether or not there is a real sensible possibility of conflict
one must adopt the position of the reasonable person looking at the relevant
facts and circumstances of the particular case: Phipps v Boardman [1966]
UKHL 2; [1967] 2 AC 46 per Lord Upjohn (at 124); Queensland Mines Ltd v
Hudson (1978) 18 ALR 1.
(3)
Nonetheless, a director may act with a personal interest even though the
director has not freed his or her mind of that personal interest when acting
provided that this personal interest was not the actuating motive rather than
some bona fide concern for the benefit of the company as a whole or for fairness
as between members: Mills v Mills [1938] HCA 4; (1938) 60 CLR 150 per
Latham CJ (at 164-65).
(4)
In certain circumstances, such as a director in “a position of power and
influence” over the board, mere disclosure of a conflict between interest and
duty and abstaining from voting is insufficient to satisfy a director’s fiduciary
duty. The director may also be under a positive duty to take steps to protect the
company’s interest such as by using such power and influence as he had to
prevent the transaction going ahead: Permanent Building Society (In Liq) v
McGee (1993) 11 ACSR 260 per Anderson J (at 289).
33
(5)
What action, beyond disclosure, the director must take will depend on matters
such as the degree to which the director has been involved in the transaction,
and the gravity of possible outcomes for the company: Fitzsimmons v R (1997)
23 ACSR 355 per Owen J (at 358).
(6)
A director of a company who is also a director of another company must not
exercise his or her powers for the benefit or the gain of the second company
without clearly disclosing the second company’s interests to the first company
and obtaining the first company’s consent: R v Byrnes [1995] HCA 1; (1995)
183 CLR 501 per Brennan, Deane, Toohey and Gaudron JJ at 517 (which here
was never effectively given by HIH or HIHC).
... to establish liability under s182(1) it is sufficient to establish that the conduct of the
director was carried out in order to gain an advantage. It is not necessary to establish
that advantage was actually achieved; Chew v R [1992] HCA 18; (1992) 173 CLR
626 per Mason CJ, Brennan, Gaudron and McHugh JJ at 633. Nor does that failure
obviate the actual advantages earlier identified .... That failure thus affords no defence
to each of the allegations of impropriety under ss181-3.”
In relation to good faith, the general principle is that directors must exercise their
discretion, bona fide in what they consider to be in the interests of the company. See
Re Smith and Fawcett [1942] 1 All ER 542. The test is objective and it has been held that
subjective honesty is insufficient to exclude liability: Permanent Building Society (in liq) v
Wheeler (1994) 14 ACSR 109 at 137. In Re HIH Insurance Ltd (in prov liq); ASIC v Adler
[2002] NSWSC 171; 41 ACSR 72 Santow J stated the following at [738] – [740] and
(ACSR 233 - 234) in relation to this aspect:
“the standard of behaviour required by s181(1) is not complied with by subjective
good faith or by a mere subjective belief by a director that his purpose was proper,
certainly if no reasonable director could have reached that conclusion. This is made
clear by the new provisions in s184(1) which by contrast imposes the additional
elements of being “intentionally dishonest” or “reckless” for the purpose of criminal
sanctions. Thus, as was said by Bowen LJ in Hutton v West Cork Railway Co (1883)
23 ChD 654 at 671:
“Bona fides cannot be the sole test, otherwise you might have a lunatic
conducting the affairs of the company, and paying its money with both hands
in a manner perfectly bona fide yet perfectly irrational.”
Where, as my findings indicate apply here, no reasonable board could consider a
decision to be within the interests of the company, the making of the decision will be a
breach of duty (Ford 6th Ed, para 8.060 at p313).
Thus, whether a director has acted for a proper purpose, namely for the benefit of the
company, is to be objectively determined (Permanent Building Society (In Liq) v
Wheeler per Ipp J at 137; see also Ford, 6th Ed at para 8.200). The application of those
principles in the circumstances that I have found lead to the conclusion that Mr Adler
34
failed to act in good faith.”
The question then, is what does the expression "in the interests of the company"
mean? According to Evershed MR in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286,
the expression "does not mean the company as a commercial entity distinct from the
corporators: it means the corporators as a general body." In addition it has been held
that where the company is part of a group of companies with common directors, the
directors cannot consider the group interests above their own company. See Walker v
Wimborne (1976) 137 CLR 1. However there may be a requirement to consider the
interests of creditors. Spies v The Queen (2000) 201 CLR 603; 35 ACSR 500.
Usually the interest of the company and its shareholders are the same, however where
they are not, it appears that the preservation of the shareholders' interests comes first.
Hodgson J in Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 15411
acknowledged this, although his Honour said that it was possible to act in the interests
of the company even though this may not be in the short term interests of its members.
A duty to shareholders as a group does not necessarily mean individual shareholders.
See Percival v Wright [1902] 2 Ch 421. However in some cases it has been held that a
duty is owed to specific shareholders. This has been held in cases dealing with a
family company where a director withheld confidential information and stood to
profit from a particular transaction. See Coleman v Myers [1977] 2 NZLR 255. It has
also been held in regards to trustee companies. See Hurley v BGH Nominees Pty Ltd (No
2) (1984) 2 ACLC 497.
In examining the extent of this duty, Courts will take into account the possibility that
directors may well be shareholders and that there could be a potential conflict. In Mills
v Mills (1938) 60 CLR 150 at 164, Latham CJ stated:
"... [A] director who holds one or both classes of such shares is not, in my opinion,
required by the law to live in an unreal region of detached altruism and to act in a vague
mood of ideal abstraction from obvious facts which must be present to the mind of any
honest and intelligent man when he exercises his powers as a director. It would be
setting up an impossible standard to hold that, if an action of a director were affected in
any degree by the fact that he was a preference or ordinary shareholder, his action was
invalid and should be set aside."
The standard of "good faith" has been tested in the courts - especially with respect to
takeovers. See for example Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
discussed below. In that case the Privy Council found that the directors had breached
their duty of good faith towards the company. In contrast, if the directors had acted in
good faith, their decision would not have been impeachable by the Courts. In arriving
at this latter conclusion the Privy Council affirmed the following statement by the
High Court in Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company
(1969) 121 CLR 483:
11
The Court of Appeal decision is reported in (1989) 16 NSWLR 260.
35
"[D]irectors in whom are vested the right and the duty of deciding where the company's
interests lie and how they are to be served may be concerned with a wide range of
practical considerations, and their judgment, if exercised in good faith and not for
irrelevant purposes is not open to review in the courts."
See also The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC
239 at para [4426].
Directors must exercise their powers for the purpose for which they were conferred ie
a proper purpose. They cannot allow themselves to be placed in a situation where the
exercise of their powers is any way restrained or where a conflict may arise. In Bell IXL
v Life Therapeutics Ltd [2008] FCA 1457; 68 ACSR 154, was held that in identifying the
purpose for which the power is exercised, the court must determine the substantial
purpose of the directors and if necessary the majority of the directors which is
causative of the particular decision being made.
This duty to exercise powers for a proper purpose often arises when directors decide
to allot shares in the company12. The decision to allot shares may be the result of many
factors and may be designed to achieve various objectives, however in some
circumstances the allotment may be challenged on the basis that it was made for an
improper purpose. To ascertain whether such an allotment is valid, Courts have
applied a number of "tests" to the circumstances surrounding the allotment. For
instance, they have asked, whether the "substantial object" behind the allotment
amounted to an improper purpose; similarly reference has been made to whether the
allotment was made "bona fide for the benefit of the company as a whole"; also on
occasion Courts have questioned whether the directors would have exercised their
power to allot despite the improper purpose which was behind their decision.
Where an allotment of shares is found to have been made for an impermissible
purpose, then irrespective of the test used to arrive at the result, it will be voidable at
the company's option if rights are purportedly given to a third party. The third party's
position will depend upon whether or not they were given notice of the directors'
abuse of power. However if a general meeting approves or ratifies the otherwise
defective allotment, the allotment may be considered to be valid and enforceable
unless the circumstances are tantamount for example, to a fraud on the minority.
In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, the board of directors of
R.W. Miller (Holdings) Ltd issued shares to assist a takeover and to block the existing
majority shareholding. The Privy Council found that the directors had breached their
duty of good faith towards the company and their Lordships refused to allow an
allotment which was made purely to destroy an existing majority shareholding or to
create a new majority. This view was subsequently affirmed by a majority of the High
Court in Whitehouse & Anor v Carlton Hotels Pty Ltd (1987) 61 ALJR 216.
12
See Hambrook JP, "Takeovers and Target Company Directors: A Brief Australian Perspective" (1989) 2
Corporate and Business Law Journal 133.
36
In Whitehouse's case, an allotment of shares was made in order to dilute the voting
power which would have occurred when the existing majority shareholder and
governing director died. The majority shareholder owned shares of a class which
conferred upon him unrestricted voting rights and the company's other directors had
no more functions under the company's articles than to receive a delegation of power
from this governing director.
The High Court had to examine whether the articles allowed such an allotment and
they held that it did not. Further their Honours considered the validity of such an
allotment when it has both permissible and impermissible purposes. According to the
majority of the court, (Mason, Deane and Dawson JJ.):
"As a matter of logic and principle, the preferable view would seem to be that, regardless
of whether the impermissible purpose was the dominant one or but one of a number of
significantly contributing causes, the allotment will be invalidated if the impermissible
purpose was causative in the sense that, but for its presence, `the power would not have
been exercised'."
However their Honours expressed no firm conclusion on this point as the particular
allotment did not have competing purposes and was solely to manipulate voting
power. This motive was an impermissible purpose and therefore the allotment was
regarded as voidable.
This view has since been applied in Abraham v Tunalex Pty Ltd (1987) 5 ACLC 888, and
in McGuire v Ralph McKay Ltd & Ors (1987) 5 ACLC 891. In Darvall v North Sydney Brick
and Tile Co Ltd & Ors (No 2) (1989) 7 ACLC 659, it was argued, among other things, that
the directors should not have taken the steps that they did in attempting to defeat a
takeover offer. This argument was rejected by the New South Wales Court of Appeal.
Importantly the Court acknowledged that in some circumstances a company may be
able to interfere in the process of share acquisition and this interference may not be
regarded as a breach of duty to exercise powers for a proper purpose. According to
Mahoney JA:
"It is not correct that ... a company has no legitimate interest in who are its shareholders
... in some circumstances, it will be proper for a company to concern itself with those
who take its shares on transfer. Thus, a company may lose a government licence or a
customer may refuse to do business if a particular person takes a transfer of shares. It
may be in the interest of the company as a whole for action to be taken."
Applying the test in Whitehouse's case, Mahoney J added at 708 in this regard13:
"[T]here is a distinction in principle between the transaction for the purpose of defeating
a takeover offer and one prompted by the takeover offer but, in the end, entered into
13
See also the comments made by Clarke JA at 716. Another case relevant on this point is Residues
Treatment and Trading Ltd and another v Southern Resources Ltd and others (No. 2) (1980) 7 ACLC
1130 at 1151-1152.
37
because the directors believe it to be in the interests of the company as a whole."
In Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, the New South
Wales Court of Appeal held that a particular allotment of shares was made for the
whole purpose or the dominant purpose of diluting a party’s shareholding and was
therefore in breach of the fiduciary duty to the company and ought to be set aside. In
arriving at this conclusion, the court applied, inter alia, Whitehouse's case and the
decision in Howard Smith Ltd.
In ASIC v Australian Investors Forum Pty Limited (No 2) [2005] NSWSC 267; 53 ACSR
305 it was held at [608]-[611] (ACSR 403) that a particular issue of shares was made for
the purpose of enabling the incumbent directors retain control of the company and, in
consequence, was therefore an improper exercise of power. In reaching this
conclusion Palmer J relied upon, inter alia, the decision in Whitehouse's case.
In Bell IXL v Life Therapeutics Ltd [2008] FCA 1457; 68 ACSR 15 it was held that a
particular allotment of shares was not for an improper purpose and had been made
bona fide in the best interests of the company. In that case, despite finding that there
had been multiple objectives behind a particular placement of shares including the
need to stabilise the share register and to provide interim working capital, the court
was not persuaded that the directors had an improper purpose when making the
placement. Of interest in that case was the comment by Middleton J at [31] – [36]
(ACSR 164) to the effect that the court should be aware not to substitute its own
commercial judgement for that of the directors. However, in some this, his Honour
acknowledged that this is not to say that the court could not examine the objective
commercial justification of a course of action to assess the credibility of assertions by
the directors as to their motives and purposes.
Another context in which the issue of failure to exercise powers for a proper purpose is
raised, occurs where directors lend money belonging to the company. In Permanent
Building Society (in liq) v McGee & Ors (1993) 11 ACLC 761, M, N and W were directors
of the Permanent Building Society ("the Society"). N and W were also directors of
Capital Hall Ltd ("Capital Hall"). In addition, W had effective control of both
corporations.
The Society, upon a resolution put forward and supported by N and M, made a loan to
Capital Hall. W abstained from voting on this resolution. At the time of the making of
the loan, Capital Hall was unable to pay all its debts.
The Society began proceedings against N, M and W and alleged, among other things,
that these individuals breached their fiduciary duties by failing to exercise their
powers as directors bona fide in the best interests of the Society. In addition it was
alleged that W had placed himself in a position of conflict.
The Court agreed with the Society. It was held that the directors must all have fully
appreciated that, the loan could not be justified as there was evidence that they knew
Capital Hall was insolvent at the time the loan was made. In such circumstances the
38
directors acted improperly.
"For the directors of a building society to exercise the power to provide financial
accommodation, by making a loan to an insolvent company to prop it up for a time in
the bare hope that it might somehow find a way to survive must, prima facie, go beyond
the legitimate scope of the lending power. The exercise of a fiduciary power for a
purpose foreign to the object and purpose of the power was improper. A general sense of
honesty - a belief that the purpose was honest - was not enough to save the actions from
invalidity: Australian Growth Resources Corp Pty Ltd v van Reesema & Ors (1988) 6
ACLC 529 at 535-536, 543-544."14
In addition it was held that W was in a position of conflict.
"... He was in a position of power and influence in respect of both companies. There was
no doubt he could have prevented the transaction proceeding. One word from him
would have been enough. He should have done so. He could not escape from his
continuing duty to act bona fide in the interests of the Society as a whole "by the simple
expedient of leaving the room": Darvall v North Sydney Brick & Tile Co Ltd & Ors (No
2) (1989) 7 ACLC 659 per Kirby P at 678. He did throughout remain in a position of
conflict and it was not overcome by his merely abstaining from the formal resolutions."
See also Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154.
The duty to retain discretions
This duty requires that directors not bind themselves to vote in a particular way at
board meetings. It appears to be a limited duty.
Statutory and general law duties of care and diligence
Section 180 provides:
“Care and diligence--civil obligation only
Care and diligence--directors and other officers
(1) A director or other officer of a corporation must exercise their powers and
discharge their duties with the degree of care and diligence that a reasonable person
would exercise if they:
(a) were a director or officer of a corporation in the corporation's
circumstances; and
14
(1993) 11 ACLC 761 at 762.
39
(b) occupied the office held by, and had the same responsibilities within
the corporation as, the director or officer.
Note:
This subsection is a civil penalty provision (see section 1317E).
Business judgment rule
(2) A director or other officer of a corporation who makes a business
judgment is taken to meet the requirements of subsection (1), and their equivalent
duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the
judgment; and
(c) inform themselves about the subject matter of the judgment to the
extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the
corporation.
The director's or officer's belief that the judgment is in the best interests of the
corporation is a rational one unless the belief is one that no reasonable person in their
position would hold.
Note:
This subsection only operates in relation to duties under this section and
their equivalent duties at common law or in equity (including the duty of care that
arises under the common law principles governing liability for negligence)--it does
not operate in relation to duties under any other provision of this Act or under any
other laws.
(3) In this section:
"business judgment" means any decision to take or not take action in respect of a
matter relevant to the business operations of the corporation.“
Section 180 sets out an objective test to measure the reasonableness of actions taken by
directors or officers, requiring them to demonstrate the same degree of care and
diligence that would be required of an ordinary person holding a similar position in
the same circumstances. The strength of this objective standard is not diminished by
the fact that the director is a non-executive, rather than executive director. If each of
the criteria set out in section 180(2) are satisfied, then a director or officer who makes
the business judgement is taken to have acted with the requisite care and diligence as
required by section 180(1) in addition to the equivalent duties at common law and
equity in respect of the judgement. Each of the criteria in section 180(2) should be
examined individually. Note also the definition in section 180(3) of “business
judgement”.
In Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171; 41 ACSR 72 at
40
[372] and (ACSR 166-169) Santow J set out the following principles applicable to the
duty of care and diligence, now as enacted in s180 of the Corporations Act and as they
relate to delegation:
(1)
Directors owe a duty of care and skill at common law and in equity: Permanent
Building Society (in liq) v Wheeler (1994) 14 ACSR 109; Daniels t/as Deloitte
Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438.
(2)
However, the equitable duty to exercise reasonable care and skill is not properly
classified as a fiduciary duty: Permanent Building Society (in liq) (supra) per Ipp J
(at 158).
(3)
The statutory duty of care and diligence, s180, is framed in similar terms to its
predecessor s232(4). It has been said of the latter that the duties imposed upon
directors by it are essentially the same as the duties of directors under the common
law: Sheahan (as liquidator of South Australian Service Stations) (In liq) v Verco
(2001) 37 ACSR 117 per Mullighan J (at 134) ; Daniels v Anderson (1995)
37 NSWLR 438 per Powell JA at 603; see also Lockhart J in Australian Innovation
Ltd v Petrovsky (1996) 21 ACSR 218 at 222.
(4)
In determining whether a director has exercised reasonable care and diligence one
must ask what an ordinary person, with the knowledge and experience of the
Defendant might be expected to have done in the circumstances if he or she was acting
on their own behalf: Permanent Building Society v Wheeler (supra) per Ipp J (at 159);
ASC v Gallagher (1993) 10 ACSR 43.
(5)
However, under the implied term in a contract of employment of an executive
director, the director ... will be taken to have promised the company that he or she has
the skills of a reasonably competent person in his or her category of appointment and
that he or she will act with reasonable care, diligence and skill: Permanent Building
Society v Wheeler at 287-8.
(6)
Although the standard of reasonable care is generally said to be that of an ordinary
prudent person (Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407 per
Romer J) there is some suggestion that directors of a professional trustee company owe
a higher duty of care: Wilkinson v Feldworth Financial Services Pty Ltd (1998)
29 ACSR 642 at 693.
(7)
In determining whether a director has breached the statutory standard of care and
diligence (s180(1)), the court will have regard to the company’s circumstances and
the director’s position and responsibilities within the company: see also Explanatory
Memorandum to the CLERP Bill 1999 (para 6.75).
(8)
In accordance with these responsibilities directors are required to take reasonable steps
to place themselves in a position to guide and monitor the management of the
company: Daniels t/as Deloitte (supra) at 664. That is to say, (supra) at 666-67:
(a)
a director should become familiar with the fundamentals of the business in
which the corporation is engaged;
41
(b)
a director is under a continuing obligation to keep informed about the
activities of the corporation;
(c)
directorial management requires a general monitoring of corporate affairs and
policies, by way of regular attendance at board meetings; and
(d)
a director should maintain familiarity with the financial status of the
corporation by a regular review of financial statements. Indeed, he or she will
be unable to avoid liability for insolvent trading by claiming that they had
never learned to read financial statements: Commonwealth Bank of Australia
v Friedrich (1991) 5 ACSR 115 at 125.
(9)
A director appointed to a company because of special expertise in an area of the
company’s business is not relieved of the duty to pay attention to the company’s
affairs which might reasonably be expected to attract inquiry, even outside that area of
expertise: Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051 at 1061.
(10)
At general law, a director is entitled to rely without verification on the judgment,
information and advice of management and other officers appropriately so entrusted.
However, reliance would be unreasonable where directors know, or by the exercise of
ordinary care should have known, any facts that would deny reliance on others:
Daniels t/as Deloitte at 665-6.
(11)
Although reasonableness of the reliance or delegation must be determined in each
case, the following may be important in determining reasonableness:
(a)
the function that has been delegated is such that “it may properly be left to
such officers”: Re City Equitable Fire Insurance Co Ltd (supra) per Romer J.
(b)
the extent to which the director is put on inquiry, or given the facts of a case,
should have been put on inquiry: Re Property Force Consultants Pty Ltd
(supra) per Derrington J at 1,060.
(c)
the relationship between the director and delegate, must be such that the
director honestly holds the belief that the delegate is trustworthy, competent
and someone on who reliance can be placed. Knowledge that the delegate is
dishonest or incompetent will make reliance unreasonable: Biala Pty Ltd v
Mallina Holdings Ltd (1994) 15 ACSR 1 at 62.
(d)
the risk involved in the transaction and the nature of the transaction:
Permanent Building Society v Wheeler (1994) 14 ACSR 109 (although in this
case the Chief Executive Officer in question also had a conflict of interest).
(e)
the extent of steps taken by the director, for example, inquiries made or other
circumstances engendering “trust”;
(f)
whether the position of the director is executive or non-executive: Permanent
Building Society v Wheeler per Ipp J, though, in Daniels v Anderson (supra),
the majority have moved away from this distinction.
42
(12)
That general law explains what the Corporations Act now requires when referring
(s190(2)) to “reasonable grounds” in codifying the directors’ responsibilities for the
actions of the delegate. Thus under s198D of the Corporations Act directors may
delegate any of their powers to a committee of directors, a single director, an employee
of the company or any other person (This delegation must be recorded in the
company's minute book: see s251A). Moreover, the director will be responsible for the
delegate’s exercise of power if he or she did not believe on reasonable grounds and in
good faith, after making proper inquiries if the circumstances indicate the need for it,
that the delegate was reliable and competent in relation to the power delegated and
would exercise the power in conformity with the duties imposed on the directors of the
company by the Corporations Act: s190(2).
(13)
For the purposes of s180(1) and relevantly in the present case, failing to ensure that a
company makes loans only in accordance with its authorised practices and failing to
ensure that the company has a proper system of controls and audit in its business to
avoid any defalcation by officers and employees may amount to breaches of the
statutory duty of care and diligence: Cashflow Finance Pty Ltd v Westpac Banking
Corp [1999] NSWSC 671 per Einstein J.
(14)
Where there is a transaction involving the potential for conflict between interest and
duty, as here arose, the duty of care and diligence falls to be exercised in a context
requiring special vigilance, calling for scrupulous concern on the part of those officers
who become aware of that transaction to ensure that any necessary corporate
approvals are obtained and safeguards put in place. While the primary responsibility
will fall on the director or officer proposing to enter into the transaction, this does not
excuse other directors or officers who become aware of the transaction.
(15)
In order for the safe-harbour “statutory business judgment rule” to be relied upon,
the director must first have made a business judgment. Then that business judgment
must satisfy the following requirements, namely made in good faith for a proper
purpose; after the director has informed himself as to the subject matter of the
judgment to the extent he reasonably believes to be appropriate; in circumstances
where the director does not have a material personal interest in the subject matter of
the judgment and rationally believes that the judgment is in the best interests of the
corporation: s180(2). The director’s belief that his or her judgment is in the best
interests of the corporation is a rational one unless the belief is one that no reasonable
person in that position would hold: s180(2).”
This position can be contrasted with the older common law more position as stated in
Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407, where Romer J, set out a variable
standard of care, diligence and skill based upon a subjective assessment. According to
his Honour, these basic obligations were as follows:

A director need not exhibit in the performance of his duties a greater degree of
skill or care than may reasonably be expected from a person of his knowledge
and experience. In other words, a director need not be an expert manager and
will be judged by a standard which could be expected of that particular director
43
considering their knowledge and experience.

A director is not bound to give continuous attention to the affairs of the
company. His duties are of an intermittent nature to be performed at periodical
board meetings and at meetings of any committee of the board upon which he
happens to be placed. He is not, however, bound to attend all such meetings,
though he ought to attend whenever, in the circumstances, he is reasonably able
to do so.

Having regard to all the circumstances of the business, and the articles of
association of the company, the directors may properly delegate to some other
official or expert the task of carrying on certain duties. As long as the director's
delegation is done honestly and as long as all appropriate steps are taken to
ensure that the agent appointed has the necessary skill to undertake the
particular duty, the directors will be cleared of any negligence.
On the issue of attendance at meetings, the decision in Re Cardiff Savings Bank (Marquis
of Bute's Case) (1892) 2 Ch 100 is of historical interest. In this case an application was
made by the liquidator of the Cardiff Savings Bank (the "bank"), to make the Marquis
of Bute liable to contribute for the losses sustained by the bank when it was trading.
In finding the Marquis not liable, the Court looked at the history of the connection of
the Marquis with the bank. The bank had been established by the Marquis' late father
who was the president of the bank. The father died when his son was only six months
old. During the whole of the minority of the son, he was described in the books and
documents issued by the bank as "president", even though he had not been formally
elected as such. After he turned twenty one years of age, the Marquis went overseas
and on his return he attended one meeting of the trustees and managers of the bank.
He never attended another meeting. Throughout this period, the name of the Marquis
as president appeared in the copies of the rules, in the depositors' passbooks and the
annual reports issued by the bank.
According to Sterling J:
"[O]n all trustees and managers alike there lay an obligation to see that the statutory
provisions as to examination and audit of accounts, and particularly as to the
preparation and examination of an extracted list of depositors, and the keeping such list
open for the inspection of depositors, were duly complied with, and that in this respect
the Marquis of Bute was guilty of neglect or omission. The trustees and managers of
the Cardiff Savings Bank were (including the president) fifty-five in number. It could
not be expected that each member of so numerous a body should take a very active part
in the management, or attend every meeting. The directors of a trading company are
only bound to use fair and reasonable diligence in the management of their company's
affairs...
... Here the Marquis of Bute took no part in the conduct of the business of the bank. It
may be that he neglected, as he certainly omitted, to attend the meetings to which he was
44
summoned. But neglect or omission to attend meetings is not, in my opinion, the same
thing as neglect or omission of a duty which ought to be performed at those meetings.
If, indeed, he had knowledge or notice either that no meetings of trustees or managers
were being held, or that a duty which ought to be discharged at those meetings was not
being performed, it might be right to hold that he was guilty of neglect or omission of the
duty. That, however, is not this case."
With regards to a director's ability to delegate duties, this has been the subject of
judicial debate in the context of sec 588G. Delegation of responsibilities is permissible
as long as the delegation does not represent an abdication of responsibilities.
According to Rogers CJ in AWA Ltd v Daniels t/a Deloitte Haskins and Sells (1992) 10
ACLC 933 at 989:
"I do not believe that it is permissible for a company and its Board of Directors to
abdicate the responsibility which it and management have for putting in place a proper
system of financial records and of internal control."
However directors can often rely upon managers and are able to trust these managers
to bring to the director's attention various matters. As Rogers CJ noted at 1015:
"Directors are entitled to rely on the judgment, information and advice of the auditor. ...
Reliance may properly be more complete where the auditor is acknowledged as being
more knowledgeable, skilled and experienced in the particular matter in question than
the directors or other auditors. A director is entitled to expect the auditor to carry out
its duties utilising that higher degree of knowledge, skill and experience. In such
circumstances the auditor will be under a higher duty of care than the standard of care
of an auditor without such specialist knowledge, skill and experience."
In AWA Limited, Rogers CJ acknowledged that there had been a evolution in the
intensity of directors' duties since Re City Equitable Fire Insurance Co Ltd (1925) 1 Ch 407.
In this regard his Honour cited with approval the conclusions of the Cadbury
Committee in the United Kingdom. According to Rogers CJ:
"Of necessity, as the complexities of commercial life have intensified the community has
come to expect more than formerly from directors whose task is to govern the affairs of
companies to which large sums of money are committed by way of equity capital or loan
... One of the most striking features of the law concerning directors duties is the
insistence that directors accept more and more responsibility for oversight of a
company's affairs at the same time as the affairs of companies become more and more
complex and diverse."
On appeal (Daniels v Anderson (1995) 37 NSWLR 438 at 500; 16 ACSR 607), the New
South Wales Court of Appeal acknowledged that although “there is no doubt reasons for
establishing a board which enjoys a varied wisdom of persons drawn from different commercial
backgrounds ... a director, whatever his or her background, has a duty greater than that of
simply representing a particular field of experience”. See also ASIC v Adler [2002] NSWSC
171 at [372] where Santow J stated: “in determining whether a director has exercised
45
reasonable care and diligence one must ask what an ordinary person, with the knowledge and
experience of the defendant might be expected to have done in the circumstances if he or she was
acting on their own behalf”.
Directors are required to take the necessary steps that will enable them to effectively
guide and monitor the management of the company: Daniels v Anderson (1995) 37
NSWLR 438; 16 ACSR 607. That decision was the appeal in AWA Limited and it was
held at [501] that the fundamental obligation to take the necessary steps that will
enable directors to effectively guide and monitor the management of the company was
imposed on all company directors. In determining what effectively monitoring meant,
it was held that the nature, size and complexity of the company would assist in
determining the extent of that obligation.
More recently there have been a number of high-profile cases in relation to section 180.
See, for example, Vines v ASIC [2007] NSWCA 75; (2007) 62 ACSR 1; and ASIC v Adler
[2002[ NSWSC 171 at [453]. In Vines, Austin J at first instance [2005] NSWSC 738; 55
ACSR 617 at para [1057]ff stated that the standard imposed in sec 180 required
consideration of all the circumstances of an officer's role within the company including
the job description and any special tasks or responsibilities they may have had
Assessing what a reasonable ordinary person, having the same skills and knowledge
and acting on their own behalf, would do in the circumstances will assist in
determining reasonableness: ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC 738 at
paras [1070]ff. On appeal, Spigelman J (with whom Ipp J agreed) held that the
standard of care under section 180(1) was similar to that imposed by the law of
negligence: Vines v ASIC [2007] NSWCA 75 at [137] and [142]; (2007) 62 ACSR 1.
Reference should be made to the summary of cases contained in the annotated
Corporations legislation (2009) at page 158 for a summary of cases relating to breach
of duty.
A director who acts recklessly or without reference to the powers of the company as
stated in the objects would breach this particular duty. Attempts by directors to sell
company property at an undervalue or without obtaining a proper valuation would be
breaches of care and diligence.
In relation to the business judgement rule reference should be made to ASIC v Adler
[2002[ NSWSC 171 where it was held that the business judgement defence did not
apply in the circumstances.
Duty to creditors
Common law has gradually acknowledged the position of creditors,15 so much so that
the separate legal entity with limited liability is no longer capable of affording officers
15
See Dabner J, "Directors' Duties - The Schizoid Company" (1988) 6 C & SLJ 105.
46
the protection which they would have traditionally received.
In Walker v Wimborne (1976) 137 CLR 1, Mason J made at 6-7, in what was described as
a, `casual statement'16, observations as to the position of creditors and the extent to
which an officer's duty extended to considering creditors' interests.
In this case, a liquidator made an application under sec 367B of the Companies Act 1961
(NSW)17 for recovery of money paid out by the company. The company, Asiatic
Electric Co Pty Ltd, made a loan which was not recovered and the liquidator sought to
make the directors responsible for the loss. The company was one of a number of
companies which shared the same directors and which moved funds around.
The High Court of Australia held that there had been a breach of duty by the directors
and that the directors were guilty of `misfeasance' within the meaning of sec 367B.
Mason J noted at 6-7:
"Indeed, the emphasis given by the primary judge to the circumstances that the group
derived a benefit from the transaction tended to obscure the fundamental principles that
each of the companies was a separate and independent legal entity, and that it was the
duty of the directors of Asiatic to consult its interests and its interests alone in deciding
whether payments should be made to other companies. In this respect it should be
emphasised that the directors of a company in discharging their duty to the company
must take account of the interest of its shareholders and its creditors. Any failure by
the directors to take into account the interests of creditors will have adverse
consequences for the company as well as for them. The creditor of a company, whether
it be a member of a "group" of companies in the accepted sense of that term or not, must
look to that company for payment. His interests may be prejudiced by the movement of
funds between companies in the event that the companies become insolvent." [Bold
added]
His Honour reasoned that failure to look after the interests of creditors amounts to
failure to look after the company's interest and therefore to a breach of duty. The
question whether the interests of creditors needs to be considered in all circumstances
or whether the duty applies only in a situation where the company was insolvent or in
serious financial difficulties which were likely to lead to insolvency, was left
unresolved.
Since the decision in Walker v Wimborne, an increasing number of judges have quoted
and relied upon Mason J's dictum in support of the conclusion that directors must act
in the interests of past and even future or contingent creditors of the company.
Illustrative is Re 67 Budd Street Pty Ltd v The Commonwealth (1984) 2 ACLC 190 at 197.
In this case a liquidator claimed against a director for misfeasance pursuant to sec 367B
16
17
Baxt R, "A Senior Australian Court gives the "Thumbs Up" to the Winkworth Principle - Directors owe
a duty to Creditors both Present and Future", (1989) 7 C & SLJ 344 at 344.
Although the High Court appeal in this case was argued in 1975 and judgment was given in
March 1976, proceedings commenced on 21 September 1972 at a time when the relevant
expression under sec 367B(1)(b) was `misfeasance or breach of trust'.
47
of the Companies Act 1961 (NSW). The claim of the liquidator was that, in breach of his
duty as a director, the respondent, used that office to have the company lend him
money in a series of loan transactions over a period of years at rates of interest which
were low, and which indicated that the respondent preferred his own interest to that
of the company.
Hope JA (with whom Moffitt P and Glass JA agreed), acknowledged the right of the
liquidator to complain about the terms of contracts for loans which a director of a
company enters into with a company. Such a right, it was held, was inherent in the
liquidator's duty to act in the interest of creditors.
Importantly the New South Wales Court of Appeal held that it was a breach of duty
for a director of a company to procure personal loans from the company at rates less
then current commercial rates, where such terms were not otherwise available to
customers and clients of the company. Hope JA noted that the creditors at the time
had not approved or affirmed the terms of the loan contracts. This was regarded as a
crucial omission.
This view was taken further in Nicholson v Permakraft (NZ) Ltd (in liq) (1982) 1 ACLC
488 and (1985) 3 ACLC 453. In this case, Permakraft Ltd had been restructured at the
instigation of its directors. This restructure involved the incorporation of another
company which was to be the holding company and the subsequent transferring to
this latter company of Permakrafts' most profitable businesses. Shareholders acquired
shares in the holding company and simultaneously sold their shares in Permakraft to
the holding company. Under the scheme Permakraft also paid a dividend from capital
profits arising from revaluation of some of its assets. Two years later when Permakraft
was placed in liquidation because of its insolvency, the company's liquidator
commenced proceedings against the directors to recover the amount of the dividend.
The trial judge, White J, found for the liquidator in concluding that the directors had
not fulfilled their duty to consider the interests of their own company18. This decision
was reversed by the New Zealand Court of Appeal19.
In the Court of Appeal, Cooke J at 457-460, made a comprehensive analysis of the
principles of law which were to be applied. According to his Honour, directors have
to consider the interests of unsecured creditors as part of their duties to the company
and failure to do so would be a breach of duty to creditors. On the issue of
ascertaining whether there had been a breach of duty owed to existing and continuing
creditors, his Honour stated at 462 that an objective test should be applied to this
question.
Cooke J provided at 459-460 the following guidance in resolving problems in this area:
"The duties of directors are owed to the company. On the facts of particular cases this
18
19
(1982) 1 ACLC 488 at 509.
(1985) 3 ACLC 453.
48
may require the directors to consider inter alia, the interests of creditors (emphasis
added). For instance, creditors are entitled to consideration, in my opinion, if the
company is insolvent, or near insolvent, or of doubtful solvency, of if a contemplated
payment or other course of action would jeopardise its solvency ... To translate this into
legal obligation accords with the now pervasive concepts of duty to a neighbour and the
linking of power with obligation. It is also consistent with the spirit of what Lord
Haldane said. In a situation of marginal commercial solvency such creditors may fairly
be seen as beneficially interested in the company or contingently so ... In such cases the
unanimous assent of the shareholders is not enough to justify the breach of duty to the
creditors. The situation is really one where those conducting the affairs of the company
owe a duty to creditors. Concurrence by the shareholders prevents any complaint by
them, but compounds rather than excuses the breach as against the creditors."
His Honour went further and attempted to prescribe matters which directors should
consider before embarking upon a particular course of action. Emphasis was placed
upon directors focusing upon the company's practical ability to pay its debts to
"present and likely continuing trade creditors." The criterion was not, his Honour said,
simply whether at the end of the day the company would remain solvent according to
the balance sheet test or whether the company can pay a capital dividend. The bottom
line was the company's ability to pay its way.
Importantly this duty to consider the company's practical ability to pay debts, raises
the question whether directors who did not take part in the particular undertaking or
perhaps who took part but did not know or could not have known of the company's
inability to meet to debts, still owe the same duty to creditors? See also Metal
Manufactures Ltd v Lewis (1988) 6 ACLC 725, Statewide Tobacco Services Ltd v Morley
(1990) 8 ACLC 827 (Ormiston J), (1992) 10 ACLC 1233 (Court of Appeal) and Group
Four Industries Pty Ltd v Brosnan and Anor (1992) 10 ACLC 1437.
The decision in Nicholson v Permakraft (NZ) Ltd was relied upon and applied in New
South Wales in Kinsela and anor v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215. In
this latter case Street CJ declared at 222:
"In a solvent company the proprietary interests of the shareholders entitle them as a
general body to be regarded as the company when questions of the duty of directors
arise. If, as a general body, they authorise or ratify a particular action of the directors,
there can be no challenge to the validity of what the directors have done. But where a
company is insolvent the interests of the creditors intrude. They become prospectively
entitled, through the mechanism of liquidation, to displace the power of the shareholders
and directors to deal with the company's assets. It is in a practical sense their assets
and not the shareholders assets that, through the medium of the company, are under the
management of the directors pending either liquidation, return to solvency, or the
imposition of some alternative administration."
In Russell Kinsela's case, a company near to financial collapse had leased property to its
own directors on terms favourable to the directors. The intention was to put a
valuable asset beyond the reach of the company's creditors. The question before the
49
Court was whether the liquidator of the company could set aside the lease which had
been entered into and which had been `ratified' by the company's shareholders in
general meeting.
The Court of Appeal examined the law relating to the duties of directors and held that
the lease was voidable. Street CJ found support for a distinction between solvent and
insolvent companys in Permakraft's case. His Honour believed that in cases of
companies on the verge of insolvency, the dictum of Mason J in Walker v Wimborne
should be applied. He added at 223:
"It is, to my mind, legally and logically acceptable to recognise that, where directors are
involved in a breach of their duty to the company affecting the interests of shareholders,
then shareholders can either authorise that breach in prospect or ratify in retrospect.
Where, however, the interests at risk are those of creditors I see no reason in law or in
logic to recognise that the shareholders can authorise the breach. Once it is accepted, as
in my view it must be, that the director's duty to a company as a whole extends in an
insolvency context to not prejudicing the interests of creditors (Nicholson and Others v
Permakraft (NZ) Ltd and Walker v Wimborne) the shareholders do not have the power
or authority to absolve the directors for that breach."
The other members of the Court of Appeal agreed with Street CJ. Significantly the
Court was reluctant to formulate a test of general application setting out the degree of
financial instability necessary to impose upon directors an obligation where they
would always have to consider the creditors of the company. However the following
warning was issued by the Chief Justice:
"It needs to be borne in mind that to some extent the degree of financial instability and
the degree of risk to the creditors are interrelated. Courts have traditionally and
properly been cautious indeed in entering boardrooms and pronouncing upon the
commercial justification of particular executive decisions. Wholly differing value
considerations might enter into an adjudication upon the justification for a particular
decision by a speculative mining company of doubtful stability on the one hand, and, on
the other hand, by a company engaged in a more conservative business in a state of
comparable financial instability. Moreover, the plainer it is that it is the creditor's
money that is at risk, the lower may be the risk to which the directors, regardless of the
unanimous support of all the shareholders, can justifiably expose the company."
Kinsela's case places an obligation upon directors of insolvent companies not to
prejudice the interests of creditors, and limits the power of the shareholders to forgive
breaches of duty.
A wider view of the duty owed to creditors was taken in Grove v Flavel (1986) 4 ACLC
654. In this case, Jacobs J, with whom both Matheson and Olsson JJ concurred, held
that there was nothing in Mason J's statement in Walker v Wimborne (1976) 137 CLR 1 at
6-7 extracted earlier in this Chapter, to suggest that it is insolvency that gives rise to the
duty to take account of the interests of creditors. However his Honour at 663, after
reviewing previous cases, refused to apply the wide proposition that there is a duty
50
owed to creditors quite independently of insolvency or financial instability. The
conclusion of Jacobs J was that directors must have regard to creditors' interests, not
only when the company is known to be insolvent, but also when directors have
knowledge of a real risk of insolvency. Whether there is such a real and perceived risk
of insolvency depends upon the facts of the particular case.
Of particular importance was the Court's finding that Grove made improper use of
information. According to Jacobs J at 663, where a director of company "X" who has
acquired information which leads them to believe that the company faces a risk of
liquidation, whether voluntary or because it cannot pay its debts as they fall due, then
as long as this risk of liquidation is a real risk and not a remote one, and if the director
then acts to protect him or herself and other companies of which they are a director
from the consequences of such a liquidation to the possible detriment of the creditors
of company X, that director is acting improperly of company X.
Finding Grove in breach of the statutory provision, meant that the claim of the external
creditors was strengthened and importantly that the duty imposed upon a director or
officer not to make improper use of information was a duty owed to creditors as well
as the company.
The trend of emphasising director's duties to creditors has continued since these
decisions. In Jeffree v NCSC (1989) 7 ACLC 566, the Western Australian Full Supreme
Court recognised not only a duty to existing creditors but a duty to future creditors as
well. Importantly Jeffree's case contains an endorsement of the English Court of
Appeal decision in Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114 at
118, and in particular of the dicta of Lord Templeman in that case.
See also Spies v The Queen (2000) 201 CLR 603; 35 ACSR 500.
Conflicts of interest
In R v Donald (1993) 11 ACLC 712, it was stated that :
"It is a breach of fiduciary duty for a director to permit a conflict to arise between his
personal interest and his duty to the company of which he is director: see Aberdeen Rly.
Co. v. Blaikie Bros (1854) 1 Macq. 461 H.L. Of this a common instance is a contract
made between the company and the director himself or another company in which that
director is interested: see Transvaal Lands Co v. New Belgium (Transvaal) Land and
Development Co [1914] 2 Ch. 488; Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B.
549; Gower: Modern Company Law, 4th ed., at 583-584; Ford: Company Law, 5th ed.,
at 448-451. In circumstances like that the fiduciary duty can be discharged only by
obtaining approval for the contract after full disclosure of the relevant interest to the
members in general meeting, or, if the articles permit it, to the other directors."
Early formulations of this fiduciary duty described it as obliging a person owing such a
51
duty not "to put himself in a position where his interest and duty conflict"20.
Illustrative of this view was the remarks of Lord Upjohn who stated in Boardman v
Phipps [1967] 2 AC 46 at 123 that:
"... [T]he fundamental rule of equity that a person in a fiduciary capacity must not
make a profit out of his trust which is part of the wider rule that a trustee must not place
himself in a position where his duty and interest may conflict."
In Aberdeen Railway Co v Blackie Bros [1854] 1 Macq 461, a company entered into a
contract to purchase furniture from a firm in which one of its directors was a partner.
This was not disclosed and although the contract was fair, the Court held that the
company was not bound to the firm. In the circumstances Lord Cranworth LC stated:
"[I]t is a rule of universal application that no one, having such duties to discharge, shall
be allowed to enter into engagements in which he has, or can have, a personal interest
conflicting or which possibly may conflict, with the interests of those whom he is bound
to protect."
Despite these early views of the scope of this duty, there have been statements made
which indicate that the duty is narrower in scope. For example in Chan v Zacharia
(1984) 58 ALJR 353 Deane J stated at 361:
"There is a wide variety of formulations, of the general principle of equity requiring a
person in a fiduciary relationship to account for personal profit or gain. The doctrine is
often expressed in the form that a person `is not allowed to put himself in a position
where his interest and duty conflict': Bray v Ford [1896] AC 44 at 51; or `may conflict':
Phipps v Boardman [1967] 2 AC 46 at 123; or that a person is `not to allow a conflict to
arise between duty and interest': New Zealand Netherlands Society "Oranje" Inc v
Kuys [1973] 1 WLR 1126 at 1129. As Sir Frederick Jordan pointed out however: ...
this, read literally, represents `rather a counsel of prudence than a rule of equity':
indeed. even as an unqualified counsel of prudence, it may, in some circumstances, be
inappropriate: see, for example, Hordern v Hordern [1910] AC 465 at 475; Smith v
Cock [1911] AC 317 at 325-326. The equitable principle governing the liability to
account is concerned not so much with the mere existence of a conflict between personal
interest and fiduciary duty as with the pursuit of personal interest by, for example,
actually entering into a transaction or engagement `in which he has, or can have, a
personal interest conflicting ... with the interests of those whom he is bound to protect':
per Lord Cranworth LC, Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 at
471; or the actual receipt of personal benefit or gain in circumstances where such
conflict exists or has existed."
Similarly in Hospital Products Ltd v United States Surgical Corporation and Others (1984)
58 ALJR 587, Mason J observed at 611:
"The traditional view that the profit rule is merely a corollary of the conflict rule may be
20
Bray v Ford [1896] AC 44 at 51 per Lord Herschell.
52
traced back to the speech of Lord Herschell in Bray v Ford [1896] AC 44 at 51. The
view has been severely criticised, with some justification; see Shepherd, The Law of
Fiduciaries (1981), pp 147-151. And a recognition of its shortcomings induced Sir
Frederick Jordan in his Chapters on Equity, op cit at p 115 to describe the conflict rule
as a `counsel of prudence' rather than a rule of equity. Accordingly, the fiduciary's
duty may be more accurately expressed by saying that he is under an obligation not to
promote his personal interest by making or pursuing a gain in circumstances in which
there is a conflict or a real or substantial possibility of a conflict between his personal
interests and those of the persons whom he is bound to protect; Aberdeen Railway Co v
Blaikie Bros (1854) 1 Macq 461 at 471. By linking the obligation not to make a profit or
take a benefit to a situation of conflict or possible conflict of interest the proposition, in
accordance with the authorities, (a) excludes the relevance of an inquiry into the actual
motives of the fiduciary; and (b) excludes restitutionary relief when the interest of the
fiduciary is remote or insubstantial."
The duty to avoid conflicts of interest involves disclosure of any conflict to the
members at a general meeting of the company. Consent by other members of the
board to a breach of duty by an interested director, will not usually dissolve the
company's right to complain about the breach. This flows from the fact that directors
owe their duty to the company. However if the board of directors are authorised
pursuant to the articles to consent to a director being interested in a transaction or
having a conflict of duty, then such interest or conflict may be sanctioned. Similarly a
board, if it has authority, may renounce a business opportunity in circumstances
where it leaves that opportunity open to one of its directors who later exploits it. See
Queensland Mines Ltd v Hudson [1978] 18 ALR 1.
The duty to avoid conflicts of interest precludes directors from misusing company
funds by mixing them with their personal funds. In Totex-Adon Pty Ltd v Marco [1982]
1 ACLC 228 a director of the plaintiff company had failed to account to his company
for the proceeds of the sale of certain goods. A separate bank account was not opened
and the monies were intermixed with other monies. The Court held this to be a breach
of the director's fiduciary obligations.
It is no defence to an action for breach of the duty to avoid conflicts of interest in
circumstances of intermixture of moneys, to say that the moneys were lent to the
director. Moneys so held by the director are regarded as being held on trust for the
company. This trust is known as a constructive trust. See Paul A Davies (Aust) Pty Ltd
v Davies [1983] 1 ACLC 1091 and J W Brien & Yorkville Nominees Pty Ltd v Walker (1981)
1 ACLC 59.
With respect to nominee directors - that is, directors who are appointed to represent
particular interests, the question which must be answered is, what is the position
where the interests of the company and those who appointed the nominee director
conflict? Such nominee directors have both a loyalty to the appointor and to the
company, however whether such nominees can consider their appointor's interest first
53
depends upon the circumstances. According to Ford21, if a nominee director has the
ability to make decisions independently of someone who may have appointed them,
then the director must still act for "the benefit of the company as a whole" when they
act. On this issue Ford states that:
"[A] director who feels committed to some faction among the members or to some
outsider and who makes decisions in their interests is in breach of duty, unless it is a
case where the director is properly deciding by reference to the company's creditors.
Although a director may be appointed to represent a special interest, he or she will,
when acting for the board, be required to serve the interests of the company as a whole
and will be assumed to be acting for the company as a whole unless the contrary is
proved."
It would appear that such nominees will not be in breach of duty:
"[I]f, in the board's deliberations, they consider the interests of somebody other than the
company as a whole where (1) the company's constitutive documents authorise that
consideration; or (2) it is in the interests of the company as a whole that the extraneous
interests should be considered; or (3) the directors in good faith reasonably conclude that
those interests are compatible with the interests of the company as whole22."
On this point see Levin v Clarke [1962] NSWR 686 where the company's articles allowed
a creditor to nominate directors and the latter were empowered to act when the
creditors security was jeapodised by a breach. It was held that these nominated
directors were not in breach of their fiduciary duty to the company when they acted to
protect the security. According to Jacobs J at 700:
"It may be in the interests of the company that there be upon its board of directors one
who will represent these other interests and who will be acting solely in the interests of
such a third party and who may in that way be properly regarded as acting in the
interests of the company as a whole."
Similarly, where a nominee director is so controlled by the appointor in such a way
that they have no independent discretion they may still owe both common law and
statutory duties to the company. See Selangor United Rubber Estates Ltd v Craddock (No
3) [1968] 1 WLR 1555.
Nominee directors who act in the interests of their principals are not in breach of duty
if they have the bona fide belief that they are acting in the company's interest. See Re
Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648. Where an actual conflict of
interest occurs, directors should remove themselves from this position. See Scottish CoOperative Wholesale Society Ltd v Meyer [1959] AC 324.
The issue of dual obligations also arises in the context of holding and subsidiary
21
22
Ford HAJ and Austin RP, "Ford's Principles of Corporations Law", Butterworths, 1992 at 461.
Ford HAJ and Austin RP, "Ford's Principles of Corporations Law", Butterworths, 1992 at 464.
54
company relationships. In Equiticorp Finance Ltd (in liq) v Bank of New Zealand;
Equiticorp Financial Services Ltd (in liq) (receiver & manager appointed) v Bank of New
Zealand (1993) 11 ACLC 952, the Bank of New Zealand ("BNZ") provided a loan to a
company which was a member of the Equiticorp group of companies. Hawkins was
the group's chief executive chairman and a member of the boards of many group
companies. After some time, BNZ sought to review its exposure to the Equiticorp
group and Hawkins participated in these negotiations. As a result of this review, it
was agreed that there would be an early repayment of the loan made to the particular
group member.
Early repayment did not occur and BNZ indicated its concerns to Hawkins. In order
to re-establish financial credibility with BNZ, Hawkins, with the knowledge of other
senior officers of the Equiticorp group, applied a liquidity reserve to satisfy the loan.
This reserve had been established by Equiticorp Finance Ltd ("EFL") and Equiticorp
Financial Services Ltd ("EFSA"), two other companies which were part of the
Equiticorp group. Hawkins was a director of EFL.
Another director of the two companies opposed the transaction. Further there had
been no formal approval from either the EFL or EFSA boards for the transfer of these
funds. Subsequently both EFL and EFSA brought action to recover the reserve from
BNZ and alleged in this action, among other things, that the application of the reserve
involved breaches by the directors of EFL and EFSA of their fiduciary duty to act in the
best interests of the companies. It was argued that the directors had acted in the
interests of the group rather than each of the individual companies.
The trial judge found that the conduct of the directors did not constitute a breach of
their duty to act in the interests of the respective companies. His Honour came to this
conclusion by considering whether an `intelligent and honest man', in the position of
an EFSA or EFL director, when faced with the effect of a default on the loan on the
group's relationship with BNZ, could have believed that he was acting in the interests
of the relevant company. Both EFL and EFSA appealed and this appeal was
dismissed.
The majority of the Court of Appeal held that Hawkins had some justification in
believing that the welfare of the overall group was closely tied with the welfare of the
individual companies. Further it was held that the steps which were taken protected
both the group as a whole and the individual companies.
In Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. In this case Regal (Hastings) Ltd
owned a cinema and wanted to acquire leases over two other cinemas through a
subsidiary company. Regal (Hastings) Ltd then planned to sell all three cinemas at a
profit. It was a requirement of the lessor that the subsidiary have 5,000 pounds paid
up capital. Regal (Hastings) Ltd could only manage 2,000 pounds and its directors
were not prepared to guarantee the leases. The directors then arranged for the capital
of the subsidiary to be fully subscribed and each director took up 500 shares
personally, as did the company's solicitor. Gulliver was company chairman and he
arranged for others to take up the balance of the shares. The directors later sold their
55
shares at a profit. Regal (Hastings) Ltd brought proceedings against the former
directors, solicitor and chairman to recover the profit made by them. The House of
Lords held that the former directors had to account for this profit in spite of acting
bona fide. The chairman had made no personal profit and the solicitor had been
requested by the directors to buy the shares, so neither was liable to account.
According to Lord Russell of Killowen at 385:
"The rule of equity which insists on those, who by use of a fiduciary position make a
profit, being liable to account for that profit, in no way depends on fraud, or absence of
bona fides; or upon such questions or considerations as whether the profit would or
should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to
obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did
for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or
benefited by his action. The liability arises from the mere fact of a profit having, in the
stated circumstances, been made. The profiteer, however honest and well-intentioned,
cannot escape the risk of being called upon to account."
Their Lordships said that it was irrelevant that the company could not itself take up
the shares. However a ratification by shareholders at a general meeting could have
excused them from liability.
This view was reinforced in Boardman & anor v Phipps [1967] 2 AC 46. In that case a
solicitor and an accountant acquired shares in a private company. The accountant was
one of three trustees of an estate which owned 8,000 out of the 30,000 issued shares in
the same company. The solicitor was solicitor to the trustees.
Both the solicitor and accountant acquired information about the company and
decided that they should gain control of it on behalf of the trust. Two of the three
trustees approved of this - the third was not consulted. The trust lacked the power to
buy the shares. Further the accountant obtained information about the company and
its potential value and he and the solicitor purchased 22,000 shares. Large profits were
made by both the solicitor and accountant and the trust.
A beneficiary argued that the shares held by the accountant and solicitor were held as
constructive trustees for the beneficiaries and wanted them to account for profits
made. The House of Lords in a 3:2 decision agreed with the beneficiary.
According to Lord Hodson at 105:
"[T]he proposition of law involved in this case is that no person standing in a fiduciary
position, when a demand is made upon him by the person to whom he stands in the
fiduciary relationship to account for profits acquired by him by reason of his fiduciary
position and by reason of the opportunity and the knowledge, or either, resulting from
it, is entitled to defeat the claim upon any ground save that he made profits with the
knowledge and assent of the other person."
56
Their Lordships distinguished Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 on the
basis that in Regal (Hastings) the directors took up the shares and made a profit - it
having been intended that the company should buy the shares. This did not occur in
Boardman. As the information was obtained while acting in a fiduciary capacity, their
Lordships held that it could not be used to make a personal profit without the consent
of the other party.
Another case, Green and anor v Bestobell Industries Pty Ltd [1982] WAR 1, followed
Boardman v Phipps. In Green's case, Green was a managing director of Bestobell
Industries. The company had obtained a contract over stage one of a building project.
Green, while managing director, later submitted a tender for stage two of the same
building project on behalf of his own company, not Bestobell Industries. Green's
company obtained the contract and Bestobell Industries sought an account of profit.
The Supreme Court of Western Australia found there was a breach of fiduciary duty as
Green knew that the contract for stage two would be sought by Bestobell Industries.
He and his company were held liable to account.
According to Burt CJ at 5-6:
"[I]t is enough ... to show that the fiduciary gains his knowledge or opportunity within
the fiduciary relationship ... it is not necessary to go further so as to prove that either the
information or the opportunity was in fact used so as to acquire the benefit."
A similar approach to this issue appears in Queensland Mines Ltd v Hudson [1978] 18
ALR 1, however in that case it was held that although the director had an opportunity
and did make use of his position, he was not in breach of his duty as the company
were fully informed of all the facts and had made a decision not to pursue the venture
themselves. They had in fact "acquiesced", that is, stood by and made no objection to
the director pursuing the venture himself.
Some limits to this duty were shown in Peso Silver Mines Ltd v Cropper (1966) 58 DLR
(2nd) 1, and Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.
The above case is a useful in interpreting the statutory duties that are set out in
sections 182 and 183.
Section 182 provides that a director, secretary, other officer or employee of a
corporation must not improperly use their position to:
(a)
gain an advantage to themselves or someone else; or
(b)
cause detriment to the corporation.
See R v Byrnes (1995) 183 CLR 501 at 512; 17 ACSR 551 where it was held that
impropriety extends beyond an abuse of power or authority and is assessed
objectively. Further it was held that “improper use” and purpose (or intention) a
57
different elements of the offence and may be established by evidence of different
circumstances. Importantly, an officer need not actually achieve his or her purpose of
gaining an advantage or causing detriment to the company: Chew v The Queen (1992)
173 CLR 626; 7 ACSR 481
In Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171; 41 ACSR 72
Santow J stated the following at [458] and (ACSR 185) in relation to sec 182:
(1)
“causing a company to enter into an agreement which confers unreasonable personal
benefits on a director is a breach of ss180, 181 and 182.
(2)
failing to end an agreement that pays reasonable benefits to a related consultant after
the director should realise that the company is insolvent breaches s182: Simar Transit
Mixers Pty Ltd v Baryczka (1998) 28 ACSR 238 [CL s232 1992].
(3)
obtaining the agreement in a manner which keeps any independent director “in the
dark” is strong evidence that the benefits are unreasonable, as is the lack of any
evidence as to what the director did for the company in return: Claremont Petroleum
NL v Cummings (1992) 10 ACLC 1685, 9 ACSR 1; on appeal (1993) 11 ACLC 125,
9 ACSR 583 [CC s229 1989].
(4)
Moreover it is sufficient to establish that the conduct of a company was carried out in
order to gain an advantage for that director or someone else without also having to
establish that an advantage was actually achieved: Chew v R [1992] HCA 18; (1992)
173 CLR 626 per Mason CJ, Brennan, Gaudron and McHugh JJ at 633.
(5)
Where a director acts in relation to a transaction in which he or a party to whom the
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
s182(1): R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 at 516-17. That is likely to
lead also to a conclusion of lack of good faith for s181 purposes. There could be no
adequate disclosure here, or the essential fully informed consent, where there was
neither disclosure to HIH’s or HIHC’s board or even to the Investment Committee. It
does not suffice that Mr Williams or Mr Fodera knew (or Mr Howard as a nondirector knew) of the transactions, or for that matter Mr Cassidy, his knowledge being
in any event limited.
(6)
Finally, impropriety for the purposes of s182(1) is to be determined objectively and
does not depend upon the director’s consciousness of impropriety. It consists in a
breach of the standards of conduct that would be expected of a person in the position of
the alleged offender by reasonable persons with knowledge of the duties, powers and
authority of the position and the circumstances of the case: R v Byrnes (supra) at 51415 per Brennan, Deane, Toohey and Gaudron JJ.”
Section 183 provides that a person who obtains information because they are, or have
been, a director or other officer or employee of the corporation must not improperly
use the information to:
58
(a)
gain an advantage to themselves or someone else; or
(b)
cause detriment to the corporation.
The proper interpretation of the word, “information” has been held to refer to that type
of information which equity would restrict the director from using to his or her
personal benefit: Rosetex Co Pty Ltd v Licata (1994) 12 ACSR 779 at 784. Further, it was
held that the statutory duty under section 183 is part of the fiduciary obligation to act
in good faith: Southern Real Estate Pty Ltd v Dellow [2003] SASC 318 at para [25].
In Commissioner for Corporate Affairs v Green [1978] VR 505 at 510 McInerney J held that
the section required the following:
(a)
that the respondent was at the relevant time an officer of the corporation.
(b)
that the respondent acquired the relevant information;
(c)
that he acquired that information by virtue of his position as officer of the
corporation;
(d)
that he made improper use of that information;
(e)
that he made that improper use in order to gain directly or indirectly an
advantage;
(f)
that such an advantage was either for himself or for some other person;
(g)
alternatively to (e), that he made that improper use to cause detriment to the
corporation.
The above list was applied by Santow j in Forkserve Pty Ltd v Jack [2000] NSWSC 1064 at
[114]-[118].
Remedies for breach of duty by directors
A number of general law and statutory remedies exist for breach of duty.
(a)
Statutory remedies
Sections 180(1), 181(1) and (2), 182(1) and (2), 183(1) and (2) are civil penalty provisions.
See sec 1317E. In such cases ASIC or the company have six years in which to apply for
a civil penalty order: Newtronics Pty Ltd v Gjergja (2007) 63 ACSR 611. Where the
Court is satisfied that a breach of duty has occurred, it can make a declaration to that
effect and in addition, it can order that the officer:

be prohibited from managing a corporation;
59




pay a pecuniary penalty of up to $200,000;
pay compensation to the company for any loss suffered;
pay any profits made over to the company;
pay any punitive damages that the court sees fit to impose.
In addition, the breach of duty will constitute a criminal offence if it was committed:

knowingly, intentionally or recklessly; and
either

dishonestly and with the intent of making a gain, or

with the intention of deceiving or defrauding someone (sec 1317FA).
See also sections 1317F, H, J, K, M, N and P.
For liability of third parties see Canberra Residential Developments Pty Ltd v Brendas (No
5) [2009] FCA 34 at [115].
(b)
General law remedies
Defaulting directors may be required to:






account to the company for any profits made as a result of a breach of duty;
pay damages and compensate the company for its losses;
comply with the terms of any injunction which has been granted so as to
restrain a threatened or continuing breach of duty;
comply with any declaration made by the Court, for example to transfer
property to the company;
restore property to the company - whether they are in possession of it or not;
hold property as a constructive trustee.
In addition, companies may be able to rescind any contract made by the director in
breach of duty. This is subject to the rules for rescission of contracts being satisfied.
Relief from liability for breach of duty
There are three main ways whereby a director who has breached a duty to the
company may be excused from liability:
(a)
Where a general meeting of shareholders ratifies the defective act
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Note sec 239.
For ratification to be effective there needs to be full disclosure about the breach being
made to the members. Ratification or approval must then be given for the act - such
approval can even be given where the director has exercised his power improperly or
breached his duty of care. If successful, ratification will preclude a minority
shareholder from taking action by way of derivative suit against the company's
directors.
Ratification will not be allowed if an action taken by directors involves:
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


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a transaction which is ultra vires;
an illegal action;
a fraud on the minority shareholders;
a breach of duty to creditor's at least in the context of insolvency;
a breach of a statutory duty contained in Part 2D.1 of the Corporations Act: see
Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR 208; [2005] HCA 23
at [32] and Forge v ASIC [2004] NSWCA 448 at [378]-[384]. Reference could
also be made to the decision of Brereton J in ASIC v Maxwell [2006] NSWSC
1052; 59 ACSR 373 at [103]ff as admitting of the possibility that shareholder
consent could prevent a breach of section 180(1) from arising
In Bamford v Bamford [1970] Ch 212, an allotment of shares was improperly made to
defeat a takeover offer. A derivative action was commenced by some of the
shareholders, but before the hearing, the general meeting of the company approved of
the allotment by passing a resolution which ratified it. This ratification was allowed by
the Court.
According to Harman LJ:
"[I]t is trite law ... that if directors do acts, as they do every day, especially in private
companies, which, perhaps because there is no quorum, or because their appointment
was defective, or because sometimes there are no directors properly appointed at all, or
because they are actuated by improper motives, they go on doing for years, carrying on
the business of the company in the way in which, if properly constituted, they should
carry it on, and then they find that everything has been so to speak wrongly done
because it was not done by a proper board, such directors can, by making a full and
frank disclosure and calling together the general body of the shareholders, obtain
absolution and forgiveness of their sins; and provided the acts are not ultra vires the
company as a whole, everything will go on as if it had been done all right from the
beginning."
This decision was followed in Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR
666. In this case the directors of Winns Ltd (Winns) became aware that their company
was the target for a take-over bid by Winthrop Investments Ltd (Winthrop). After
learning of this, the directors proposed to cause Winns to enter into a transaction to
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purchase the assets of certain retail stores owned by Burns Philip & Co Ltd. Payment
for the assets would partially be made by the issue of shares in Winns. As a result of
this Winthrop applied for and was granted an interlocutory injunction restraining
Winns. Subsequently, an extraordinary general meeting of Winns was held and
resolutions were passed by the shareholders then present, approving the making and
carrying into effect of the transaction.
The passing of the resolution led to the injunction being dissolved and Winthrop
appealed. One of the issues on appeal was whether a general meeting could cure in
advance a potential defect in an allotment of shares made by directors. The Court, by
majority, allowed the appeal and held that the resolution of the general meeting was
not effective to cure a defect in the directors' allotment because adequate disclosure
had not been made to the shareholders before they voted. On the issue of the
shareholders' ability at a general meeting to cure potential defective actions, differing
reasons were given by the Judges. See Samuels JA at 684, Glass JA at 674 and
Mahoney JA at 697. However it would appear that even if the general meeting ratifies
the acts of directors, the ratification may be a fraud on the minority and thus be
invalid.
According to Samuels JA:
"There are many more cases which can be cited on both sides of the question. But we
were not referred to any other decision of the High Court said to be inconsistent with
Bamford v Bamford. I, therefore, follow the views which their Lordships there expressed.
I do so with all the more confidence because the ultimate conclusion to which I have
come does not require me to decide this issue. I will, therefore, assume, at all events,
that a majority of the shareholders in general meeting have power to affirm a decision of
their directors, otherwise voidable because in breach of a fiduciary duty owed to the
company.
But in the present case the directors had merely decided to act in the future; at the time
of the general meeting they had not done the act upon which they had determined. They
had not, therefore, committed any act in breach of their duty. So, in the strict sense,
there was nothing to ratify. If the power of the shareholders was confined to ratification
of an act already done, that power was not exercisable for want of appropriate subjectmatter."
Mahoney JA stated:
"There is a difference in the restrictions imposed upon the exercise of directors' powers
and those imposed upon the exercise of the powers of a general meeting in that, whereas
the former cannot be exercised so as to result in a benefit to the directors, the latter may
be exercised in a particular way, even though it is clear that a benefit will accrue to the
majority shareholders ... Contrast the position where the majority use their voting
power `to make a present to themselves'... But, the question remains whether, subject to
such difference, the powers of the company in general meeting are in this regard less
restricted than those of directors; in particular, the question remains whether, for
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example, the powers of the company in general meeting may be exercised solely for
what, in respect of directors' powers, is assumed to be a collateral purpose, that is the
defeat of a takeover ...
Counsel did not refer the court to any case which finally determines the power of
shareholders to act. It is established that resolutions of shareholders in general meeting
would not be effective in this way, if the purpose of the majority at the meeting was
otherwise than for the purposes of the company as a whole ... It has not yet been settled
whether, if the purpose of that majority be that which the directors are here assumed to
have, viz. the defeating of the Winthrop takeover, that will be an improper purpose of
that majority within the principles adverted to in Ngurli Ltd v McCann (1953) 90 CLR
425. Bamford v Bamford [1970] Ch 212, decides that, in an exercise by the shareholders
of the power of the company to avoid a transaction on that ground, a resolution may be
valid to affirm the transaction; it decides, as I have previously pointed out, nothing as to
whether that resolution may be ineffective, because the majority had the same purpose.
Therefore, if Winthrop, at the hearing of the proceeding in this case, can show that the
majority passed the resolution for the same purpose that the directors had, to defeat the
takeover, a serious question remains to be argued whether the resolutions in any way
assist the defendants."
Ratification will not be permitted where it will injure a third party23. Furthermore
ratification may be impossible if the directors who have acted dishonestly are now to
vote on the issue of ratification as shareholders24.
(b)
Where the constitution permits
(c)
Where the court grants relief.
Provision exists under sec 1317S and sec 1318 of the Corporations Law for officers to
apply to the court for relief from liability for negligence, default, breach of trust or
breach of duty. The court may grant relief if it considers the officer has acted honestly
and having regard to all the circumstances, the person ought to be excused. See ASIC
v Plymin, Elliot & Harrison (No 2) (2003) 21 ACLC 1237.
23
24
Bay Marine Pty Ltd v Clayton Properties Pty Ltd (1985) 3 ACLC 16.
See Cook v Deeks (1916) 1 AC 554. But compare the decision in this case with Regal (Hastings) Ltd
v Gulliver (1942) 1 All ER 378, where the House of Lords stated that the shareholders could have
approved a breach of duty by directors.
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