LAWS7023 – Corporate Law
Directors’ Duties I (Textbook – Topic 9 pg. 379-492)
Director definition
 Statutory definitions
Section 9 – Director



Section 9 – Officer

Section 9 – Senior
manager
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388-389
A person appointed to the position of director or alternate director
De-facto directions – person who acts in the position, but I called
something else or as not been validly appointed
Shadow director – a person in accordance with whose directions the
directors are accustomed to act
A director, secretary, shadow officer and certain people appointed
to insolvent corporations
A person (other than director, secretary, partner or trustee
depending on the business type) who makes or participates in
making decisions that affect the whole or a substantial part of the
business, or has the capacity to affect significantly its financial
standing.
388
389
389

Non-statutory directors
Nominee director, executive director, non-executive director, managing
389
director, or alternative director.
Appointment and removal of directors
390-392
Many rules in this section are replaceable, meaning they can be modified in the company’s own constitution.
 Appointment
Section 201A
392
 Proprietary companies must have a least 1 director
 Public must have at least 3 directors
Section 201B(1)
Must be over 18 years of age
391
Section 201D
Must consent to appointment as director
391
Section 201B & 206B
Must have no convictions related to the management of a company
391
Section 204A
391
 All public companies must have at least 1 secretary
Panorama
 Can be the same as the director
Developments v Fidelis
 Responsible for record keeping and minutes of meetings for Act
furnishing fabrics [1971]
compliance as well as providing required information to ASIC
 Removal
Section 203A
Requires directors to give notice of resignation
395
Section 203C
Permits a proprietary company to remove a director by passing an ordinary
395
resolution
Section 203D
Directors of public companies may be removed by an ordinary resolution
395
Allied mining v Boldbow regardless of what is stated in the constitution
[2002}
Duty of care, skill and diligence
414-449
Duty of care
416
 Under Corp act evidence of breach is sufficient, under common law, damaged suffered
required as well as evidence of breach.
 Remedy:
o Common law: damages & compensation or account of profits
o Corp act, civil penalties is brought by ASIC & common law remedies
Section 180(1)
A director or other officer of a corporation must exercise their powers and
415
discharge their duties, with the degree of care and diligence that a
reasonable person would exercise if they
 Were a director or officer of a corporation in the corporations
circumstances
 Occupied the office held by, and had the same responsibilities
within the corporation as, the director or officer
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LAWS7023 – Corporate Law
Daniels v Anderson
[1995]
AWA Ltd v Daniels
Director owes the company a duty to exercise reasonable care and skill in
the performance of the functions and the exercise of the powers of a
director. No difference between executive and non-executive directors.
AWA suffered a loss from one of its employees covering up a fraud.
Employee operated without control or supervision. AWA claimed auditor
was negligent in not detecting the loss. Held AWA contributed to the
negligence as executive director breached his duty of care.
414 &
423
417
Duty of skill
Directors must comply with a core irreducible requirement of skill consisting of ordinary competence and
reasonable ability. Other skills with depend on the circumstances of appointment
South Australia v
Directors are expected to possess certain basic skills in relation to the
Marcus Clark
financial statements and financial affairs of their companies
Vines v ASIC
Officers are expected to have knowledge related to their position within the
company. He breached the duty to act with reasonable care and diligence.
Bank v Friedrich
Directors are expected to be able to reach reasonably informed opinions of
their financial statements and are able to keep abreast of the company’s
affairs and act accordingly if the company will be unable to pay debts.
Duty of diligence
Daniels v Anderson
Every director must:
 Obtain a basic understanding of their company’s business
 Keep informed about the activities of the company
 Monitor the company’s activities and regularly attend board
meetings
 Monitor the company’s financial position
Sheaham v Verco
Directors must:
 Attend board meetings
 Be familiar with company’s business and financial status
 Conduct periodic review of company’s financial statements
James Hardie Case
Directors breached their duty of care and diligence when they approved the
release of a misleading statement to the ASX regarding their asbestos fund
amount.
Defences
Section 190(1)
Directors are responsible for the actions of the delegate
Section 190(2)
Directors are NOT responsible if the director believed:
Delegation
1. On reasonable grounds
2. In good faith
3. After making proper inquiry if the circumstances indicated the need
for inquiry; that the delegate was reliable and competent in relation
to the power delegated
Section 189
 Directors may rely on information or professional advice from
Reliance
employees, professional advisors or officers, or a committee of
directors
 The reliance must be made
o In good faith
o After making an independent assessment of the information
or advice
 The reliance is taken to be reasonable unless the contrary is proved
Section 180(2)
Protects directors and officers against liability for breach of the general law
Business judgement rule or statutory duty of care
Applies to a business judgement (s 180(3)) made by a director or officer if
they:
a) Make it in good faith and for a proper purpose and
b) Do not have a material personal interest and
Slides
418 &
423
425
434
438
421-422
441 442
443
445
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LAWS7023 – Corporate Law
c) Inform themselves about the subject matter to the extent they
reasonably believe is appropriate and
d) Rationally believe that it is in the best interests of the corporation
Duty to prevent insolvent trading
Section 95(a)
A company is insolvent when it is unable to pay its debts as and when they
Definition insolvency
fall due
Section 588(g)
Engages in insolvent trading in breach of 588(g):
Insolvent trading
1. Person is director of the company when the company incurs a debt
2. The company is insolvent at the time of incurring the debt, or
becomes insolvent by incurring debt
3. There are reasonable grounds for suspecting that the company was
insolvent, or would become insolvent, at the time the debt was
incurred
4. The person is aware of such grounds, or a reasonable person in a
like position in the company in the circumstances of that company,
would be so aware
5. The person fails to prevent the company from incurring the debt
Section 588(h)
Prove only one to be no breach:
Insolvency defences
 The director could and did reasonably expect, that the company was
solvent at the time and would remain solvent, even if it incurred the
debt
 The director expected that the company was solvent, on the basis of
information supplied to her or him by a subordinate the director
believed on reasonable grounds to be competent, reliable and
responsible for providing adequate information about the solvency
of the company
 The director, because of illness or other good reasons, did not take
part in the management of the company at the relevant time
 The director took all the reasonable steps to prevent the company
from incurring the debt
Consequences of breaching s 588(g)
Section 588(m)
Director must pay compensation to creditors for any loss
Section 588(j)
Director must pay compensation to company for any loss
Section 1317(e)
Director is liable for civil penalty up to $220,000
Section 588(g)(3)
Director must pay criminal penalty (up to $200,000 or five years prison if
contravention involves dishonesty)
449-454
450-451
454
452
452
452
452
Directors’ Duties II (Textbook – Topic 9 pg. 379-492)
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Duty to act in good faith in the best interests of the company for a proper purpose
455-465
Duty to act in good faith in the best interests of the company
 Not necessarily in the best interests of majority shareholders
 Corporations Act s181 – civil obligations of directors and other officers to act in good faith
Equiticorp v Bank of NZ
323
 Equiticorp chairman directed use of reserves of an associated
(1993)
company to reduce debt of Equiticorp
 No authority to do so (no board consent), but his actions were not a
breach of duty as it could be perceived to be in the best interests of
Equiticorp as a whole
 “Would a reasonable person believe they were acting in the
interests of the company?”
Stakeholders – best interests of who?
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LAWS7023 – Corporate Law
Greenhalgh v Arderne
Cinemas (1951)
Percival v Wright (1902)
Kinsela v Russell (1986)

Members as a whole
457


455
458
Walker v Wimborne
(1976)
Parke v Daily News Ltd
(1962)

Individual shareholders
Creditors
 When a company is insolvent/nearly insolvent, interests of
company becomes the creditors rather than its shareholders
Other companies within a corporate group
 Subsidiaries owe interest to parent company
Daily News sold its newspaper business, leading to job losses
Daily News decided to distribute profits from sale of business to its
past employees
Shareholders’ interests take precedent over employees


458
460

Corporate Social Responsibility
 Consider impact of actions on society
James Hardie
421-422
 Relocated assets overseas as a means of evading CSR
 Would not be socially acceptable if no compensation were
given to past employees who had contracted health issues
from working with asbestos at James Hardie company
Duty to act for a proper purpose
 Directors must act in way that is consistent with purpose of power
 Cannot use powers:
 To advance other purposes (eg. their own private interests)
 For an improper purpose (even if judged to be in the best interests of the company)
 Proper purpose test:
1. What are the proper purposes for which the power in question may be exercised? (Law/Legal)
2. For what purpose was the power actually exercised? (Fact/Actual Purpose)
Proper purposes
Ngurli v McCann (1953)
484
 Issuing of shares to raise capital
Harlowe’s Nominees v
462
 Issuing of shares to foster business connections
Woodside Oil (1968)
 Issuing of shares for an employee share scheme
Winthrop Investments v
484
 Issuing of shares as consideration for the purchase of an asset
Winns (1975)
Improper purposes
Howard Smith v Ampol
462
 Ampol controlled 55% of shares in R W Miller (Holding) Ltd
Petroleum (1974)
 Ampol and HS both made takeover bids for Miller; HS’ bid was
higher than Ampol’s, but Ampol was majority shareholder
 Miller did not want to sell to Ampol, thus issued new shares to HS to
↓ Ampol’s shareholding % and fight off their takeover bid
 Improper purpose – primary purpose of issuing new shares was to
dilute the shareholding of a member (ie. Ampol)
Winthrop Investments v
 Issuing of shares to certain shareholders to entrench them control of 507
Winns (1975)
the company
- Howard Smith v Ampol
462
 Issuing of shares to fight off a hostile takeover bid
Petroleum (1974)
- Darvall v North Sydney
457
Brick Ltd (1988)
Mills v Mills (1938)
461
 Issuing of shares to enable directors to maintain control of the
company
Mixed purpose
 Look at the most important purpose and judge whether that was improper
 “But for” test:
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LAWS7023 – Corporate Law

Would the directors still have exercised the power in the same manner if it wasn’t for the improper
purpose?
Mills v Mills (1938)
462
 Resolution passed to increase managing director’s extent of power;
led to increase in dividends received by all ordinary shareholders,
including managing director
 Minority directors argued that this was improper as it was not in
best interests of company as a whole
 Proper purpose – main purpose was to increase the dividends
received by all ordinary shareholders; just a coincidence that
managing director benefited from act
Duty to avoid conflicts of interest
466-488
General law:
 Avoid conflicts between personal interests and interests of the company
 Unless permission of company obtained in general meeting
 Subjective motives and intention not relevant
Statutory law:
 ss182-183: Prohibition on improper use of position/information
 Directors, officers, employees, etc. of a corporation must not use their position (s182) or
information obtained from working for the corporation (s183) to:
 gain an advantage for themselves/others; or
 cause detriment to the corporation
 ss191-194: Disclosure of interests by directors (excluding single director PTY companies)
 Directors must disclose material personal interests that could potentially be conflicting to the
board, unless exempt
 s195: Restrictions on voting by directors of public companies
 Director who has material personal interest in matter being considered at a meeting must not:
 be present while the matter is being considered in the meeting; or
 vote on the matter
Aberdeen Railway Co v
 Aberdeen Railway Co contracted Blaikie Bros as supplier
Blaikie Bros (1854)
 Aberdeen Railway Co ended contract early
 Blaikie Bros sued for breach of contract
 Conflict of interest (contracts) – Thomas Blaikie was managing
partner of Blaikie Bros and chairman of Aberdeen Railway Co
Furs Ltd v Tomkies
466
 Tomkies was managing director of Furs Ltd
(1936)
 Furs Ltd told Tomkies that he would be made redundant after
making the ‘best deal’ for a contract negotiation with a buyer
 Buyer offered Tomkies a job, “on-the-side” cash payment and
reduction in contract price if Tomkies disclosed information about
Furs Ltd; Tomkies obliged
 Conflict of interest (misuse of corporate property/information) –
Tomkies obtained personal profit via a transaction which he was
acting on behalf of Furs Ltd and divulged confidential information
about Furs Ltd
Regal (Hastings) Ltd v
467
 Regal Ltd owned cinema and sought to acquire leases to two more
Gulliver (1942)
cinemas
 Regal Ltd’s directors and Gulliver, chairman (but not a director),
contributed towards leases
 Directors sold Regal Ltd for a profit and kept profit personally
 Conflict of interest (personal profits) – Directors of Regal Ltd made
profit in the course of managing the company and thus, the profit
remains with the company
Cook v Deeks (1916)
469
 Deeks owned 75% of TCC; and Cook 25%
 TCC formed to tender construction of railway lines for CPR
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LAWS7023 – Corporate Law
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
Canadian Aero Service v
O’Malley (1973)
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
Deeks decided to exclude Cook from any new contracts, so formed
new company (DCC) to carry out contract with CPR
TCC general meeting held, where Deeks used majority voting power
to approve sale of company’s plant to DCC and to declare that TCC
had no interest in new contract
Conflict of interest (Corporate Opportunity) – Directors must not
take property/information which belongs to the company
O’Malley was officer of CAS and developed proposal for project
O’Malley resigned from CAS and formed new, similar company
(Terra)
Terra was chosen for project based on O’Malley’s proposal that he
developed while working for CAS
Conflict of interest (Corporate Opportunity) – Director must not
resign from a company to personally take up that company’s
opportunity
Corporate Opportunity steps:
 Identify opportunity
 Company’s opportunity? If yes;
 Could company have taken up opportunity?
 Has company considered and rejected opportunity?
 If no, then conflict of interest
 Director in breach even if company cannot take up opportunity itself (company has to agree to director
taking up opportunity)
State Bank of SA v
 Conflict of interest (Multiple directorships) – Directors must not be
Marcus Clark (1996)
directors of >1 company
Defences:
 Ratification:
 Upon disclosure, breach is ratified by a special resolution of shareholders
 Not available where:
 Would constitute fraud on the minority; or
 Company is nearing insolvency and it would prejudice creditors; or
 Defeat a member’s personal rights; or
 Oppressive
 Relief:
 Court may relieve director partly (s1317S)/wholly (s1318) of liability if director has breached general
law duty/civil provision (NOT criminal), but:
 Has acted honestly; and
 Should fairly be excused from contravention of breach
 Director may also be relieved from general law duty by:
 Ratification; or
 Company’s constitution
Consequences of Breach:
 General law – civil remedies to company:
 Injunction
 Compensaton/damages
 Account of profits (give personal gains back to company)
 Termination of contract
 Statutory law – ASIC:
 Civil penalties:
 Applies to:
 S180 – duty of care, skill & diligence
 S181 – duty to act in good faith in the best interests of the company and for a
proper purpose
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LAWS7023 – Corporate Law

 S182 – duty not to make improper use of position
 S183 – duty not to make improper use of information
 S209 – prohibited benefits to related party
 S588G – duty not to trade while insolvent
 S1317G – penalty of up to $200,000
 S206C – disqualification from managing companies
 S1317H – compensation order
Criminal penalties:
 Applies where breaches of the following are intentional, reckless or dishonest:
 S184(1) – duty to act in good faith in the best interests of the company and for a
proper purpose
 S184(2) – duty not to make improper use of position
 S184(3) – duty not to make improper use of information
 S588G(3) – duty not to trade while insolvent
 Fines of up to $220,000; and/or
 Up to 5 years’ jail
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