Director's Duties

Must be more than subjective standard.

“Good faith”: Directors genuinely believe that they are acting in the best interests of the company.

The director must act in a way a reasonable director would consider to be in the best interest of the company.
Park v Daily News 1962 Ch 927

The director must proritize the benefit of the shareholders

As long as directors do not disregard interest of shareholders entirely, they are allowed to consider other interests beyond those of shareholders (such as employee)

Directors need to consider the interests of employees in certain situations
Part 5.8A

Company interest is the same as collective interest of the members/shareholders (Park v Daily News 1962 Ch 927)

Interest of the employees come after shareholder's interest Park v Daily News 1962 Ch 927

To avoid undisclosed conflict of interest

No conflict

Not putting themselves in situation where they will be tempted to prefer their own interest, or someone else's interests, over those company

The director can be in breach if he or she acts honestly and does not make a profit

NO profit

the director is responsible for the company for profits that the director gain from using company's information or his position

Test

whether there is a "real sensible possibility of conflict" Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 103 per Maison J

Exception for Both rules

Company's fully informed consent has been obtained (Disclosure). Full disclosure to general meeting, general meeting vote to ratify, OR

The constitution often allows the board of director to approve at general meeting

Example of Breach of conflict rule

Misuse of company funds (Paul A Davies Pty Ltd)

Taking up a corporate opportunity (Mordecai v Mordecai)

Misuse of confidential information (Thomas Marshall v Guinle - competed with the co, soliciting business from the co’s customer)

Statutory duty

Misuse position - section 182: " A director, secretary, other officer or employee of a corporation must not improperly use their position to gain advantage for themselves or cause detriment to the corporation"

Misuse information - section 183: "a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to gain an advantage for themselves or cause detriment to the corporation"

2. General law duty to exercise power for proper purpose and the corresponding statutory duty under s 181(1)(b)

The legal test obliges directors to not have substantial purpose that is improper .

s.181; statutory duty - “Directors have a duty to act in good faith in the best interest of the Co. and for proper purpose”

● s.184(1); if “reckless or intentionally dishonest” then can be criminal liability and therefore deserving of a harsher penalty

Example: making a share issue to defeat a know existing or impending takeover bid, is an improper purpose. However, proper use of this power ( rising capital, purchase assets)

duty not to improperly use of position under s182

duty not to make undisclosed personal profits while acting in their position: regal Hastings ltd v Gulliver 16e:p438

duty to to improperly use of information under s183

PERMANENT BUILDING SOCIETY (IN LIQ) v WHEELER AND ORS, Supreme Court of Western Australia, Full Court, 28 July 1994

4. Duty of care, skill and diligence
Sec.180

Evaluation of the breach

Subjective Elements:

Responsibilities

Take account of special background, qualification, management responsibility of officer. (ASIC v Rich, ASIC v MacDonald)

To some extent, the subjective skills/ability/background come into consideration. Eg if director was appointed BECAUSE of his special skills and expertise.

“ In the corporation’s circumstances”
Urgency and magnitude of problem faced by the co, financial affairs, size and business, constitution, composition of board.

Objective elements

Standard of care of executive directors

should take reasonable steps to place themselves in a position to guide and monitor the management of co. (Daniels v Anderson [1995])

Standard of care of non-excutive directors

not as high as exclusive directors

Defences

Business judgment rule
S. 180(2) : not liable if
Judgment is made in good faith for a proper purpose
No material personal interest
Directors were informed
Rationally believed that the judgement is in the best interests of the corporation.

S.180(3) – definition of “business judgment’ : any decision to take or not take action in respect to a matter relevant to the business operations.

Reliance
s 189: – reliance on
Reliable and competent employee;
Professional advisor or expert
Another director
A committee of directors
Must act in good faith, reliance on reasonable grounds.

Remedies

s1317 :disqualification for a period; (this is not avail under general law)
pay the Commonwealth (the government) a pecuniary penalty of up to 2000 penalty units.
the court may order compensation to co. if there is loss suffer. (similar to damages/eq compensation)

s.180(1) does NOT give rise to criminal liability – unlike other duties. “negligence” is not dishonest.

5. Duty to retain discretions

The person is a director of the company when it incurs a debt

The company is insolvent at that time, or becomes insolvent by incurring that debt or debts including that debts

A person who is not solvent; or if and only if the person is able to pay all the person's debts as and when they become due and payable s.95

There are reasonable grounds for suspecting the company is insolvent or would so become insolvent at that time

a company incurs a debt at a particular time; and at that time

The director is aware that such grounds exist or a reasonable person in a like position in a company those circumstances would have been so aware

Definition

a person who is appointed to the position of a director regardless of name given to their position, includes: s9

de facto director

not formally appointed but carries all the duties as a director

top level management

how that person's role is perceived by outsider

shadow director

not appointed but give directions or instructions to director to act upon

Number of Director

Proprietary co.

Min: 1

s.201A(1), Saloman

Public co.

Min: 3

Types of Directors

Managing directors

Chair of directors

Executive directors

Non-executive directors

Alternate directors

Procedure

set out in RR or Constitution

Board Meeting

passing all solutions

s.248G (RR)

resolution must be passed by a majority of the votes cast by directors entitled to vote

s.248C (RR)

reasonable notice given for directors’ meetings

s128F (RR)

2 directors (quorum)

s195

public co.: director is prohibited from being present and voting at board meetings where a matter in which the director has a material interest is considered.

s251A(1)(b)

proceedings and resolutions recorded in minute books

Commitees of the Board

Delegated power from the board

Ensure important matters are given full attention, and Workload distributed

eg: audit committee

Appointment of Directors

s.201B(1)

A person under 18 cannot be appointed

General law

Rescission of a contract

An order to requiring property to be held on constructive trust for the benefit of the company

Damages and compensation
(ASIC v Adler & Ors [2002] NSWSC 171 (http://www.austlii.edu.au/au/cases/nsw/NSWSC/2002/171.html)

Injunctive relief

Statutory law

If breached s180:
- Civil penalty and no criminal liability (s.180(1)) ,
- Disquilification, pecuniary penalty
and compensation to company (s.1317E)

If breached s181, s191-196, s182-183:
- Civil penalty up to $200k
- Compensation to corporate
- Disqualified from management
- Criminal offence if a director was

If breached S588G:
- Civil penalty up to $200k,
- Compensation to corporation for loss and damage ,
- Disquilified from management, liquidator may take action to recover the debt to co's loss suffered by unsecured creditors,
- Creditors can sue the director,
- Criminal penalties if the director's failure to prevent the company incurring debt was dishonest

If breached CH2E:
-Breach of s208 does not invalidate the transaction (s103)
- Civil penalty provision
- Criminal offence
- Injunction by court