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Topic 9 : Duties of Directors and Officers

Topic 9 : Duties of Directors and Officers. Life-Cycle of a Company. Incorporation (Starting Up) Classification of companies Registration Business Names Effect of incorporation. Running the Company Corporate liability Internal governance Fundraising Directors’ duties

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Topic 9 : Duties of Directors and Officers

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  1. Topic 9: Duties of Directors and Officers

  2. Life-Cycle of a Company • Incorporation (Starting Up) • Classification of companies • Registration • Business Names • Effect of incorporation • Running the Company • Corporate liability • Internal governance • Fundraising • Directors’ duties • Members’ rights and remedies • Financial reporting • Closing the Company • Insolvency • External administration

  3. Learning Outcomes • Define key concepts. • Explain when a conflict of interest might arise. • Outline remedies available for transactions entered into under conflicts of interest. • Discuss and apply the general law and statutory duty of care. • Explain ‘reliance on others’ (s 189) as a statutory defence to a breach of duty of care.

  4. Learning Outcomes • Discuss the significance and operation of the business judgment rule. • Discuss the remedies available for a breach of duty of care. • Apply the law to a set of facts. • Note: Sections in slides refer to the Corporations Act 2001 (Cth) and cases refer to case notes in the textbook

  5. Topic 9 - Outline • Duty to avoid a conflict of interest • Duty to act with care and diligence • Duty to prevent insolvent trading

  6. Duties of Directors and Officers • Duties arise from three sources: • General law (Common law and Equity) • Statutory law – Corporations Act • Company constitution and replaceable rules

  7. Duty to Avoid Conflict of Interest • Directors owe a fiduciary duty to the company. • They must not place themselves in a position of conflict of interest with the company. • Avoiding a conflict of interest means that directors must not use their position to: • Divert business opportunity from the company • Use company’s property for their private use (unless they have permission) • Make a secret profit

  8. Discussion: Case Examples • Refer to the following case examples and identity the conflict of interest: • Green v Bestobell Industries (1982) – page 500 • Breach of fiduciary duty – conflict of interest • Diversion of a business opportunity • Cook v Deeks [1916] – page 505 • Breach of fiduciary duty – conflict of interest • Diversion of a business opportunity • Regal (Hastings) v Gulliver [1967] – page 508 • Breach of fiduciary duty – making a secret profit

  9. Duty to Avoid Conflict of Interest • Statutory Duty: s 182 and s 183. • Directors must not improperly use their position to gain a benefit for themselves and/or someone else: s 182. • Directors must not improperly use information acquired because of their position to gain a benefit for themselves and/or someone else: s 183.

  10. Examples of Conflict of Interest • Taking contracts away from the company. • Accepting bribes or secret commissions. • Misusing company funds. • Taking opportunities that belong to the company. • Misusing confidential information. • Competing with the company. • (Ciro & Syms , 2009:271-273)

  11. Discussion: Case Example • ASIC v Vizard (1005) FCS 1037 • Read the facts of the case – refer to pages 37 and 498 of the textbook (The case is also on Blackboard under Topic 9) • What duties were breached by Mr Vizard? • Breached section 183 • What where the consequences of the breach? • Pecuniary penalty of $400,000 and disqualified

  12. Duty to Avoid Conflict of Interest • Disclosure of material personal interest – s 191 • A director must disclose any material personal interest to the Board (s 191) unless exempted (s 191(2). • If a director of a proprietary company discloses a material interest, the director will be able to vote on matters relating to that interest: s 194. • A director of a public company who has a material personal interest cannot be present or vote on matters relating to the interest: s 195. Note there are some exceptions.

  13. DISCLOSURE/VOTING PROCEDURE FOR PTY/PUBLIC CO PTY CO • S191: material personal interest, disclose at meeting of directors • RR194: Interested director may vote + retain benefits • If constitution silent, also declare to GM: common law PUBLIC Co • S191: same as pty co. • S195(1): cannot vote or be present in room. • S195(2): Board may allow director to vote • S195(4),(5): BOD quorum of 2 required, else GM required to deal. • Also declare to GM: common law

  14. Related Party Transactions • Chapter 2E only applies to public company’s. • S 207: Purpose is to prevent director’s giving away company’s assets • S 208: A related party transaction can only proceed with members approval, unless it falls within Division 2 exception • S 228 – a related party. • S 229 – a financial benefit.

  15. Related Party Transactions • S 210 – transactions at arm’s length. • S 211 - remuneration or reimbursement for officers and employees. • S 212 – indemnities, exemptions, insurance premium and legal cost. • S 213 – small scale benefits, under $5,000. • S 214 – benefits provided to or by closely-held subsidiaries. • S 215 – ‘fair’ benefits to related parties as members. • S 216 – court ordered financial benefits.

  16. Duty of Care and Diligence • Directors have a duty under common law and statutory law to perform their duties with due care and diligence. • Common law duty of skill, care and diligence • Directors expected to act a as reasonable person to take reasonable care and respond appropriately to foreseeable risks of harm

  17. Statutory Duty of Care • 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: s 180(1) • Were a director or officer of a corporation in the corporation’s circumstances; and • Occupied the office held by, and had the same responsibilities within the corporation as, the officer or director.

  18. Duty of Care: Executive Directors/Officers • Should take reasonable steps to place themselves in a position to guide and monitor the management of a company: • Daniels v Anderson (1995) 37 NSWLR 438. • Should inquire and obtain information: • Vines v ASIC (2007) 73 NSWLR 451. • Note page 531

  19. Duty of Care: Non-Executive Directors • Daniels v Anderson (1995) 37 NSWLR 438 • Outlines minimum standards – all directors must: • Be familiar with the company’s business • Monitor management • Inquire and obtain information • Not shut their eyes to corporate misconduct • Be familiar with the company’s financial position • Where a director has particular skills, the director is expected to use them: • ASIC v Rich (2003) 44 ACSR 341

  20. Discussion: Case Study • Read the James Hardy case on page 537. (Also refer to page 196) • What action was brought against the executive and non-executive directors? • What duties were breached? • What was the decision of the Appeal Court? • What was the recent decision of the High Court?

  21. Discussion: Case Example • Read the Centro case study on page 557. • Why did ASIC take action against Centro? • What was the outcome of the case? • Could the defendants rely on s 189? • What lessons can be learned from the Centro case for boards of directors?

  22. Statutory Defences • The business judgment rule is a defence against claims for a breach of duty of care: s 180(2). • Business judgment: means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation: s 180(3).

  23. Statutory Defences • Directors or other officers can rely on the business judgment rule if: • The judgment is made in good faith and for a proper purpose; and • They do not have a material personal interest in the subject matter; and • They have informed themselves about the subject matter; and • They rationally believe the judgment is in the company’s best interests: s 180(2)

  24. Statutory Defences • Reliance on information or advice: sec 189. • Reliance on information is taken to be reasonable if: • A director relies on information and advice given and prepared by the categories of people stated in s 189(a); and • The reliance is in good faith and after making an independent assessment of the information and advice provided (s 189(b); and • It is reasonable in the circumstances (s 189(c)).

  25. Statutory Defences • Delegation of responsibilities to others is a defence under s 190. • The Board has the power to delegate to others: s 198C and s 198D. • A director, however, may not be responsible for a delegate’s conduct: • If after making proper inquiries, the director had reasonable grounds to believe the delegate was reliable and competent: s 190(2).

  26. Consequences for a Contravention • Remedies under common law and equity: • Damages or compensation; • Account of profits; • Rescission of contract; • Return of property.

  27. Consequences for a Contravention • The company’s remedies: • Duty of care is owed to the company – if there is a breach that causes a loss then the company can sue a director or officer for damages. • Shareholders’ may bring proceedings in the name of the company under s 236 and s 237 if they have obtained leave (permission) from the court.

  28. Duty to Avoid Insolvent Trading • Companies are prohibited from trading while insolvent. • Directors have a duty to prevent insolvent trading: s 588G(1). • A director is in breach of this duty if all the elements under s 588G(1) are present.

  29. Duty to Prevent Insolvent Trading • The following elements must be present: s588G • The person was a director of the company when the debt was incurred. • A debt was incurred. • The company was insolvent when the debt was incurred or the company became insolvent because of the debt. • The director reasonably knew the company was insolvent. • The director/s did not stop the company from becoming insolvent.

  30. Duty to Prevent Insolvent Trading • Reasonable grounds for suspecting insolvency include: • Continuing loses • Overdue taxes • Inability to raise further capital • Warrants issued against the company • Special arrangements with creditors • Inability to produce timely financial reports • ASIC v Plymin (2003) – Harris et al, 2013:585

  31. Defences • Defences under s 588H apply to the duty to prevent insolvent trading. • Directors had reasonable grounds to expect that the company was solvent at that time and would remain solvent even if the company incurred that debt: s 588H(2). • A defence of reliance on information from other persons: s 588H(3).

  32. Defences • A director did not take part in the management of the company at the time the debt was incurred: s 588H(4). • The person took all reasonable steps to prevent the company from becoming insolvent: s 588H(5).

  33. Discussion: Case Example • Read the case of ASIC v Plymin (Water Wheel case) [2003] VSC 123 on page 570 of the textbook • What are the facts of the case? • What is the key legal issue? • What was the outcome of the case? • Were there any defences available to the defendants? • What penalties were imposed? • What are the key lessons learned from this case for directors?

  34. Summary • There is a fiduciary duty between directors and the company. • Directors have a fiduciary and statutory duty to act in good faith and in the best interest of the company. • This generally means that they must act in the best interest of the general body of shareholders. • Directors have a fiduciary and statutory duty to avoid a conflict of interest. • They must not use their positions improperly to gain an advantage for themselves or someone else.

  35. Summary • The duty to avoid a conflict of interest is breached when directors fail to disclose material personal interests in transactions with the company. • Directors have a common law and statutory law duty to act with due care and diligence. • Directors are expected to make enquiries and be properly informed so that they can properly manage the company. • A breach of duty of care gives rise to civil liability. • There are various defences against claims for a breach of duty of care, including the business judgment rule and reliance on others.

  36. Summary • A company must not trade while it is insolvent. • Directors have a duty to avoid insolvent trading. • In other words, directors must prevent the company from incurring debts when there are reasonable grounds to believe the company is insolvent. • If directors allow the company to trade while insolvent the courts may ‘lift the corporate veil’ and hold directors personally liable for insolvent trading. • Directors must take creditors’ interests into account if the company is insolvent.

  37. Next Topic • Topic 10: Members’ Rights and Remedies • Work through the Study Guidance Notes • Read the relevant sections in Chapters 12 and 19 • Complete learning activities

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