Director\'s Duties - Concise, easy to understand PDF

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DIRECTOR DUTIES: Directors have a fiduciary relationship with their company, which is a duty under general law. They would be in breach of in equity and in tort and statute for breaching their fiduciary duties. Under general law, the available remedies would be damages and compensation measured in tort. In Daniels v Anderson, the Court affirmed that these duties are imposed under general law in the tort of negligence and equitable duty of care. Provision s180 Case Daniels v AWA ltd

Permanent Building Society (in liq) v Wheeler

Explanation to exercise care and diligence Explanation Requirements of the responsibilities of directors:  Take reasonable steps to place themselves in a position to guide and monitor the management of the company  Become familiar with the fundamentals of the business in which the company is engaged  Continuing obligation to keep informed about the activities of the company  Directorial management does not require a detailed inspection of daily activities, but general monitory of corporate affairs and policies, including regular attendance at board meetings  Familiar with the financial status by regular review of financial statements, capacity to understand them s180(1) prescribes a norm of conduct, and therefore requires consideration of the public interest, separate from the interest of the company, in determining whether the contravention has occurred. Directors were entitled to rely without verification on the judgment, information and advice of senior management. The right of reliance would be removed only where a director was aware of the circumstances that were so obvious that no person with a degree of prudence would have relied on the particular judgment, information or advice. They must satisfy themselves that the person they are relying on is competent and reliable. Vrisakis v ASC: whether a director has exercised a reasonable degree of care and diligence can be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question. This take place from the perspective of the company’s circumstances and the office and responsibilities of the individual director whose conduct is in question. The reference to ‘harm’, per ASIC v Cassimatis (No 8), is best understood as a reference to harm to any of the interests of the company, interests which are not limited to pecuniary loss or financial harm but extend to unlawful conduct having non-pecuniary consequences, such as loss of

corporate reputation.

ASIC v Adler

ASIC v Healey

ASIC v Rich

ASIC v Gallagher held that the test is an objective one in the sense that the question is what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if he was acting on his own behalf. Inherent in this test is the balancing exercise of harm and benefits. Must be established on balance of probabilities.  ‘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 circumstances if he or she was acting on their behalf’  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 director’s position and responsibilities in the company.  Under the implied term in a contract of employment of an executive director, the director will be taken to have promise the company that they have the skills of a reasonably competent person in their category of appointment.  The defence of s198D fails if directors did no 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. Non-execs have the same standard of care as execs as they had every opportunity to make enquires, and to check the correctness of the reports. s180(1) expressly contemplates the circumstances of the company are relevant to the content of the duty. Directors cannot substitute reliance upon the advice of management for their own examination of an important matter falling within the Board’s responsibilities as with the reporting obligations. Directors must have the objective duty of competence in understanding financial information, per s295(4)(d). Non-exec directors would owe the same duties as exec directors  ASIC alleged that the director had special responsibilities beyond the scope non-exec directors by reason of his position being chairman of board, chairman of finance and audit committee and because of his high qualification, experience and expertise relative to other directors.  ASIC’s case was that a person in director’s position and with his experience and qualifications would have known or ought have known the company was in financial difficulty and in this respect owed a higher standard of care because of position, experience

AISC v Vines

ASIC v McDonald

Defence Business judgment rule

AISC v Mariner

ASIC v Rich

and qualifications. In this case, the director did not meet such standards.  The director’s responsibilities include: - General performance of board - Employment of finance director - Public announcement of information - Making recommendations board as to prudent management of the company - Flow of financial information to board - Establishment of systems to allow flow of information to board  The court held that the factual responsibilities of chairman of a listed company were more than ceremonial and procedural matters.  Referred to and accepted principles in AWA that a chairman has primary responsibility of selecting matters and docs to be brought to boards attention in formulating policy of the board and in promotion of position of company The basis of the profit forecast was unlikely to be achieved and that the director knows or ought to have known this and therefore under a duty to advise the company’s due diligence committee. Execs and non-execs made misleading and deceptive conduct by releasing false information into market. Directors must comprise the skills to monitor the actions of management for any special tasks particular to their appointment. Explanation s180(2)  Makes the judgment in good faith for a proper purpose  Do not have a material personal interest in the subject matter  Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate  Rationally believe the judgment is in the best interests of the company BJR successful: The directors had extensive backgrounds and expertise in MA and finance. Such backgrounds informed their judgment calls, assessments of risk and the strategies they pursued in relation to the transaction. To rely on s180(2) there was a need to balance risk and reward analysis. Business judgment rule considered:  Court held that ‘matters relevant to business operations of the corporation’ included matters of planning, budgeting and forecasting. The definition of business judgment encompassed the setting of policy goals, the apportionment of responsibilities between the board and senior management relating to corporate personnel and the termination of litigation provided these matters

Defence s189

Duke Group Ltd v Pilmer

Sheahan v Verco

s190

ASIC v Adler

involved a decision to take or not to take action.  In order to be a business judgment a director must make a conscious decision to take or refrain from taking action. (i.e. simple neglect to deal with proper safeguards with no evidence that he turned his mind to a judgment of what safeguards there should be has not made a BJR. Explanation Director may rely on others:  (a)(i) an employee whom the director believes on reasonable grounds to be reliable and competent in relation to the matter  (ii) professional adviser or expert in relation to matters  (iii) another director or officer in relation to matters within the director’s authority  (iv) committee of directors on which the director did not serve in relation to matters within the committee’s authority  (b) reliance must be made in good faith and after making an independent assessment of the information or advice Directors are informed and experienced business people are expected to make sound estimates of share and company valuations. They cannot simply accept an expert’s advice without question where this involves disregarding their own knowledge and suspending judgment. The extent of non-exec directors trusting managing director depend on the nature and circumstances of the company. In this case, neither of them sought any information as to how the business was run, they did not become familiar with the business, they did not take reasonable steps to guide and monitor. Directors may delegate duties under s198D:  (1) directors will be responsible for the exercise of power by the delegate as if the power had been exercised by directors themselves  (2) avoids responsibility if believed on reasonable grounds that the delegate would exercise the power in conformity with the duties, in good faith, after making proper inquiry if the circumstances indicated the need for inquiry and the delegate was reliable and competent in relation to the power delegated and would exercise the power in conformity with the duties Factors to determine whether the delegation is reasonable:  Function that has been delegated is such that ‘it may properly be left to such officers’  Extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry  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 whom reliance can be placed, knowledge that the delegate is dishonest or incompetent

Thorby v Goldberg

Remedy Common law

Statutory

Provision s181(1)(a) and (b) Case Howard Smith Ltd and Ampol Petroleum LTD

Whitehouse v Carlton Hotel

Parke v Daily News

will make reliance unreasonable  Risk involved in the transaction and the nature of the transaction  The extent of steps taken by the director  Whether the position of the director is executive or non-exec Directors must bring to bear an independent judgment in the exercise of their powers, which prohibits directors from delegating discretionary powers to another or from binding themselves as to the future exercise of those powers. Directors will breach their duty if they enter into agreements with outsiders that they will vote in a certain way at future board meetings. Directors may enter into contracts on behalf of the company, whereby they agree to vote in favour of a particular course of action if they properly consider this to be in the interests of the company at the time the agreement is entered into. Explanation Company can sue the director or officer for damages if their breach of common law standard of care causes loss. Shareholders may bring proceedings in the name of the company under s 236 if they obtain prior leave of the court. Designated civil penalty provision under s 1317E, maybe ordered to pay a pecuniary penalty of up to $200k under s 1317G; compensation to the corporation for damage suffered by it under s1317H, or be disqualified from management under s 206C.

Explanation Fiduciary duty to act in good faith and in the best interests of the company and for proper purpose Explanation Directors may act for improper purposes even where a share issue is not motivated by self-interest. Directors breach their duty to act for proper purposes if they use their power to issue shares for the purpose of creating a new majority shareholder or to manipulate control within the company. This is even where the directors may honestly believe their actions are in the best overall interests of the shareholders. It is impermissible for the directors of a company to exercise a fiduciary power to allot shares for the purposes of destroying or creating a majority of voting power. This is the case if the manipulation of voting power is for the best interests of the company. Payment to employees against the benefit of shareholders. Held that the benefit of the company means the benefit of shareholders as a general body. The payments are not reasonably incidental to the carrying on of the company’s business, they were gratuitous payments to the detriment of shareholders and company as a whole because the company

Terk Corp Ltd v Millar

Walker v Wimborne

Provision s182(1)(a) and (b) Common law S191

Grand Enterprises v Aurium Resources Transvaal Land Co v New Belgium (Transvaal) Land and Development Co

s195

is in liquidation stage. The director’s duty is to the company thus the shareholders as a whole. However, there must be decent respect for other interests but does not itself cause a breach of their statutory duties owed to the company. Impropriety lies in the directors’ purpose. The directors ought to be allowed to consider who is seeking control and why. If they believe that there will be substantial damage to the company’s interest upon takeover, then their exercise of power may not be improper. The directors must act in good faith, there must be reasonable ground for their belief. Duty owed to groups: Directors must take into account the interests of its shareholders and its creditors, because failing to do that will have adverse consequences for the company.

Explanation Fiduciary duty to not improperly use their position to gain advantage for themselves or someone else or cause detriment to the company. General equitable obligation to avoid conflict between duty and personal interest without the consent of the company (1) Director who has a material personal interest in a matter that relates to the affairs of the company (s53) must give the other directors notice of the interests (2) Does not need to give notice of the interest if: - (a) Interest falls within an exempted category - (b) Company is Pty Ltd and other directors are aware of the nature and extent of the interest - Director has given a standing notice of the nature and extent of the interest under s192 The word ‘material’ conveyed the idea that the interest must be of some substance or value rather than a slight interest. Entering into contracts with director’s company: (1) Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards and owes a duty to another company which is proposing to enter into engagements with the company of which he is a director, he falls within the rule of disclosing any conflicts of personal interest. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others. (2) Director of public company who has a material personal interest in a matter that is being considered at a director’s meeting must not be present while the matter is being considered at the meeting or vote on the matter

Case Aberdeen Railway Co v Blaikie Bros

(3) (b) the other directors may pass a resolution to not disqualify that director from voting Explanation Personal interest ahead of the interest of the company: A corporate body can only act by agents, and it is the duty of those agents so to act as best to promote the interests of the company whose affairs they are conducting. It 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 a personal interest conflicting with.

The liquidators of the Imperial Mercantile Credit Association v Coleman

The inability to contract depends not on the subject matter of the agreement, but on the fiduciary character of the contracting party. Entered into transaction without the board knowing the nature of the transaction:

R v Byrnes

Although the director stated his interest but did not state clearly his interest or intention. If were known, the other directors would have declined his personal involvement. Improper use of position and definition of ‘improper’:

Chew v R

Impropriety 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. The state of mind is important: knowledge of the circumstances in which the power is exercised and their purposes or intention in exercising the power are important factors in determining the question whether the power has been abused. Gain advantage or to cause detriment:

R v Donald

It is necessary to establish not merely that the accused intended that a result should ensue, but also that the accused believed that he intended result would be an advantage for himself or herself or for some other person or a detriment to the company. Gain advantage or to cause detriment:

Totex-Adon Pty Ltd v Marco

Not disclosing interest that the director of both companies which entered into contracts between each other. The companies that received payment were still gaining an advantage and it was not necessary to the directors to gain a profit. This advantage was gained because the payments were made without the usual checking and scrutiny. Company’s funds are mixed with the director’s personal funds or funds with another company:

Director failed to open separate bank account and all its receipts and payments were deposited to own account. The appropriation of Directors must not make secret profits: corporate property, information and Under a fiduciary duty to account to the company for benefits derived where the benefit was obtained in circumstances of conflict. opportunity Gray v New Augarita Director used company funds to purchase company shares at discounted Porcupine Mines Ltd prices: Where a director places himself in the position of contracting with his company, the contract is generally not binding, for a director is not entitled to place himself in a position in which interest is in conflict with his duty. Even if the contract is not avoided, the director remains accountable to the company for any profit that he may have realised from the deal.

Furs v Tomkies

Regal (Hastings) v Gulliver

A director who wishes to keep for himself the benefit arising from some deal with his company has to establish that he has Undisclosed profit as director disclosed to the other party a secret only known to him because of his position and received a benefit in return. The payment was obtained by the respondent in course of a transaction which he was carrying out on behalf of the company in execution of his office as managing director. The directors acted in good faith and the company had not been deprived of a business opportunity because it did not have the required funds. The company benefited as a result of the other shareholders taking up shares in the subsidiary. But the intention was not disclosed. However, the rule of equity insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, depends on the mere fact of a profit having been made. The profiteer, however well intentioned, cannot escape the risk of being called to account.

Industrial Development Consultant Ltd v Cooley

Now, directors can avail themselves of s 1318 as it relieves an officer from any liability for negligence, default, breach of trust or breach of duty if it appears that he acted honestly and having regard to the circumstances of the case, he or she ought fairly to be excused. Man...