Directors Duties PDF

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DIRECTORS DUTIES  GOOD FAITH &  PROPER PURPOSE WHAT IS AN OFFICER? 

OFFICER - is a person in the corporation who – Section 9 of CA - Who makes or participates in making, decisions that affect the whole or substantial part of the business of the corporation OR - who has the capacity to affect significantly the corporation's financial standing; OR - in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excludes advice)

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TYPES of officers 1. 2. 3. 4.

Employee Executive officers Company secretary Director

*NOTE!: Definition of ‘officer’ is wider than ‘director’, allowing to captures a broader group of people who have control within a corporation. > Important to be aware of the statutory definition of ‘officer’ because of the instances where different statutory duties are applicable to officers and directors. WHAT IS AN EMPLOYEE? 

EMPLOYEE – does not refer to each employee of the company rather only to SENIOR MANAGERS OF THE CORPORATION.

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Managers are under CONTRACT OF EMPLOYMENT which always carries with a traditional common law DUTY OF FIDELITY (Faithfulness) owed by all employees of the company. EXAMPLE: It would be a breach of this duty to set up a competing business by using customer lists and other confidential information gained from an employer. WHAT IS AN EXECUTIVE OFFICER?

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EXECUTIVE OFFICER – one of the most SENIOR EMPLOYEES in the corporation Usually have a specific title such as CHIEF EXECUTIVE OFFICER (CEO) or Managing director Responsible for the management of the corporation. It is necessary to look at the meaning of MANAGEMENT and the degree of PARTICIPATION that is necessary to fit within the definition

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Commissioner for Corporate Affairs v Bracht (1989) Orminston J took a wide view of the meaning of both management and participation so that it included participation in the corporation decision-making process and was not confined to the ultimate decision maker but still had to be more than merely having some responsibility.

Shafron v ASIC 2002 FACTS: ASIC brought an action against several non-executive directors and executive officers concerning their role in the restructure of the James Hardie group of companies 

Peter Shafron was a co-company secretary and a group general counsel

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Shafron was a ‘officer’ of the company because of his role as a secretary (s. 9)

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He claimed that his performance was not of a secretary but of a general counsel, therefore, was not an ‘officer’ because in that role he was not the ultimate decision maker

HELD: Lower courts found Shafron’s performance as an ‘officer’ when engaged in the defaulting conduct 

Shafron was hired to act in both capacities and he could not neatly divide his two roles, therefore HC ruled that Shafron was acting as second or third most senior executive in the James Hardie company. Acting in such position meant that he was making significant decisions that made him an officer of the company, not only with respect to the restructuring proposal but also other matters

SIGNIFICANCE: Persons with multiple roles in a company will be assessed according to their whole position and their time cannot be divided up to meet different roles. Shafrons role as a company secretary and a general counsel concluded to him not having separate and distinct roles

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia (2010) The Buzzle case narrows the scope of the meaning of officers to persons who are acting as part of the company’s internal governance structure. It is possible, however, that external persons who have significant influence over the company may be shadow directors. HELD: Apple was not an officer of Buzzle. When it had discussions with Buzzle’s management and made requests for Buzzle to change its operations, Apple was only acting to protect its own independent commercial interests and was not participating in making decisions for Buzzle. Apple clearly had the capacity to affect significantly Buzzle’s financial standing (as its refusal could cause the business to close) it did not have the capacity as part of Buzzles internal governance structure. Apple was only acting to protect its own independent commercial interests and was not acting as an officer of Buzzle. At [124] any bank or financial institution of significant worth, or any wealthy person or company had the same capacity… they have the capacity to affect the financial standing of every company. It would be absurd to say that on that account, the Commonwealth and State Governments, every bank, wealthy company and wealthy individual, is an officer of every other company owing duties to that company.

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Morley v ASIC (2010) - the general counsel and the chief financial officer were both found to be officers of the company

WHAT IS A COMPANY SECRETARY? 

COMPANY SECRETARY – the chief administrative officer in the company and usually responsible for much of the company legal compliance obligations

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public company is required to have a company secretary – Section 204A

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Company secretary bound by same statutory duties as directors in ss. 180-183 and is appointed by the board of directors s. 204D CA  Secretary must be > 18 yrs old – s204D 

Duty of care and the stand of performance of a company secretary same as director

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Company secretary duties and responsibilities summarised – s188(1) CA

Corporation Act 2001 a) requirement for a company to have a registered office s. 142

f) lodgment of notices with ASIC s. 205B

b) requirement that the registered office be open to the public s. 145

h) lodgment of annual reports with ASIC s. 319

c) change of principle place of business s.146

g) issue of shares s. 254X

i) lodgment of half-year reports with ASIC s. 320 j) response to extract of particulars s. 346C k) response to return of particulars s. 348D

d) change to proprietary company’s member register s. 178A

l) change to proprietary company's ultimate holding company s. 349A

e) change to proprietary company’s share structure s. 178C

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] A Company secretary in modern times is an officer of the company with extensive duties and responsibilities …[he or she] regularly makes representations on behalf of the company and enters into contracts on its behalf which come within the day-to-day running of the company’s business… [he or she] is certainly entitled to sign contracts connected

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with the administrative side of the company’s affairs, such as employing staff and ordering cars [he or she] has no apparent authority to enter into commercial transactions upon [their] own, save for transactions of an administrative kind required for the day to say running of company affairs

WHAT IS A DIRECTOR?  

Directors - defined the same way as general officers – s9 CA They are persons who: - Who makes or participates in making, decisions that affect the whole or substantial part of the business of the corporation OR - who has the capacity to affect significantly the corporation's financial standing; OR - in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excludes advice)

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The definition is exhaustive and it is up to the courts to identify a director by looking at the functions of the person rather than their job title.

Definition does highlight that there are three possible categories of directors for the purpose of the corporation act: 1. Officially appointed directors 2. Directors who are acting under a defective appointment (de facto directors); 3. Persons who exercise directional control but are not officially appointed (shadow directors) WHAT IS A ‘DEFACTO’ DIRECTOR? 

DEFACTO DIRECTOR – person acts in the position of a director without proper authority, that person may nonetheless still be treated by the law as being a director of the company.

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The significance of being treated as a director is that the FIDUCIARY DUTIES AT GENERAL LAW and the STATUTORY DUTIES imposed on directors – pt 2D.1 and 588G

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Corporate Affairs Commission v Drysdale (1978) Mason J described a de facto director as one “who acts in the position [of director] with or without lawful authority A person can be found to be a defacto director even where they do not actively consent to act as a director, provided that their actions demonstrate that they are ‘acting in the position’ of director. A person does not need to be said to have engaged in activities that only a director could lawfully have done (such as signing documents as a director of the company) provided that the person can be said to have occupied the position as director-demonstrated in the Grimaldi case

Grimaldi v Chameleon Mining NL (NO 2); Chameleon Mining NL v Murchison Metals Ltd (2012) 200 FCR 296; [ HELD: although Grimaldi acted as a consultant for Chameleon Mining this did not prevent a finding that he was a de facto director APPLY TEST of principles applicable to determine if a person is a de facto director:  Whether the person has assumed responsibility to act as a director;  The nature of the corporate governance structure and the position the person occupies within it  What the person actually did, as distinct from any job title  The cumulative effect of the activities relied on, with the whole of the circumstances being looked at in the round;  Whether the company regarded the person as a director and held him or her out as such;  Whether the company regarded the person as a director and held him out or her out as such;  Whether third parties considered that the person was a director; and  Whether the person was consulted about or participated in directorial decisions.

WHAT IS A ‘SHADOW’ DIRECTOR? 

SHADOW DIRECTOR – A person who is able to exert SIGNIFICANT INFLUENCE over the decisions made by the board of directors

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Test to determine whether the person is a shadow director – Buzzle Operations Pty v Apple  Whether the officially appointed board of directors is ‘accustomed to act in accordance with the person’s instructions or wishes. *NOTE!: an external person will not be held to be a shadow director where they impose conditions for their continued support of the company on a commercial arm’s length basis – Buzzle Operations Pty v Apple NOTE!: secured creditors unlikely to be held to be shadow directors by imposing conditions on their continued financial support for companies in distress – Buzzle Operations Pty v Apple Re Akron Roads Pty Ltd (2016)

Clearly a shadow director need not be someone who attends board meetings. This statutory definition contemplates someone as a source of influence over the board members. A de facto, on the other hand, is somebody who acts in the position of a director. Thus, such a person would usually be somebody who participates in board decisions as a director but who was not formally appointed a director. A person who acts in a managerial position or carries out a managerial function could not normally be said to be acting in the position of a director.

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TYPES OF DIRECTORS

 CHAIRMAN OF THE BOARD (CHAIR PERSON) - - their role is to manage the company meeting and will work closely with the chief executive officer and company secretary in the preparation for all board meetings and determining the agenda of board meetings.  MANAGING DIRECTORS - General role involves being accountable to the board for everyday decisions and being responsible for the executive employees of the company. 

The replaceable rule allows the managing director to be appointed with any of the powers of any director in order to fulfil these day-to-day running requirements – s 198C

 EXECUTIVE DIRECTORS - Required to manage significant part or aspect of the business of the company. It is the executive director’s responsibility to account for the everyday management, actions and decision-making of the senior management of the company in respect of that element of business.  NON-EXECUTIVE DIRECTORS - Are usually appointed to the board with the intent that they will bring an external, independent view to the management of the company. 

They are required to consider the interests of the company as a whole and the perspectives of shareholders

 NOMINEE DIRECTORS - Appointed to represent the needs and interests of a particular stakeholder group. Stakeholders who usually have a nominee director considering their interests include a major shareholder, a large creditor or joint venture representatives.  ALTERNATE DIRECTORS – Created under replaceable rules – 201K a director is able to, with the approval of other directors, appoint an alternate director to utilise any or all of the director’s powers. This alternate director will be able to utilise the powers of the director when the director is unable to be present at a meeting. QUALIFICATION FOR COMPANY DIRECTORS     

The person must not be disqualified from being a director: s 201B(2). The person must be at least 18 years of age: s 201B(1). The person must be an individual: s 201B(1) The person must agree to the appointment: s 201D. If mentally incapacitated they must appoint a personal representative or a trustee – 201F

HOW CAN A DIRECTOR BE REMOVED FROM OFFICE? 

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Directors can be removed:

1. By the company complying with a REMOVAL procedure in the corporate constitution; (the term of a directors office is usually specified in the constitution) 2. By the company complying with the STAT CONDITIONS 1. In a PRORPRIETARY COMPANY – an ordinary resolution of 50% can remove a director from office and that an ordinary resolution of 50% appoint another person as director instead – s203C of CA 

NOTE!: This is a replaceable rule – s141 CA

2. In a PUBLIC COMPANY – only way to remove a director is through passing an ordinary resolution 50% - 203D of CA 

NOTE!: This is regardless of whether the constitution states otherwise!!!

3. By RESIGNATION– s203A 4. By the director BECOMING DISQUALIFIED from managing a corporation – s206A o

Disqualification via conviction: If a person is convicted of any offence that is a contravention of the CA that is punishable by imprisonment for more than 12 months, or it is an offence that involves dishonest that is punishable by a. IMPRISONMENT FOR >3MONTHS, then they may be disqualified from managing companies automatically: s 206B (1) Additionally, if a director is convicted of an offence which has the capacity to significantly affect the corporations financial standing, then disqualification will occur: s 206B (1). b. DISQUALIFICATION BY BANKRUPTCY Undischarged bankrupts are also automatically disqualified from directing companies under s 206B (3). People who have undertaken deeds of arrangements under the Bankruptcy Act 1966 (Cth) and have not fully satisfied their terms under s 206B (4) c. COURT ORDER- The courts through the CP act have the power to disqualify an individual from directing and managing corporations - s 206c

ASIC V Adler (2002) FACTS: Mr Adler obtained an unsecured loan from HIH(a company that he was the director and shareholder of) to purchase share in a company that he was involved in, which the court held was in breach of his statutory duties (ss 180 (1) – 182) which are listed as civil penalty provisions under s 1317 E and issued a declaration of contravention of civil penalty provisions. The declaration allowed the court to imposed a period of disqualification of Mr Adler under S 206C HELD: The court disqualified Mr Adler from management for 20 years. In reaching that decision, the court stated that the determination of disqualification periods is governed by the following

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relevant factors;

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Specific deterrence (committing a breach in the future), general deterrence (penalty harsh enough to discourage future people from engaging in similar conduct), dishonest conduct should attract longer periods of disqualification, the amount of loss suffered by the company, whether the defendant abused a position of trust, whether the company or defendant has a history of similar breaches.

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This case provides a guidance on how to determine the length of a court-ordered disqualification.

CAN SHAREHOLDERS MANAGE A COMPANY?  directors are not agents of the shareholders and so are not bound to implement shareholder resolutions - Automatic Self-Cleansing Filter Syndicate v Cunninghame 1906

Automatic Self Cleaning Filter Syndicate v Cunninghame FACTS: In this case, the shareholder believed that the company needed to sell some of its assets. The shareholder went to a members meeting to try and pass a resolution that the company must sell their assets. Ordinary resolution (50%) passed. Board of Directors argued that they would not sell their assets, regardless of the resolution, as they believed that the directors are in charge of the management of the company; not the members HELD: The resolution was held invalid. The Court stated that it didn’t matter that a resolution had passed. Selling assets is a management decision. Therefore, it is a decision which can only be made by the Board of Directors. WHAT POWERS DO A SHAREHOLDER HAVE IN REGARDS TO CORPORATE GOVERNANCE? 

If any issue arises between a director and shareholders the following can be done 1. Shareholders can have the director removed – s203, 203D of CA 2. Shareholders replace the rules and change the constitution with a special resolution (75%) 3. Shareholders can sell their shares and leave

GOOD FAITH & PROPER PURPOSE WHAT IS THE DUTY TO ACT IN GOOD FAITH AND IN COMPANYS BEST INTERESTS (p396-397) The fiduciary duty to act in the company’s best interests is a general obligation to act in the interests of its members, at least when the company is solvent. This is also known as the

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shareholder primacy rule. In acting in the interests of the company, ordinarily, shareholders will also benefit through increased profitability, dividends and capital gains. The requirement to act in ‘good faith’ is a common element of corporate regulation and is generally taken to refer to an obligation to act honestly.

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For example, a director who acts solely to benefit themselves will not be acting for a proper purpose nor will they be acting in good faith in the best interests of the company. o

Both of these elements will be found in s181(1), which was considered by Black J in

Colorado Products Pty Ltd (in prov liq) (2014) at [420] ‘Section 181 may be contravened if a director promotes his or her personal interests in a situation where there is a conflict or real substantial possibility of a conflict between those interests and the company’s interests’.

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GOOD FAITH - Directors have a duty to act honestly in the company’s interests as the director’s perceive those interests. The duty is mainly present under EQUITY and STATUE NOTE!: To ascertain whether there has been a breach of this duty YOU MUST CONSIDER WHETHER IT HAS BEEN BREACH UNDER EQUITY OR STATUE! Different remedies apply! TO WHOM ARE DIRCETORS DUTIES OWED

(pp385-392) The question of to whom the duties of directors are owed is normally answered by the phrase ‘to the company as a whole’. This was interpreted by the United Kingdom Court of Appeal as mean...