Statutory Duties unders 180 to 183 PDF

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Duties under ss 180-184, Application alongside the common law and equitable duties, Civil Penalty Provisions, Enforcement

STATUTORY DUTIES The Act and the underlying law • Sections 180-184 (where we find the statutory directors’ duties) have effect in addition to, and not in derogation of, any rule of law (common law or equitable duties) which applies to people satisfying the definitions of director, or officer, or employee •

May alter who owes the duty

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May alter who can enforce the duty

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Provides access to different types of consequences, remedial or otherwise

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Often will have concurrent breaches of both statutory and non-statutory duties:

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NB: s 185 and s 193

STEP 1) Define a director Director: defined in s 9 Is a person who: Is appointed to the position of director (de jure director) Is appointed to the position of an alternate director and is acting in that capacity, regardless of the name given to their position; • if:

And unless the contrary intention appears, a person who is not validly appointed as a director

They act in the position of director (de facto director); or

The directors of the company are accustomed to act in accordance with the person’s instructions or wishes (shadow director) Types: •

Chairperson

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Managing director/CEO

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Executive director

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Non-executive director

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Nominee director

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Alternate director (s 201K(1) RR)

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Who does the act apply to? (Duties under Corporations Act) •

Sections 180-181: director or other officer

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Section 182: director, secretary, other officer, or employee

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Section 183: director, other officer or employee

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Section 184: director or other officer

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Section 191: director

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Section 588G: director

De facto directors: –

Someone appointed to the position of director regardless of the name given to that position

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Person who is not appointed but acts in the position of a director

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Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565

“Whether person acts as a director ‘will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned”.

Relevant factors include: –

Size of company

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Internal practices and structures

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How person was perceived by third parties

Shadow Directors Person who is not validly appointed as a director but on whose instructions the directors of the company are accustomed to act –

Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustees (1994) 13 ACSR 386

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Outside person calls the tune and directors dance

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Directors perform positive acts, not simply stand aside

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Will of the outside person not the independent will of the board determines actions of board

Officer: defined in s 9 (MAY BE IN BREECH TOO) •

A director or secretary of the corporation; or

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A person:

– Who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or 2

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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; or: A receiver, administrator, liquidator of the corporation

ASIC v Citigroup Pty Ltd (No 4) (2007) 160 FCR 35: –

Day trader (Mr Manchee) with a daily trading limit of A$10m

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Held: not an officer as he has no engagement in managing or policy

Shafron v ASIC (2012) 88 ACSR 126 – Peter Shafron held dual role as general counsel and company secretary of JHI (argued that he had breached duties as general counsel not as company secretary) – Held: it is not possible to divide the roles neatly so that it could be determined when one hat was being worn. His work in ‘shaping and developing’ the company re-structure proposal that went to the board for a final decision was enough to indicate that he was ‘participating’ in the decision.

ASIC V ADLER IS A PERFECT BREECH PRECEDENT: Adler was a non-executive director of HIH •

Court had to consider, was he also a director / officer of other HIH entities?

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Yes, he was also an officer of HIHC, a wholly owned subsidiary of HIH

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He was never appointed as a director or officer, but:

– As a director of HIH, and a member of HIH’s investment committee, he participated in making decisions of HIHC’s business which affected the whole or a substantial part of that business

Breach of s 181 in ASIC v Adler •

ASIC argued that Adler had breached s 181 in relation to the loan to PEE.

• Adler caused PEE to buy, on market, $3.9m in HIH shares, but publicly stated that this was a personal purchase by him • Adler was already a large shareholder of HIH, and this had the effect of improving the share price of HIH, which Adler took advantage of by selling the HIH shares owned by Adler Corp • ASIC made the same argument against Williams and Fodera, but was unsuccessful (lack of diligence instead)

Section 181 - Good faith and proper purpose Elements: •

A director or officer [note: not employee] 3

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Must exercise their powers and discharge their duties

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In good faith in the best interests of the corporation

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AND

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For a proper purpose

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Two limbs

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This is a civil penalty provision

What is good faith? – CAN LINK WITH BONA FIDE •

Has been equated with honesty and this suggests a subjective test

– Recall: Advance Bank v FAI Insurances Aust Ltd (1987) 5 ACLC 118 The duty of good faith – to act honestly has 2 components: 1) Subjective: act honestly 2) Objective: ‘reasonable person’ •

Two possibilities:

– Where directors actually believe they are acting against the company’s interests they will breach – Where they assert a belief that they were acting in the company’s best interest the court will look for objective evidence to support this

What is for a proper purpose? •

Test:

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Power is given for particular purpose/s and must be used for that purpose

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This is usually located in the constitution

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It will be breached if the substantial purpose of exercise of power was improper

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Bona fides is relevant but honest behaviour does not prevent a finding of improper conduct

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Where multiple purposes, would power have been exercised but for the improper purpose?

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(Permanent Building Society v Wheeler (1994) 14 ACSR 109)

Improper Use of Position (182) and use of info (183) These sections do not depend on the directors’ intentional impropriety, or actual detriment An act may be improper regardless of the director’s belief that they are acting honestly: R v Byrnes (1995) 183 CLR 501 Objectively: 4

Impropriety on the part of a director may be consistent with a breach of the standards of conduct expected of a person in the director’s position with the knowledge of the directors duties, powers and authority of that position

Improper use of position – s 182 •

Elements:

Director, secretary, officer or employee Must notimproperly use position to hain advantage for themselves or another •OR Cause detriment to the corporation –

Eg ASIC v Vizard (2005) 145 FCR 57

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This is a civil penalty provision

Improper use of information – s 183 •

Elements:

– A person who obtains information because they are (or have been) a director, officer or employee –

Must not improperly use the information to

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Gain an advantage for themselves or another

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OR

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Cause detriment to the corporation

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Eg again, ASIC v Vizard (2005) 145 FCR 57 -

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Continues after person ceases to be a director, officer or employee This is a civil penalty provision

Relation to Adler: •Adler used his position in HIH, HIHC and PEE to gain an advantage for himself and Adler Corp, at the expense of HIH, HIHC and PEE. •Williams, through authorising the loan without proper approval from HIH’s investment committee, also used his position improperly

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Duty of care, skill and diligence – s 180 Elements: Director or officer [not employee] must exercise their powers AND 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 corporation’s circumstances AND

• Occupied the office held by and had the same responsibilities as the relevant director or officer

Essentially objective test: “Would a reasonable director, in the same position, in the same industry make the same decision? i.e without testing, market research etc.” – But s 180(1) does take into account the particular circumstances of the company, particular office held by the director and the responsibilities of that director in that company : Daniels v Anderson (1995) 13 ACLC 614 – ‘responsibilities’ are not confined to tasks expressly delegated to the director: ASIC v Rich (2009) 75 ACSR 1, 614. –

No regard to the purely personal circumstances of the relevant director

Skills “particular role, responsibilities of a director etc. is taking into consideration” “A non-executive director, the skill set is considered. Therefore would a reasonable person act in this way…”

All directors must possess certain basic non-reducible skills –

Enabling them to at least understand the operation of the company and its financial affairs

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Other specific skills may be expected, depending on the circumstances of appointment

A director will be expected to exercise that degree of diligence that will enable them to be informed about the company’s affairs and financial position

Diligence Directors’ meetings: Attendance must be disclosed in director’s report ‘[T]he responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. The board of AWA met only once a month for half a day. But to our mind the board should meet as often as it deems necessary to carry out its functions properly.’ Daniels v Anderson (AWA Appeal) (1995) 37 NSWLR 438, 501. 6

Failure to hold meetings held to be a breach of s 180: Sheahan (as liquidator of SA service stations) v Verco [2002] SASC 69

S180 (2) The business Judgment Rule A director or other officer of a corporation is taken to meet the requirements of the duty of care if they make a business judgment and they: (a) make the judgment in good faith for a proper purpose; (b) do not have a material personal interest in the subject matter of the judgment; (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. • The director's or officer's belief that a judgment is in the best interests of the corporation “is a rational one unless the belief is one that no reasonable person in their position would hold”. • Section 180(3) defines "business judgment" to mean “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation”. •

“Safe harbour” for unsuccessful business decisions, but this is not inviolable

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Protects against breaches of s 180 and its common law equivalents

• Explanatory memorandum: Must distinguish between director decisions made without good faith and due care, and those which satisfy the required degree of care but still result in a loss for the company • Courts have consistently declared that they will not review the merits of business decisions made by directors in good faith and with due care: Harlow Nominees Pty Ltd v Woodside; Howard Smith Ltd v Ampol Section 180(3 and 2 s 2 defined the requirements and 3 defines the business judgement to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporations) defines "business judgment" to mean “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation”. (can see tutorial notes for BJR Too) Examples of BJR: Directors not entitled to rely on BJR as had personal material interest. Onus? •

Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1

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No business judgment where director lacked interest in co’s affairs

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Gold Ribbon Accountants Pty Ltd (in liq) v Sheers [2006] QCA 335

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Receivers can rely on BJR

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Deangrove v Buckby (2006) 56 ACSR 630

• Director has onus. Decision not to comply with disclosure obligations was not related to the business operations of the corporation but rather to compliance with the Act 7

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ASIC v Fortescue (2011) 190 FCR 364

Example of BJR – Adler: • Adler instigated the scheme where by $10m would be loaned to a company he controlled (avoiding HIH’s loans practices in the process), and some of that money would be used to purchase shares in HIH on the market • Williams, as managing director of HIH and HIHC, failed to ensure that there were proper safeguards in place for the $10m loan to PEE, and failed to bring the proposed investment to HIH’s investment committee •

Fodera failed to carry out his duty as finance director of HIH by implementing the payment

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None of the directors were able to make out the BJR

Duties to disclose – ss 191, 195, Ch 2E S191 – Disclosure • Requires a director with material personal interest in a matter relating to company affairs to give the other directors notice of that interest •

Must disclose, unless exempt under s 191(2)

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Section 192 provides for “standing notice”

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Notice not required in proprietary company if other directors aware

Disclosure in Common Law? •

No direct positive obligations to disclose conflicts of interest

• However: the defence to a claim of breach of the directors’ fiduciary obligation is the fully informed consent of the beneficiary (the company) – Where there is a real, sensible possibility of conflict (Boardman v Phipps) there will be a breach of the no conflict rule – unless the company is made aware of the full facts, and consents to the behaviour –

Consequences: company can recover profits made by the director if in breach

S195 – Voting •

A director of a public company is, under s 195, prohibited from:

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Being present during discussions of

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AND

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Voting on

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Matters in which they have a material personal interest

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• Disinterested directors may resolve that the director can be present and/or vote (where the Constitution does not prevent it)

S194 – Voting in PTY •

Director has a material personal interest and

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discloses using procedure set out in s 191; or,

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interest does not need to be disclosed under s 191

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Director may vote and transactions may proceed and director can retain benefits.

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This is a replaceable rule

Chapter 2E – related party transactions Aim: to protect a public company and its shareholders against un-commercial transactions entered into between the company and related parties without member approval: s 208 Related Parties: directors, directors of entity that controls public co, person who make up controlling entity (where not co), and their spouses, parents and children, and entities controlled by them: s 228 Financial benefit: s 229 broad interpretation, substance over form, non-exhaustive list includes providing finance, buying, selling, leasing asset, supplying or receiving services

Statutory Framework •

Determined, in part, by the role of ASIC in enforcing the civil penalty provisions

Sections 180, 181, 182, 183, 588G are all CPPs – Breaches of these provisions cannot be ratified by the members in general meeting (Angas Law Services Pty Ltd (in liq) v Carabelas (2005) HCA) • This will affect the way in which proceedings for breach are brought, and the remedies which are available if breach is proven

Enforcing a CPP • Section 1317J(1): ASIC has the right to apply for a “Declaration of Contravention” of a CPP seeking pecuniary penalty orders and / or compensation orders –

Section 1317J(4) – only ASIC, not the members or creditors 9

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Section 1317K – must be brought within 6 years of the breach

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If a Declaration of Contravention is ordered, it can lead to:

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Section 1317G: pecuniary penalty order up to $200,000

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Section 206C: disqualification of directors

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Section 1324: injunction to restrain breaches

– Section 1317H: compensation to the company, either by application of ASIC or the company. Only the company has standing to apply for compensation orders for breach of the civil penalty provision: CA s 1317J(2).

Criminal Sanctions • Some of the statutory directors’ duties can, with the requisite mens rea, also constitute criminal offences (see week 5 if need be) – Sections 184(1)-(3) reckless or intentional dishonesty in relation to s 181; dishonest use of information or position under ss 182-183 (Note: not s 180) • Under s 184, an offence may give rise to a penalty of 2,000 penalty units, imprisonment of up to five years, or both –

No need to show that the director gained a benefit: R v Wilkie (2008) 220 FLR 2230

• Under s 206B(1), a person is automatically disqualified from managing corporations for five years if they are convicted of any of the offences set out in that section

Disqualification •

Automatic disqualification:

– contravention for offence of dishonesty or punishable by imprisonment for a period greater than 12 months: s 206B(1) •

ASIC can apply to court for extension of up to 15 years to disqualification under s 206B(1)

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Bankruptcy: undischarged bankrupt: s 206B(3)

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Court can disqualify:

– s 206C: Court may disqualify a person from managing companies for breach of civil penalty provision for a period that court considers appropriate if satisfied: •

Disqualification is justified with regar...