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Chapter 20 Directors statutory duties 

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Corporations act 2001 includes the responsibilities if directors and other officers. However, duties of directors also arise from the general law and these general law duties are also relevant to how directors perform their roles. S 185 specifies this set out. Accordingly, remedies exist for companies where directors fail to adhere to the standards developed in the general law. It is the company, the liquidator or the ASIC on behalf of the company that will bring the action. Where a directors conduct contravenes a provision of the corporations act, it will be ASIC, in its role as the corporate regulator that will commence proceedings against the relevant director. Relationship between general and statutory law duties of directors are as follows:

General law duty Corporations Act Care and diligence Ss 180 & 588G Use power for purpose Ss 181 and 184 Good faith Ss 181 and 184 Avoid conflict of interest Ss 182, 183, 191 and 195 Main provisions in the corporations act dealing with director’s duties can be divided into four groups: a) Those dealing with meeting peer standards of management (ss180 & 588G). b) Those dealing with inappropriate conduct (ss 181, 182 & 183) c) Those dealing with dishonest and reckless conduct (s 184). d) Those dealing with obligations of disclosure (ss191 & 192). Although in some instances a breach of directors fiduciary duty may be ratified by the general meeting of shareholders, the breach of a statutory duty will not allow for a ratification by shareholders. Refer pg 151, 152. ASIC plays an important role in providing information and advice to persons intending to become directors of companies. This is done through information sheets periodically updated by the ASIC. Pg 152, 153.

Statutory duties of good faith and loyalty Section 181 

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This section mirrors the fiduciary duty to act in good faith, in the best interests of the company and for a proper purpose. An example of the application of section 181 can be read in pg. 153. ASIC v Adler. When considering a breach by a director of the duty to act in good faith, and for a proper purpose, there is a need to identify how the duty is to be applied. If it is a subjective duty, the directors belief as to the relevant conduct may be important. However, if the duty is objective the directors conduct needs to be weighed by a peer standard.

Section 182  

This section prohibits directors from improperly using their position to gain advantage. Also targets conflicts of interest. An evidence where the court has found a breach of this duty in the general law is Furs Ltd v Tomkies where a director disclosed a secret formula known to him because of his position and received a benefit in return.

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In ASIC v Adler Mr. Adler used loan funds to gain an advantage for a company he controlled. The loan funds were used to purchase worthless shares from Adler corporation Ltd for almost $4 million which resulted in a breach of this section.

Section 183 This section prohibits directors misusing their information to gain advantage. In Grove v Flavel one company within a corporate group was near insolvency. To protect himself and the other companies in the group a director rearranged the group structure to isolate the failing company. This conduct was held to be an improper use of the information gained as a result of his role as director. Phoenix company – When the directors become aware that there company is insolvent, they may take steps to transfer the business and assets of the company either to a newly formed company or to an existing related company. The old company which has their liability to their respective creditors, is left as a shell with no assets. Often, because the new company has a similar name and even the same address, creditors mistake it for the old company and fail to recognize that the company that is trading is the new company and does not owe them any debt. In some instances, directors will be adjudged as breaching their duty. Directors may avoid breach of this duty by following relevant disclosure procedures. Ex: Queensland mines v Hudson.

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Section 184 

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Where directors or other officers act in a manner prohibited in ss 181, 182 or 183, that is, they do not exercise good faith or act for a proper purpose, or they misuse their position of their information for gain, and in doing so they are reckless and dishonest, they will be in breach of s 184. S 184 (1) sets out that a director commits an offense if they are reckless or dishonest and do not exercise their powers and duties in good faith in the companies best interests or for proper purpose. S 184 (3) creates an offense that sets out that a director obtains information because of their position and uses that information dishonestly with the intention of gaining an advantage for themselves or others. This section targets criminal liability and pursuant to Sch 3 of the Corporations Act a breach will result in 15 years imprisonment.

The duty of care and diligence 

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Whether a director had breached the duty of care and diligence in the general law has, in the past, depended on a largely subjective assessment of that directors own skills and knowledge. In Daniels v Anderson case the expectations in relation to the conduct and skills of the directors were considered. Refer pg 163. Here, the directors had a duty to take responsible steps to monitor management and be familiar with the company’s financial position. Although the NSW court of appeal found that auditors were primarily responsible for the loss. Refer pg 164, 165

Section 180

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This section reflects the progression of the law from a subjective approach to the determination of directors responsibilities of care and diligence to an objective, peer focused approach. Directors must be pro-active in their approach to management. This can be achieved by: a) Keeping themselves important about company matters b) Regular attendance at meetings c) Participating in the decision-making process. The business judgement rule as per s 180 (2) requires directors to: make their decisions in good faith for a proper purpose; avoid a material personal interest in the subject matter of the business judgement and rationally believe the judgement is in the company’s best interest. The protection afforded by s 180(2) is only available in relation to the care and diligence obligations set out in s 180(1). Refer to the ASIC v Adler case S 180 concerns decisions made in a business context and the defenses in s 180 (2) only become relevant if a business judgement can be shown to have been actually made

Chapter 21 Remedies and penalties for directors breaches 

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Where the ASIC believes that it is in the public interest for a company to bring proceedings against a director and, for example, the company does not have sufficient funds for the litigation, then ASIC may bring the action in the name of the company. If a company Is in liquidation, its property vests in the liquidator and it will be the liquidator who has the power to bring actions on behalf of the company. Remedies available to the company under the general law include damages or compensation, rescission of contract, an accounts of profits, injunction and the finding of constructive trust.

Enforcing director’s statutory duties  

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The statutory duties are the means by which parliament regulates the conduct of directors in order to achieve the air of efficient corporate management. S 13 of ASIC act gives ASIC the power to investigate corporate conduct. S 49 enables to commence prosecutions for offenses and s 50 allows it to begin civil proceedings. Ss 179 – 197 of the corporations act include both civil and criminal penalties. The most common penalty is a monetary penalty. Civil penalty breaches can also attract disqualification from management, compensation orders, relinquishment and refund orders. Criminal penalties can also include imprisonment. There are a number of ways to calculate the monetary penalty; for civil penalties see s 1317 G and for criminal penalties see s 1311 B and 1311 C. When a company is in breach, annual turnover is also relevant. If the breach is an offense pursuant to the corporations act the calculation of monetary policy will vary depending on the period of imprisonment.

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Factors to be considered when determining the monetary policy: benefits derived and detriment avoided because of the breach and the number of penalty units applicable to the breach. Currently a penalty unit is worth $210. The value of it is periodically updated. Although directors and officers insurance is available, certain restrictions exsist in the corporations act. S 199A, 199B, 199C prohibit companies paying or agreeing to pay for insurance that encompasses coverage for various matters including willful misconduct or contravention of s 182 & 183.

Civil Penalties If the section of the Corporations Act breached is a civil penalty provision, the following penalties are applicable to individuals: a) A monetary penalty of the greater of: 5,000 penalty units and if the court can determine the benefit derived and detriment avoided because of the contravention, then that amount multiplied by three. (s 1317G) b) An order to pay compensation s 1317H c) A refund order where an ongoing fee has been received after termination of the fee arrangement in contravention of s 962P d) Disqualification from managing a corporation (s 206C)  S 1317G sets out civil penalties that are applicable to contraventions by body corporates.  In s 1317 G(4), the penalty will be the greatest of the following three calculations. a) 50,000 penalty units b) If the court can determine the benefit derived and detriment avoided because of the contravention then that amount multiplied by 3 c) Whichever is the lesser of 10% of annual turnover of the company or $2.5 million penalty units.  Pursuant to s 1317S and 1318, where a court is determining civil penalty breaches, the issue of directors honesty maybe taken into account. Refer pg 194 and 195.  Declaration of contravention a) If a court is satisfied that a person has contravened a civil penalty provision, the court must make a declaration of contravention. b) The declaration must specify the following: I. The court that made the decleration II. The civil penalty provision that was contravened III. The person who contravened the provision IV. The conduct that constituted the contravention. 

Disqualification as a penalty for a breach of duty 

Refer to ASIC v Vizard (2005) case that provides a good example of issues relating to the sentencing of directors who breach their statutory good faith and loyalty duties.

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There can sometimes be a difference between the corporate regulator and the court as to what penalties are appropriate....