Directors’ Duties

1. 23 Directors’ Duties © Oxford University Press, 2007. All rights reserved.

2. Directors’ Duties Learning Objectives: • Understand the duties of directors and other company officers; • Understand the liability of directors for breaches of their statutory duties, fiduciary duties and common law duties; • Understand the importance of directors to avoid conflicts of interest; • Explain the obligations of directors when the company is insolvent

3. Directors’ Duties cont… Statutory and Fiduciary Duties: Shareholders • Solvency Test • Interests of Shareholders • Interests of Creditors (Insolvent or Near Insolvent) See:- Walker v Wimborne (1976)137 CLR1 See:- T.Ciro The Twilight Zone Revisited: Assessing the Enforceability of Pre-liquidation Transactions in a Corporate Group Insolvency (2005) 20(11) Journal of International Banking Law and Regulation 590.

4. Directors’ Duties cont… Statutory Duties • Duty to Act with due care, skill and diligence: s.180; • Duty to Act in good faith and for a proper purpose: s.181; • Duty to not to misuse your position to gain an advantage or cause detriment: s.182; • Duty not to misuse your position to obtain and use information: s.183 (civil); • Duty of good faith, use of position and use of information: s.184 (criminal

5. Directors’ Duties cont… Duty to Act with Due Care, Skill and Diligence: Key Requirements for S.180:- • Objective test based on a reasonable person; • Assessment of the requisite degree of care and diligence in light of the company’s circumstances; • A court will take into account all relevant considerations; • Safe harbour for directors that satisfy the “business judgment rule”; • Degree of care required by a non-executive director is measured objectively; • All directors irrespective of whether they are executive or non-executive directors are bound to give continuous attention to the affairs of the company. See: Rogers J inAWA Ltd v Daniels t/as Deloitte Haskins & Sells and Ors (1992) ACSR 759

6. Directors’ Duties cont… Duty to Act in Good Faith & Proper Purpose: S.181 Civil • Directors and company officers must act in good faith; • Best interests of the company • Must act for a proper purpose • Must be honest and not for a collateral purpose • Look at all of the factors and circumstances of the case

7. Directors’ Duties cont… Duty not to misuse your position to gain an advantage or cause detriment: S.182 Civil • unreasonable personal benefits on a director; • independent director “in the dark” is strong evidence that the benefits are unreasonable; • conduct of a company was carried out in order to gain an advantage for that director or someone else; • director owes a fiduciary duty stands to gain a benefit without making adequate disclosure of his interest, that director acts improperly within the meaning of s.182; • for the purposes of s.182 an objective standard applies and breach of the section does not depend upon the director’s subjective intentions

8. Directors’ Duties cont… Duty not to misuse your position to obtain & use information: S.183 Civil Director or company officer must not improperly use the information to: • gain an advantage for themselves or someone else; or • cause detriment to the company. See: Australian Securities and Investments Commission v Vizard [2005] FCA 1037.

9. Directors’ Duties cont… Duty of Good Faith, use of position and use of information: s.184 Criminal Imposes criminal liability on company directors/officers who act:- • reckless or; • intentionally dishonest and fail to exercise their powers and discharge their duties: • in good faith in the best interests of the company; or • for a proper purpose.

10. Directors’ Duties cont… Section 184 contains two offences:- • Use of position:- Director, officer or employee who dishonestly or recklessly uses their position to gain an advantage, directly or indirectly for themselves or someone else or to cause detriment to the company. • Use of information:- Director, officer or employee who dishonestly or recklessly uses information to gain an advantage, directly or indirectly for themselves or someone else or to cause detriment to the company. See: R v Rivkin[2004] 59 NSWLR 284.

11. Directors’ Duties cont … Avoiding Conflicts of Interest: Fiduciary Duty • Fiduciary duties owed at common law including the duty to avoid conflicts of interest. • Conflicts can arise in many different contexts involving directors, company officers and financial advisers. See: T. Ciro and M. Fox, Financial Service Providers in Australia: Managing Conflicts of Interest (2006) 17(1) International Company and Commercial Law Review 6. See: ASIC v Vizard [2005] FCA 1037

12. Directors’ Duties cont … Related Party Transactions: Chapter 2E • must obtain the approval of its shareholders: s.208 • a financial benefit can be direct or indirect; • economic and commercial substance of the transaction has priority over legal form; • a court may disregard any consideration that may have been provided; • breaches of related party benefit provisions can result in civil and criminal sanctions.

13. Directors’ Duties cont … Section 229(3) provides some examples of providing a financial benefit:- • giving or providing the related party with finance or property; • buying an asset from or selling an asset to the related party; • leasing an asset from or to the related party; • supplying services to or receiving services from the related party; • supplying services to or receiving services from the related party; • issuing shares or granting an option to the related party; • taking up or releasing an obligation of the related party

14. Directors’ Duties cont … Consequences of Breach: s.209 • Civil penalties • Criminal liability if dishonest Arm’s length Defence: s.210 • the financial benefit would be reasonable in the circumstances if the public company or entity and related party were dealing at arm’s length; or • are less favourable to the related party relative to an arm’s length transaction.

15. Directors’ Duties cont … Duties owed to Creditors: When does the duty arise? • Test of Solvency: Current assets exceed current liabilities • Insolvent or “near insolvency” Current Liabilities exceed current assets See: Walker v Wimborne (1976) 137 CLR 1.

16. Directors’ Duties cont … S.588G Corporations Act • Statutory duty to prevent the company from trading whilst it is insolvent. • Directors to avoid incurring further debts when the company is insolvent including: • Paying a dividend; • Reducing share capital; • Buying back shares; • Redeeming preference shares; • Financially assisting a person to acquire shares; • Entering into an uncommercial transaction

17. Directors’ Duties cont … Liability of Directors for Breaches of Director’s Duties Civil penalties including:- • Declaration of contravention:- s.1317E; • Pecuniary Penalty: (up to $200,000 for each breach) - s.1317G; • Disqualification:- s. 206 B (automatic); s.206 C & 206 D & 206 E (court ordered); 206F (ASIC imposed); • Compensation Order:-s.1317H; Criminal Liability:-s.184 See: Rich v Australian Securities and Investments Commission (2004) 50 ACSR 242.

18. Directors’ Duties cont … LIABILITY OF DIRECTORS FOR INSOLVENT TRADING • Civil Penalty: Compensation • Criminal Offence: s.588G(3) • Recovery by the Liquidator: s.588M • Recovery by a Creditor See: Elliott v ASIC(2004) 205 ALR 594.

19. Directors’ Duties cont … Additional Remedies & Penalties • Equitable damages; • Equitable compensation; • Constructive Trust; • Account of Profits; • Equitable Lien. • Criminal Prosecution by ASIC (dishonesty):s.184.