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Topic 9 : Duties of Directors and Officers. Life-Cycle of a Company. Incorporation (Starting Up) Classification of companies Registration Business Names Effect of incorporation. Running the Company Corporate liability Internal governance Fundraising Directors’ duties

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life cycle of a company
Life-Cycle of a Company
  • Incorporation (Starting Up)
  • Classification of companies
  • Registration
  • Business Names
  • Effect of incorporation
  • Running the Company
  • Corporate liability
  • Internal governance
  • Fundraising
  • Directors’ duties
  • Members’ rights and remedies
  • Financial reporting
  • Closing the Company
  • Insolvency
  • External administration
learning outcomes
Learning Outcomes
  • Define key concepts.
  • Explain when a conflict of interest might arise.
  • Outline remedies available for transactions entered into under conflicts of interest.
  • Discuss and apply the general law and statutory duty of care.
  • Explain ‘reliance on others’ (s 189) as a statutory defence to a breach of duty of care.
learning outcomes1
Learning Outcomes
  • Discuss the significance and operation of the business judgment rule.
  • Discuss the remedies available for a breach of duty of care.
  • Apply the law to a set of facts.
    • Note: Sections in slides refer to the Corporations Act 2001 (Cth) and cases refer to case notes in the textbook
topic 9 outline
Topic 9 - Outline
  • Duty to avoid a conflict of interest
  • Duty to act with care and diligence
  • Duty to prevent insolvent trading
duties of directors and officers
Duties of Directors and Officers
  • Duties arise from three sources:
    • General law (Common law and Equity)
    • Statutory law – Corporations Act
    • Company constitution and replaceable rules
duty to avoid conflict of interest
Duty to Avoid Conflict of Interest
  • Directors owe a fiduciary duty to the company.
  • They must not place themselves in a position of conflict of interest with the company.
  • Avoiding a conflict of interest means that directors must not use their position to:
    • Divert business opportunity from the company
    • Use company’s property for their private use (unless they have permission)
    • Make a secret profit
discussion case examples
Discussion: Case Examples
  • Refer to the following case examples and identity the conflict of interest:
    • Green v Bestobell Industries (1982) – page 500
      • Breach of fiduciary duty – conflict of interest
      • Diversion of a business opportunity
    • Cook v Deeks [1916] – page 505
      • Breach of fiduciary duty – conflict of interest
      • Diversion of a business opportunity
    • Regal (Hastings) v Gulliver [1967] – page 508
      • Breach of fiduciary duty – making a secret profit
duty to avoid conflict of interest1
Duty to Avoid Conflict of Interest
  • Statutory Duty: s 182 and s 183.
  • Directors must not improperly use their position to gain a benefit for themselves and/or someone else: s 182.
  • Directors must not improperly use information acquired because of their position to gain a benefit for themselves and/or someone else:

s 183.

examples of conflict of interest
Examples of Conflict of Interest
  • Taking contracts away from the company.
  • Accepting bribes or secret commissions.
  • Misusing company funds.
  • Taking opportunities that belong to the company.
  • Misusing confidential information.
  • Competing with the company.
      • (Ciro & Syms , 2009:271-273)
discussion case example
Discussion: Case Example
  • ASIC v Vizard (1005) FCS 1037
    • Read the facts of the case – refer to pages 37 and 498 of the textbook (The case is also on Blackboard under Topic 9)
    • What duties were breached by Mr Vizard?
      • Breached section 183
    • What where the consequences of the breach?
      • Pecuniary penalty of $400,000 and disqualified
duty to avoid conflict of interest2
Duty to Avoid Conflict of Interest
  • Disclosure of material personal interest – s 191
    • A director must disclose any material personal interest to the Board (s 191) unless exempted (s 191(2).
    • If a director of a proprietary company discloses a material interest, the director will be able to vote on matters relating to that interest: s 194.
    • A director of a public company who has a material personal interest cannot be present or vote on matters relating to the interest: s 195. Note there are some exceptions.
disclosure voting procedure for pty public co
DISCLOSURE/VOTING PROCEDURE FOR PTY/PUBLIC CO

PTY CO

  • S191: material personal interest, disclose at meeting of directors
  • RR194: Interested director may vote + retain benefits
  • If constitution silent, also declare to GM: common law

PUBLIC Co

  • S191: same as pty co.
  • S195(1): cannot vote or be present in room.
  • S195(2): Board may allow director to vote
  • S195(4),(5): BOD quorum of 2 required, else GM required to deal.
  • Also declare to GM: common law
related party transactions
Related Party Transactions
  • Chapter 2E only applies to public company’s.
  • S 207: Purpose is to prevent director’s giving away company’s assets
  • S 208: A related party transaction can only proceed with members approval, unless it falls within Division 2 exception
  • S 228 – a related party.
  • S 229 – a financial benefit.
related party transactions1
Related Party Transactions
  • S 210 – transactions at arm’s length.
  • S 211 - remuneration or reimbursement for officers and employees.
  • S 212 – indemnities, exemptions, insurance premium and legal cost.
  • S 213 – small scale benefits, under $5,000.
  • S 214 – benefits provided to or by closely-held subsidiaries.
  • S 215 – ‘fair’ benefits to related parties as members.
  • S 216 – court ordered financial benefits.
duty of care and diligence
Duty of Care and Diligence
  • Directors have a duty under common law and statutory law to perform their duties with due care and diligence.
  • Common law duty of skill, care and diligence
    • Directors expected to act a as reasonable person to take reasonable care and respond appropriately to foreseeable risks of harm
statutory duty of care
Statutory Duty of Care
  • A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: s 180(1)
    • Were a director or officer of a corporation in the corporation’s circumstances; and
    • Occupied the office held by, and had the same responsibilities within the corporation as, the officer or director.
duty of care executive directors officers
Duty of Care: Executive Directors/Officers
  • Should take reasonable steps to place themselves in a position to guide and monitor the management of a company:
    • Daniels v Anderson (1995) 37 NSWLR 438.
  • Should inquire and obtain information:
    • Vines v ASIC (2007) 73 NSWLR 451.
  • Note page 531
duty of care non executive directors
Duty of Care: Non-Executive Directors
  • Daniels v Anderson (1995) 37 NSWLR 438
    • Outlines minimum standards – all directors must:
      • Be familiar with the company’s business
      • Monitor management
      • Inquire and obtain information
      • Not shut their eyes to corporate misconduct
      • Be familiar with the company’s financial position
  • Where a director has particular skills, the director is expected to use them:
      • ASIC v Rich (2003) 44 ACSR 341
discussion case study
Discussion: Case Study
  • Read the James Hardy case on page 537. (Also refer to page 196)
    • What action was brought against the executive and non-executive directors?
    • What duties were breached?
    • What was the decision of the Appeal Court?
    • What was the recent decision of the High Court?
discussion case example1
Discussion: Case Example
  • Read the Centro case study on page 557.
    • Why did ASIC take action against Centro?
    • What was the outcome of the case?
    • Could the defendants rely on s 189?
    • What lessons can be learned from the Centro case for boards of directors?
statutory defences
Statutory Defences
  • The business judgment rule is a defence against claims for a breach of duty of care: s 180(2).
  • Business judgment: means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation: s 180(3).
statutory defences1
Statutory Defences
  • Directors or other officers can rely on the business judgment rule if:
    • The judgment is made in good faith and for a proper purpose; and
    • They do not have a material personal interest in the subject matter; and
    • They have informed themselves about the subject matter; and
    • They rationally believe the judgment is in the company’s best interests: s 180(2)
statutory defences2
Statutory Defences
  • Reliance on information or advice: sec 189.
  • Reliance on information is taken to be reasonable if:
    • A director relies on information and advice given and prepared by the categories of people stated in s 189(a); and
    • The reliance is in good faith and after making an independent assessment of the information and advice provided (s 189(b); and
    • It is reasonable in the circumstances (s 189(c)).
statutory defences3
Statutory Defences
  • Delegation of responsibilities to others is a defence under s 190.
  • The Board has the power to delegate to others: s 198C and s 198D.
  • A director, however, may not be responsible for a delegate’s conduct:
    • If after making proper inquiries, the director had reasonable grounds to believe the delegate was reliable and competent: s 190(2).
consequences for a contravention
Consequences for a Contravention
  • Remedies under common law and equity:
    • Damages or compensation;
    • Account of profits;
    • Rescission of contract;
    • Return of property.
consequences for a contravention1
Consequences for a Contravention
  • The company’s remedies:
    • Duty of care is owed to the company – if there is a breach that causes a loss then the company can sue a director or officer for damages.
  • Shareholders’ may bring proceedings in the name of the company under s 236 and s 237 if they have obtained leave (permission) from the court.
duty to avoid insolvent trading
Duty to Avoid Insolvent Trading
  • Companies are prohibited from trading while insolvent.
  • Directors have a duty to prevent insolvent trading: s 588G(1).
  • A director is in breach of this duty if all the elements under s 588G(1) are present.
duty to prevent insolvent trading
Duty to Prevent Insolvent Trading
  • The following elements must be present: s588G
    • The person was a director of the company when the debt was incurred.
    • A debt was incurred.
    • The company was insolvent when the debt was incurred or the company became insolvent because of the debt.
    • The director reasonably knew the company was insolvent.
    • The director/s did not stop the company from becoming insolvent.
duty to prevent insolvent trading1
Duty to Prevent Insolvent Trading
  • Reasonable grounds for suspecting insolvency include:
    • Continuing loses
    • Overdue taxes
    • Inability to raise further capital
    • Warrants issued against the company
    • Special arrangements with creditors
    • Inability to produce timely financial reports
          • ASIC v Plymin (2003) – Harris et al, 2013:585
defences
Defences
  • Defences under s 588H apply to the duty to prevent insolvent trading.
  • Directors had reasonable grounds to expect that the company was solvent at that time and would remain solvent even if the company incurred that debt: s 588H(2).
  • A defence of reliance on information from other persons: s 588H(3).
defences1
Defences
  • A director did not take part in the management of the company at the time the debt was incurred: s 588H(4).
  • The person took all reasonable steps to prevent the company from becoming insolvent: s 588H(5).
discussion case example2
Discussion: Case Example
  • Read the case of ASIC v Plymin (Water Wheel case) [2003] VSC 123 on page 570 of the textbook
    • What are the facts of the case?
    • What is the key legal issue?
    • What was the outcome of the case?
    • Were there any defences available to the defendants?
    • What penalties were imposed?
    • What are the key lessons learned from this case for directors?
summary
Summary
  • There is a fiduciary duty between directors and the company.
  • Directors have a fiduciary and statutory duty to act in good faith and in the best interest of the company.
  • This generally means that they must act in the best interest of the general body of shareholders.
  • Directors have a fiduciary and statutory duty to avoid a conflict of interest.
  • They must not use their positions improperly to gain an advantage for themselves or someone else.
summary1
Summary
  • The duty to avoid a conflict of interest is breached when directors fail to disclose material personal interests in transactions with the company.
  • Directors have a common law and statutory law duty to act with due care and diligence.
  • Directors are expected to make enquiries and be properly informed so that they can properly manage the company.
  • A breach of duty of care gives rise to civil liability.
  • There are various defences against claims for a breach of duty of care, including the business judgment rule and reliance on others.
summary2
Summary
  • A company must not trade while it is insolvent.
  • Directors have a duty to avoid insolvent trading.
  • In other words, directors must prevent the company from incurring debts when there are reasonable grounds to believe the company is insolvent.
  • If directors allow the company to trade while insolvent the courts may ‘lift the corporate veil’ and hold directors personally liable for insolvent trading.
  • Directors must take creditors’ interests into account if the company is insolvent.
next topic
Next Topic
  • Topic 10: Members’ Rights and Remedies
    • Work through the Study Guidance Notes
    • Read the relevant sections in Chapters 12 and 19
    • Complete learning activities