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23. Directors’ Duties. © Oxford University Press, 2007. All rights reserved. Directors’ Duties. Learning Objectives: Understand the duties of directors and other company officers;

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23

Directors’ Duties

© Oxford University Press, 2007. All rights reserved.


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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


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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.


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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


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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


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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


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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


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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.


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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.


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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.


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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


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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.


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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


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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.


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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.


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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


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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.


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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.


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Additional Remedies & Penalties

  • Equitable damages;

  • Equitable compensation;

  • Constructive Trust;

  • Account of Profits;

  • Equitable Lien.

  • Criminal Prosecution by ASIC (dishonesty):s.184.


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