6. Directors Duties

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Directors duties

Resource summary

6. Directors Duties
1 To Whom is the Duty owed?
1.1 Percival v Wright (1902): Directors owe fiduciary duty to the company as a whole.
1.2 Coleman v Myers (1977): Found a fiduciary relationship existed between director and shareholder. Had an obligation to disclose material matters, and there was a substantial likelihood that the facts would have assumed signficance in the deliberations of the shareholder.
1.3 Brunninghausen v Glavanics (1977): again found a duty owed by director to a shareholder. B was dominant director, G was minor director. B received unexpected takeover offer, allows G to sell shares and then B sells for much higher price. G sues B for breach of fiduciary duty. Held: Nature of circumstances gave rise to duty. Complete dependence on advice and info that G placed in B. Small proprietary company w/ 2 shareholders, not appropriate to draw distinction b/w duties to company and duties to shareholders.
2 Duty to act in good faith for the benefit of the company as a whole and for a proper purpose
2.1 Good faith: subjective test.
2.2 Company's best interests: objective test.
2.3 s.181: Director/officer must exercise their powers and duties in good faith, in the best interests of the company, for a proper purpose.
2.4 Re Smith and Fawcett (1942): F and S held 50% shares in company. Constitution gave discretion to refuse transfer of shares at any time. F died, son tried to register their shares, to have son on the board. S relied on discretion in constitution, refused shares. Held: The articles of a company obviously specify the limits of the directors' power (and their discretions) - however, the directors' powers are also always limited by their obligation to exercise their power in good faith and for a proper purpose. Here, article gives D an uncontrolled and absolute discretion and the D’s refusal to issue the shares was a bona fide consideration of the interests of the company - appeal dismissed.
2.5 Australian Metropolitan v Ure (1923): Contest for control of insurance company between 2 groups of shareholders. Mrs U was leading member of a group, purchased parcel of shares sufficient to enable her group to command resolution at GM and elect her husband to the board. Purchaser submitted share transfers for board resolution. Board relied on constitution that they could refuse to register shares and give no reasons. Held: whilst they had this power, it must still be exercised bona fide, not arbitrarily, honestly in the interests of shareholders. Directors were acting in power here, appeal dismissed.
2.6 "the company as a whole"
2.6.1 The corporators as a general body:Ngurli v McCann:
2.6.2 Directors must consider both present and future members: Gaiman v National Association (1971)
2.6.3 As insolvency approaches, directors have an obligation to consider interests of creditors: Bell Group v Westpac (2008)
2.6.4 Others (employees, customers, community) Parke v Daily News (1962): Company making loss, D's decided to sell, had to dispose of company assets and make employees redundant. D's intended to use proceeds of sale for ex gratia payments to employees. Shareholder challenged this decision. Held: the decision was not for the benefit of the company as a whole. Cannot favour the interests of other groups over shareholders.
2.6.5 Corporate Group Walker v Winborne (1976): court recognised potential conflict b/w interests of a sub its group. Held: directors must act in the sub's best interests and not in the interests of the group as a whole. BUT acknowledged sometimes sub's concern is inextricably tied to the continued existence of its fellow corporate group members. Equiticorp Finance (1993): Bank insisted that funds of members of the Equiticorp Group of companies be applied to reduce the debt of Uruz (sub). Later, companies went into liquidation - liquidators sued directors for breach of fiduciary duties. Held: no breach of duty - if debt wasn't repaid, the company could have collapsed. Was for benefit of the companies that the debt was paid. Directors honestly believed it would protect group as a whole.
2.7 "for a proper purpose"
2.7.1 Hogg v Cramphorn (1967): proper purpose is a separate consideration from "bona fide." C was chairman and MD, approached by B who wanted to takeover company. C thought this would have negative impact on company - took steps to frustrate the offer, issued shares to friendly parties. Challenged as improper purpose. Held: Power was improper - even though bona fide belief of D was present, issuing shares to defeat a takeover was an improper exercise of mgmt power. Directors not to use powers to issue shares for purpose of maintaining control or their friends control.
2.7.2 Teck Corp (1973): Court did NOT follow Hogg. A was formed to take over mining claims, lacked resources so sought a contract with another company to develop property. T, P and C possible suitors, directors chose P. T started buying shares in A, directors realised they were close to securing control. Accelerated negotiations and signed agrmt with C who was allotted shares. T sued A, argued directors were actuated by an improper purpose - to frustrate T's takeover. Held: D's are allowed to consider who is seeking control and why. IF they believe there will be substantial damage if takeover, the exercise of power to defeat them will not necessarily be improper.
2.7.3 Howard Smith (1974): 2 shareholders of company A and B, which held 55% of Miller. HS involved in conflict for control of Miller. Each had directors on the board of MIller Rival takeover offers made. HS bid more generous, company believed HS better option from managerial view. D's of Miller issued shares to HS to dilute A's shareholding in company. A became minority shareholder. A argued issuing of shares was improper use of power. Held: only purpose of issuing shares was to dilute A's position and make them minority - improper. Two prong test: (1) analyse the purpose for which the power may be used (2) determine on the facts what purpose was used.
2.7.4 Whitehouse v Carlton Hotel (1987): Share structure of company was divided into 3 classes. W goes to court arguing he himself issued shares for improper purpose. HC agreed: even if D's have wide discretion under constitution, they have no place favouring one group of shareholders over others. W had diluted Mrs W's shares for what he assumed were friendly parties. But for test - but for its presence, power would not have been exercised.
2.7.5 Darvall v North Sydney Brick and Tile (1989): Company subject of hostile takeover bid. Prudent bidders knew last price company traded was 87c. Unbeknown to shareholders, true value was far greater. Takeover bid offered $10 share, directors felt this was undervalued. Took actions to defeat the bid. Held: Bona fide actions taken to defeat takeover aren't improper per se. Distinction b/w action for purpose of defeating bid, and action prompted by bid but in the end, entered into because D's believe in best interests of company.
2.7.6 Statute: s.181 - Director/officer must exercise their powers and duties in good faith in the best interests of the company AND for a proper purpose.
3 Duty to avoid conflict between duty and interest
3.1 Directors interests in contracts w/ their own company
3.1.1 Aberdeen Railway: AR argued not bound by contract because their chairman was also the MD of Blaikie. Conflict of interest. Held: company not bound.
3.1.2 Transvaal (1914): constitution held no contract should be avoided, provided D discloses nature of any interest, but no D can vote on the matter. H failed to disclose he was trustee shareholder of the contracting party, AND recently appointed as their D but not yet accepted. Held: contract voidable.
3.1.3 Guinness v Saunders (1990): G appointed a committee to handle affairs during takeover bid. One was paid 5.2m as a "fee" agreed by the committee. Held: the power to pay remuneration should be strictly followed.
3.2 s.194: replaceable for proprietary - if D's have personal interest and they disclose that at D's meeting, OR its an interest they don't have to disclose under s.191, they may vote, retain benefits and company CANNOT void transaction.
3.3 Statute
3.3.1 s.191: Directors duty to disclose - D with material personal interest must give other D's notice, UNLESS interest listed in (2), including D already giving notice, or issuing standing notice under s.192.
3.3.2 s,195: A D of a public company w/ a material interest CANNOT vote. (2) The D may be present and vote if Ds who do not have a material personal interest in the matter pass a resolution that: (a) identifies the director, the nature and extent of the director's interest in the matter and its relation to the affairs of the company; and (b) states that those directors are satisfied that the interest should not disqualify the director from voting or being present.
3.4 Secret Profits: property, info and opportunity
3.4.1 Cook v Deeks (1916): 3 Ds wanted to exclude 1D. Took contract under their own names, then passed shareholder res stating company had no interest in the contract. Cook argued contract did not belong to the D's. Held: 3Ds breached their duty of loyalty to company. Shareholder ratificiation was fraud on minority (Cook). Profits made on the contract were held on trust for the company.
3.4.2 Regal Hastings (1967): Owned cinema, wanted to buy more through a sub. Company couldn't afford all shares in sub, D's provide extra money, made a substantial profit. New owners sued for breach of fid duty. Held: Person who makes a profit by their fid position is liable. Because they had acted in good faith, the COULD have gotten away w/ it if got a GM resolution.
3.4.3 Peso Silver Mines (1966): Company had mines, board approached by geologist, rejected idea. MD was approached, he accepted and made profit. Board later argued MD had made profit in breach. Held: MD had acted in good faith at all times. Where there is bona fide rejection of corporate opportunity, no liability to account for profits made.
3.4.4 IDC v Cooley (1972): MD of IDC offered services to EGB, they said no thanks, but then MD accepted offer in his personal capacity. Said he was unwell, requested to resign from IDC. Held: D was acting as MD and info only came via his fiduciary position. Duty to pass the information on about his personal offer.
3.4.5 QLD Mines v Hudson (1978): QLDM formed by AOE and F. MD sought to personally obtain a mining licence, this was disclosed to QLDM, board resolved he was allowed. MD resigned, acted in own name at own expense. QLDM later claimed account of profit Held: Board had reached fully informed decision to renounce its interest, assented to MD taking over. Board approval said to be tantamount to approval by GM.
3.5 Statute
3.5.1 s.182: improper use of position
3.5.2 s.183: improper use of information
3.6 Related Party Transactions
3.6.1 s.208: public company giving financial benefit to related party must obtain approval of members.
3.6.2 s.210: arm's length transactions
3.6.3 s.211: reasonable remuneration.
3.7 Duty not to fetter discretion
3.7.1 Exceptions: Nominee Directors. Competing Directors (not always in conflict, but big risk).
4 Duty of care, diligence and skill
4.1 s.180(1): Directors/officers must exercise powers and duties with care and diligence that a reasonable person would exercise if they were D/officer of company in the company's circumstances
4.1.1 s.180(2): Business judgement rule: a d/officer who makes a business judgement is taken to meet requirement in (1) and their common law duties IF: (1) made judgement in good faith for proper purpose (2) do not have material personal interest (3) inform themselves on subject to extent appropriate (4) rationally believe its in best interests of co s.189: IF D relies on info or professional advice given by (1) employee of company (2) a professional advisor (3) another D within their authority (4) a committee of D's within their authority who D believes on reasonable grounds to be reliable and competent AND reliance made in good faith, after independent assessment having regard to D's knowledge of co, the D's reliance will be reasonable. s.190: If D delegates under s.198D, D is responsible for delegate's exercise of power. But NOT responsible if D believed on reasonable grounds the delegate would exercise power in conformity and the D believed on reasonable grounds (good faith, making proper inquiry if need be) that delegate was reliable/competent. s.198D: Unless constitution says, D's can delegate to anyone. ASIC v Adler: Standard of care under statute is NOT higher than general law standard. Daniels v Anderson (1995): The responsibilities of D's require they take reasonable steps to place themselves in position to guide and monitor mgmt of company. However, unreasonable to expect every D to have equal knowledge and experience in every aspect. D's cannot rely on fact they are NEDS - integral part of being D is to acquire at least rudimentary understanding of business of the company. Permanent Building Society v Wheeler: MD breached DOC by failing to inquire sufficiently into unusual transaction and was capable of causing harm to the company. This was new area of investment, no prior experience in property development, so heavy duty to scrutinise transaction closely. ASIC v Rich (2003): In some circumstances, chairman may have special responsibilities above and beyond other NEDS. Now recognised ppl holding special positions may hold special responsibilities when discharging duty. Chairman must take reasonable steps to ensure company has effective reporting system to enable proper monitoring.
4.2 s.189: statutory right to delegate and rely on others. reliance made in good faith, after independent assessment.
5 Insolvent Trading
5.1 s.95A definition
5.2 s.588G: when D will be liable for insolvent trading.
5.2.1 The Stake Man Pty Ltd (2009): court relieved D of insolvent, acted honestly trading, had engaged advisers, followed instructions.
5.2.2 DCT v Clark (2003): the liability of "sleeping directors:"
5.2.3 s.588H: defences
6 Remedies
6.1 s.1317J: application by ASIC for declaration, pecuniary penalty order, or compensation order. Company can apply for compensation, any other person who suffers damage may apply for compensation.
6.2 s.1317E: if court satisfied person has contravened, must make declaration of contravention
6.3 s.1317G: pecuniary penalty orders
6.4 s.1317H: compensation to the company.
6.5 s.206C: disqualification of person from managing companies for period.
7 Liability Escape Hatches for Directors
7.1 Ratification by shareholders at a GM
7.1.1 Forge v ASIC: Authority to suggest shareholders CAN NOT release director from statutory duties under s.180, 181, 182.
7.1.2 ASIC v Maxwell: Ratification does not provide defence to breach of statutory duty but fact director got ratification is relevant to determining whether they acted improperly.
7.2 Ratification by the Board
7.2.1 QLD Mines: Court confirmed possible for board to ratify the decision of a Director, provided full disclosure. May no be possible to ratify breach of a whole board though - Regal Hastings.
7.3 Relief granted by the court
7.3.1 s.1317S: Court may relieve wholly or partly from liability if person acted honestly, looking at circumstances court feels they ought to be excused. e.g, the Stake Man Pty Ltd.
7.3.2 ASIC v Healey: there is a 'core irreducible requirement of D's to be involved in the mgmt of the company and take all reasonable steps to guide and monitor. Court wouldn't allow the D's defence of reliance on others.
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