A Guide to Director's Duties in Australia

by Christopher Bevan

To whom are the duties owed?

 

The general proposition is that the duties are owed to the "company". In Greenhalgh v Arderne Cinemas Ltd  (1951) UK, it was held that this does not mean the company as a commercial entity distinct from the corporations. Obviously if the directors are shareholders, then they are entitled to have regard to their own interests. As was said in Mills v Mills  (1938) HCA, the directors are not required to live in an unreal region of detached altruism. The position has gradually changed so that the directors must take account of the interests of the shareholders and, from the dicta of Mason J, (as he then was), those of the creditors: Walker v Wimborne  (1976) HCA. In Parke v Daily News  (1962) UK, it was held that the interests of the employees are not relevant. However, in that case, the business of the company was about to cease and the major shareholders were restrained from distributing the purchase price from the sale of the business to redundant employees. If the company is viable and there is no indication that the company is about to cease trading, then payments to employees, and charitable and political donations, when viewed objectively, may be for the benefit of the company.

Directors not to act for an improper purpose

 

The directors must always act within the powers of the company, and not profit from their positions as directors nor obtain control of the company for their own individual or collective advantage. This aspect was discussed in Howard Smith Ltd v Ampol Ltd  (1974) UK on appeal to the Privy Council from the NSW Court of Appeal. In that case the directors were empowered to issue new shares. Thus certain shareholders, on taking up such shares, could change the balance of power through the number of shares then held. In such a situation, the court is empowered to look at the purpose of the share issue objectively and to determine the purpose for so acting. If the issue of shares dilutes the former majority control, then the purpose of the issue would be one which was improper.

Directors must act with unfettered discretion

 

Shareholders are able to contract on how they will vote in the future. However, directors are not able to do this. This is so even if there is no personal gain to the director. In Thorby v Goldberg  (1964) HCA, it was held that, if, when a contract is negotiated on behalf of a company, the directors bona fide think it in the interests of the company as a whole that the transaction should be entered into and put into effect, they may bind themselves by the contract to do whatever is necessary to effectuate it. In Re County Pallative Loan & Discount Co; Cartmell's Case  (1874) UK, it was held that the board may not delegate its discretion to others in the absence of express authority. Section 226D, which is a replaceable rule, provides that the directors may delegate any of their powers to a committee or committees consisting of such of their number as they think fit, and that such a committee shall exercise the powers delegated in accordance with any directions of the directors, and a power so exercised shall be deemed to have been exercised by the directors.

Conflict of duty and interest

 

It is important that the directors are seen to be acting with good faith. The directors must so act that they do not place themselves in a position where there is a possible conflict or bias in their actions.

Contracts with the company

 

If a person is a party to a contract with a company of which he or she is a director, then the contract can be avoided unless there has been disclosure to the shareholders who have ratified the contract, or who have entered into the contract, in general meeting. Any profit derived by the director, or by the entity of which the director is a party, is recoverable by the company. This principle was established in Aberdeen Ry v Blaikie Bros  (1854) UK. It is not sufficient for the director to disclose her or his interest to the board of directors unless the constitution of the company so provides.

Statutory disclosure

 

Section 231 of the Act deals with disclosure of interests in contracts, property and offices. The aim of the section is to have full disclosure of any direct or indirect interest in a contract or proposed contract with the company being made to a meeting of directors of the company. Provision is made for the secretary of the company to record every declaration under the section in the minutes of the meeting at which it was made. An officer or employee of a corporation, or a former officer or employee of a corporation, shall not make improper use of information acquired by virtue of her or his position as such an officer or employee to gain, directly or indirectly, an advantage for herself or himself or for any other person or to cause detriment to the corporation: s 232(5). An officer or employee of a corporation shall not make improper use of her or his position as such an officer or employee, to gain, directly or indirectly, an advantage for herself or himself or for any other person or to cause detriment to the corporation: s 232(6).

Section 232 was analysed at length by the NSW Court of Appeal in AWA Ltd v Daniels  (1995) NSW. A company is required to keep a register recording particulars of each director's shareholdings in the company or related companies: s 235. The director is placed under a general duty to make disclosure of all shareholdings, debentures, options and contracts and of any changes relating to them as required by s 236 of the Act. A director is required by Chapter 6 of the Act to disclose any interest or shares in a takeover company. Several requirements are necessary to enable a company to recover compensation or for a prosecution to be successful: Esme Pty Ltd v Parker  (1972) WA and Waldron v Green  (1978) Vic.

Payments for loss of, or retirement from, office

 

Section 237 prohibits a company making, or giving by way of compensation, any consideration or benefit for the loss by a director (or any other person) of, or for, or in connection with, retirement of that person (or any other person) from her or his position unless particulars with respect to the proposed consideration or benefit have been disclosed to the members of the company who have approved the giving of such consideration or benefit. This is parallel to the common law position in cases such as Regal (Hastings) Ltd v Gulliver  (1942) UK, where in order to acquire two further cinemas, with a view to selling the whole undertaking as a going concern, the directors and their friends subscribed for a number of shares which were later sold at a profit.

There had been no ratification of their actions by the company in general meeting. No company property had been diverted to the directors and no opportunity was taken from the company which it could have acquired itself. The House of Lords held that the directors were liable to account once it was established: (a) that what the directors did was so related to the affairs of the company that it could properly be said to have been done in the course of their management and in utilisation of their opportunity and special knowledge as directors; and (b) that what they did resulted in a profit to themselves.

Abuse of corporate opportunity

 

This interesting and expanding area has been subject to court scrutiny in the past 20 years or so. The basic principle is that the directors must not abuse a corporate opportunity. In other words, if an opportunity is presented to the company, the company alone may take advantage of it and the directors must not profit from any opportunity so presented. The basic principle was established in Cook v Deeks  (1916) UK. In Phipps v Boardman  (1967) UK, the appellants had purchased shares in a company, having made use of information which they had received at the AGM as representatives of trustees and during negotiations upon the basis of their representation of the shareholding of the trust. The House of Lords held that the appellants had placed themselves in a special position, which was of a fiduciary character, in relation to the negotiations with the directors of the company relating to the trust shares. They had thus acquired an opportunity to make a profit out of the shares and also knowledge that the profit was there to be made. They were accordingly held to be accountable for the profit made. However, in Peso Silver Mines Ltd v Cropper  (1966)

Can, a prospector approach the board of directors of a mining company with a proposal. The board considered the matter but decided not to accept the offer. Later, certain of the directors took up the opportunity offered by the prospector. They formed a company which was later taken over and the new board of directors sued the former directors for the profit they had obtained. The Supreme Court of Canada held that the directors had not made use of any confidential information and had acted as individuals rather than as directors of the company. In Queensland Mines Ltd v Hudson  (1976) NSW, Wootten J held that the courts will insist that persons in fiduciary positions do not act in ways in which they are exposed to temptation. The Privy Council held otherwise because Mr Hudson had given full details to the company and the company had not restrained Mr Hudson from utilising a corporate licence, which it was not able to take advantage of itself because of lack of finance. However, as Mr Hudson had not obtained the approval of the company in terms of Furs Ltd v Tomkies  (1936) HCA (ie by ratification by the company in general meeting: see below), he was required to disgorge the profit made.

In Industrial Development Consultants Ltd v Cooley  (1972) UK and Canadian Aero Service v O'Malley  (1973) Can, companies were anxious to obtain highly remunerative work concerning impending projects. The companies were unlikely to obtain the work but each company had a director whose expertise was required by the negotiating parties. Each director resigned and each either directly (in Cooley ), or indirectly through a company formed (in Canadian Aero Service ), obtained benefits which the courts held the directors liable to account for. In Cooley , it was held that the director had concealed the information from the company. It was held that the director had a duty to pass the information on to the shareholder plaintiffs.

In Canadian Aero Service , it was held that directors or senior officers cannot usurp for themselves or divert to another person or company a maturing business opportunity which their company is actively pursuing. This applies even after they have resigned. If the officer has disclosed fully the circumstances to the company, which has declined to accept the opportunity presented, the director may enter into the contract either directly or indirectly and retain the benefits from it. The question arises as to whether the directors involved should be allowed to vote on the ratification or authorisation of the contract with the director. In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)  (1980) UK, Vinelott J, as dicta, held that the directors of a company do not have the right to ratify their own breaches of duty. What will develop in this area in the future will be interesting to read.

Conflicting obligations

 

Sometimes directors will find themselves directors of two companies, or in a position where they are involved either as lender or creditor of a company in dealings with another company. In Australia, the position appears to be that the directors should try to reach a balanced position: Re Broadcasting Station 2GB Pty Ltd  (1964) NSW. In Scottish Co-operative Wholesale Society Ltd v Meyer  (1958) UK, Lord Denning found that the directors of competing companies were in a position where, in the circumstances, the directors could not do their duty by both companies and that they had not done so. In Berlei-Hestia (NZ) Ltd v Fernyhough (1980) NZ, an Australian company owned 40 per cent of the shares of a New Zealand company.

After some years, the New Zealand company began to export to Australia, thus becoming a competitor in Australia of the Australian company. In the course of his judgment, Mahon J said that he thought that there was a wide distinction between asking a director to account for a profit made out of her or his fiduciary relationship, and asking a director not to join the board of a competing organisation in case the director should, at some future time, decide to act in breach of fiduciary duty.

Insider trading

 

It was generally held for a long period of time, in accordance with Pervical v Wright  (1902) UK, that the directors owed no duty to the individual shareholders. In Coleman v Myers  (1977), a case in which a company was taken over by a shareholder in the company by, inter alia, selling company assets after the takeover to pay for the shares purchased, Mahon J held that the respondent directors owed fiduciary duties to the shareholders arising from the family character of the company, and due to the high degree of inside knowledge and the way in which they went about the takeover and the persuasion of shareholders. In Esplanade Developments Ltd v Dinive Holdings Pty Ltd  (1980) WA, the Full Court of the WA Supreme Court followed Percival v Wrigh , but in that case Coleman v Myers   had not been referred to the court. Sections 1002G, 1002M, 1002Q, 1002S and 1002T of the Act (formerly s 128 of the Securities Industry Code  in each State) provide that a person who is, or at any time in the preceding six months has been, connected with a body corporate shall not deal in any securities of that body corporate if, by reason of being, or having been, connected with that body corporate he or she is in possession of information that is not generally available but, if it were, would be likely materially to affect the price of those securities. Section 1002G applies to a number of employees and other persons associated with the company.

The duty of care and skill

 

In contrast to the heavy duties of good faith owed to the company, the duties of care and skill are light. Until recently, the possession of a title or retirement from high office often gained board seats ahead of qualities of business acumen and drive. The courts expected a part-time director to display only such skill as was actually possessed and such duty to office as was actually offered. This contrasted with the duty of full-time employees who are bound to devote their full-time attention and skill to the running of the company. However, with the changing standards, and the greater degree of care and skill required in what appear to be more complicated business decisions, it would be expected that the duties of care and skill would correspondingly increase. The classic statement of the duties of care and skill required of directors was stated by Romer J in Re City Equitable Fire Insurance Co  (1925) UK. His Lordship said:

(a) Directors need not exhibit in the performance of their duties a greater degree of skill than may reasonably be expected from a person of their knowledge and experience.

(b) Directors are not bound to give continuous attention to the affairs of their company. Their duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which they happen to be placed. They are not, however, bound to attend all such meetings, though they ought to attend whenever in the circumstances they are reasonably able to do so.

(c) In respect of all duties that, having regard to the exigencies of business and the articles of association, may properly be left to some other official, directors are, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. More recently, see the discussion of the relevant case law by the NSW Court of Appeal in AWA Ltd v Daniels  (1995) NSW.

Christopher Bevan BEc LLM (Hons)(Syd) Barrister Wentworth Chambers



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