DIRECTORS’ DUTIES SUMMARY - Duties of loyalty and good faith
1. Duty to Act in Good Faith in Company’s Best Interests *s181 (1) (a)+
2. Duty to Act for a Proper Purpose [exercise powers –s181 (1) (b)]
3. Duty to Avoid Conflicts of Interest [ss 182, 183, 191, 208]
- Duties of care and diligence:
4. Exercise reasonable care and diligence [s180 (1)]
5. Prevent insolvent trading: [sG588 – director only]
Issues:
- What are the sources of the duties?
General law: s9 – Fiduciary duties (Common law and equity) – closes to “Indoor management rules”
o Act in good faith in company’s best interests o Exercise powers for a proper purpose o Avoid conflicts of interest
o Exercise reasonable care, skill and diligence
Statute duties:
o Act in good faith in company’s best interests : s181 (1) (a) o Exercise powers for a proper purpose: s181 (1) (b) o Not to improperly use position: s182
o Not to improperly use information: s183
o Exercise reasonable cadditional Statutory Obligations:
Disclosure of material personal interest: s191
Related party transactions: s208 - Who owes the duties?
General law: Directors ONLY
Statutory duties:
o Ss 180 +181: Directors and officers
o Ss 182 +183: Directors/ officers / employees o S 588G: Director
S 9 : extended definitions:
Alternate director: pointed at the meeting
De facto director: “in fact” director *not in law, has not been pointed+
Shadow director: people who are not director in any senses presuming to act as a director
- To whom are the duties owed?
- What are the duties?
- What are the consequences of breaches
Duties of loyalty and good faith
o Duty to Act in Good Faith in Company’s Best Interests *s181 (1) (a)]
o Duty to Act for a Proper Purpose [exercise powers –s181 (1) (b)]
o Duty to Avoid Conflicts of Interest [ss 182, 183, 191, 208]
LOYALTY AND GOOD FAITH [Loyalty and Honesty]
1. ACT IN GOOD FAITH IN BEST INTEREST OF THE COMPANY –same requirement for GL and SL duty Act in good faith: - act in the best interest of company objectively and believe subjectively that the act is in the best interest of company as well.
a. Sources:
General Law fiduciary duty:
- Directors must act “bona fide” in best interests of company: GRERNHAL V ARDERNE CINEMAS.
Statutory duty:
- S 181(1) (a) – Directors and officers must exercise powers/ discharge duties in good faith in best interests of company.
Both forms of duty have same requirements.
b. Determine the best interest of the company:
Shareholder group – Directors must act in the best interest of shareholders as collective group (Greenhalgn v Arderne Cinemas).
Directors do NOT own duty to particular shareholders (Percival v Wright) [Shareholders generally don’t have legal stand to sue the director for breach of their duties toward the company – but there is exception for it]
Except in special circumstance – Directors must have direct and close contact with individual shareholder so that cause shareholder to act in a way that detrimental to them (Coleman v Myers)
o Particularly dependent on information/advice o Relationship of confidence
o Significant transaction
o Promotion of transaction by director
If company acts as trustee, directors owe duty to act in the best interest of beneficiaries (Hurley v BGH Nominee) *Trust can not be sued because it’s not separate legal entity+.
Nominee Directors are sometimes appointed to represent sectional interest, thus they are expect to act in the best interest of their appointer rather than the company’s shareholders if they honestly and reasonably believe there is no conflict of interest (Re Broadcasting Station 2GB).
However, Nominee directors breach their duty if there is a clear conflict of interest between the appointer and the company (Scottish Co-operative Wholesale v Meyer – Nominee director appointed by holding company put the interest of the subsidiary’s shareholders ahead of interest of the majority shareholders)
Creditors – Directors have duty to exercise their powers in a way that does not prejudice company’s ability to pay its creditors (Kinsella v Russell Kinsella). They will potentially breach their duty if they allow the company enter into arrangement that reduce the pool of company assets that would be available to be shared among creditors when the company is wound up.
Directors who prejudice creditor’s interest may also breach their Statutory Duties in ss181 (1)(a), Best interest of Company, 182(1) Improper use of position, and 183(1) Improper use of information.
Corporate Group –Directors of subsidiary must act in the best interest of the subsidiary’s interest rather than the group as a whole (Walker v Winbourne)
S187 – Directors of subsidiary not in breach of duty if
o Constitution authorize them to act in the best interest of parent
o Act in the best interest of parent AND subsidiary not solvent by their act.
Employee – Director should NOT consider interest of employee over the interest of Company (Parke v Daily News)
Directors must always act in good faith of the company as a whole
If director decides to take into account the employee’s interest They need to
demonstrate that the company would gain some benefits from that action in some way otherwise the director is in breach of duty.
c. Transactions with no benefit to the company:
Overpayment for goods and services – ASIC v Adler; Parke v Daily News Loan unlikely to be paid – Walker v Winborne
Guarantee of debt unrelated to company’s activities – ANZ v Qintex Sale at under value –Coleman v Myers
