Directors’ Duties Part I – Duties of Loyalty and Good Faith 13.0, 13.1, 13.2, 13.3
ss 9, 53, 180, 181(1)(a)(b), 182, 183, 185, 190, 191(1)(2), 192, 194, 195, 196, 198C, 198D, 208, 209, 210, 211, 213, 216, 228, 229, 588G s1071F
GREENHALGH v ARDERNE CINEMAS [1951] Ch 286 ASIC v ADLER [2002] NSWSC 171*
PERCIVAL v WRIGHT [1902] 2 Ch 421 COLEMAN v MYERS [1977] 2 NZLR 225*
SCOTTISH COOPERATIVE WHOLESALE v MEYER [1958] 3 All ER 66 WALKER v WINBOURNE (1976) 137 CLR 1
PARKE v DAILY NEWS [1962] Ch 927*
RING v SUTTON (1979) 5 ACLR 546 WALKER v WIMBORNE (1976) 137 CLR 1 ANZ v QINTEX [1991] 2 Qd R 360
PERMANENT BUILDING SOCIETY v WHEELER (1994) 12 ACLC 674 WHITEHOUSE v CARLTON HOTEL [1974] AC 821*
NGURLI v MCCANN (1953) 90 CLR 425 HOWARD SMITH v AMPOL [1974] AC 821
ADVANCE BANK v FAI INSURANCES (1987) 9 NSWLR 464*
AUSTRALIAN METROPOLITAN LIFE v URE (1923) 33 CLR 199
DIRECTORS
Director: s9 a person who has been appointed to the position of director. It also includes a person who has not been validly appointed but acts in the position of a director (a de facto director) as well as a person on whose instructions or wishes the directors of a company are accustomed to act (a shadow director).
Officer of a corporation: s9 Includes persons who hold certain specified positions including the directors or secretary of the corporation. A receiver, administrator and liquidator are also included. It includes company executives who hold senior positions below board level, including people:
● Who makes or participates in decisions that affect the whole or a substantial part of a company’s business; or
● Who has the capacity to affect significantly the company’s financial standing; or
● In accordance with whose instructions or wishes the directors are accustomed to act (shadow officer).
The definition does not include middle managers. Therefore they cannot be liable for civil penalties or criminal offences for contravening ss180 or 181.
ASIC v Adler
The court held that Adler, a director of HIH, was an officer of a wholly owned HIH subsidiary under the s9 definition, even though Adler had not been appointed a director or officer of the subsidiary. Adler’s role as a director of HIH, the subsidiary’s holding company, and a member of HIH’s investment committee indicated that he participated in making decisions that affected the whole or a substantial part of the subsidiary’s business decisions.
Employees of a corporation are also subject to the duties in s182 (improper use of position) and s183 (improper use of information)
DUTY TO ACT IN THE BEST INTERESTS OF THE COMPANY
General law fiduciary duty: Directors must act ‘bona fide’ in best interests of the company.
The fiduciary duty is characterized by the obligation of loyalty(Bristol & West Building Society v Mothew).
Statutory duty: s181(1)(a) Directors and officers must exercise powers/ discharge duties in good faith in best interests of the company
Test:
(ASIC v Adler) The duty is breached if the director acts in a way that no rational director would have considered to be in the best interests of the company
(Bell Group Ltd (in liq) v Westpac Banking Corp) Established both a subjective and objective test. The circumstances should be considered. A breach is established if the assertion that directors acted in the best interests of the company should be doubted, discounted or not accepted.
Best interest of the company
Directors must act in the best interests of the shareholders as a collective group (Greenhalgh v Arderne Cinemas Ltd) [1951] Ch 286
The duty requires directors to have regards to both the interests of present and future shareholders as well as the interests of the company as a commercial entity. Directors may act in what they consider the best interests of the company as a commercial entity even though this may not be in the short term interests of shareholders (Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1987) 6 ACLC 154.
Individual shareholders:
The company does not owe duties to particular shareholders (Percival v Wright) (Percival v Wright)
A director did not breach its duty by failing to disclose to an individual shareholder wishing to sell his shares that there was an impending takeover bid at a substantially higher price
In special circumstances a fiduciary relationship may arise between a director and an individual shareholder. The director must have been in direct and close contact with the individual so that the director caused the member to act in a certain way which turned out to be detrimental to them (Peskin v Anderson)
Circumstances (Coleman v Myers):
● The member is particularly dependent on advice
● Relationship of confidence such as trustee
● Significant transaction for some members
● Any promotion of transaction by director (Coleman v Myers)
The managing director of a family company arranged for the company to be taken over at an under value by a new company controlled by him. The managing director failed to disclose material information including his potential profits and misled the shareholders as to the true value of the company’s assets.
Held: the managing director breached fiduciary duties to minority shareholders in the family company
Interests of creditors:
The directors have a duty to exercise their powers in a way that does not prejudice the company’s ability to pay its creditors (Walker v Wimborne). Directors prejudice creditors’ interests if they cause their
company to enter into arrangements that reduce the pool of company assets that would otherwise be available to be shared among creditors when the company is wound up.
Employees
‘Of the company’ does not refer to employees (Parke v Daily News)
Corporate social responsibility
‘Of the company’ may refer to corporate social responsibility. Eg s299(1)(f) directors’ report regarding the entity’s performance in relation to environmental regulation.
Beneficiaries of a trust
Where the company acts as a trustee, the directors may owe a duty to act in the best interests of the beneficiaries (Hurley v BGH Nominees Pty Ltd (No 2)
Classes of shareholders
(Mills v Mills) the test of whether a director is actng in the interests of the company is not appropriate where shares are divided into different classes. Rather, it is a question of what is fair as between the classes of shareholders.
S232 A member can obtain a remedy if a resolution of a class of members was contrary to the interests of the members as a wholly, oppressive or unfairly prejudicial or unfairly discriminatory.
Nominee director’s fiduciary duties:
Nominee directors are permitted to act in the interests of their appointer provided that they honestly and reasonably believe that there is no conflict between the interests of their appointer and the interests of the company (Re Broadcasting Station 2GB Pty Ltd)
Corporate groups
Nominee directors on the board of a subsidiary are required by the holding company to act in the best interests of the group of companies.
(Equiticorp Finance Ltd (in liq) v Bank of New Zealand)
Funds were transferred by two companies in a group to satisfy the debt of a related company. It was held that the director of the group was justified as the welfare of the group was linked to the welfare of individual companies.
If there is a conflict of interests of a subsidiary and the group, nominee directors must act in the subsidiary’s best interests and not in the interests of the group as a whole (Walker v Winbourne).
S187A A director of a subsidiary is not in breach of a duty if:
● The constitution authorizes action in best interests of the parent
● The director acts in good faith in best interests of the parent and
● The subsidiary is not insolvent or made insolvent by action
CONSEQUENCES OF CONTRAVENING S181
S1317E The court has the power to impose a civil penalty order on a person involved in a contravention of s181(1).
S79 ‘Involvement’ in a contravention may arise where a person aids and abets, induces or is knowingly concerned in, or party to the contravention.
S184(1) Criminal liability may be imposed if a director or other officer is reckless or intentionally dishonest.
DUTY TO EXERCISE POWERS FOR THE PROPER PURPOSE
General law fiduciary duty: Directors must exercise powers for a proper purpose (Permanent Building Society v Wheeler)
Statutory duty: s181(1)(b) – Directors and officers must exercise powers/ discharge duties for a proper purpose. The duty may be contravened even if directors believe they are acting in the company’s best interests. There may not be an actual benefit from the conduct, but the conduct is carried out in order to gain an advantage.
This duty is breached if a director acts in a way that no reasonable director would have considered to be for a proper purpose (ASIC v Adler).
(ASIC v Adler)
Adler was a nonexecutive director of Adler Corporation, a substantial shareholder of HIH.
Adler Corporation also controlled AEUT and PEE. HIHC, a subsidiary of HIH, provided an undocumented, unsecured $10 million loan to PEE. After the loan, PEE became trustee of AEUT. HIHC’s $10m loan to PEE was then applied to HIHC’s subscription for $10m worth of AEUT units. Under the trust, Adler was entitled to 10% of the trust’s income. PEE used the $10 million in the following transactions:
● $4m used to buy HIH shares to give the stock market the false impression that Adler was supporting HIH’s falling share price by personally buying its shares. PEE then sold HIH shares at a $2m loss.
● $4m used to purchase unlisted shares in technology companies from Adler Corporation
● $2m loaned by the trust to Adler in unsecured and undocumented loans.
There was evidence of a consciousness of impropriety on Adler’s part because the normal investment safeguards put in place were bypassed in a semicovert way.
Test
The director will breach the duty if the assertion of directors that their conduct was for the proper purposes should be doubted, discounted or not accepted” (Bell Group Ltd (in liq) v Westpac Banking Corp (No 9)
(Howard Smith Ltd v Ampol Petroleum)
Objective test: Consider the objective purpose for which the purpose was granted Subjective test: Consider the purpose which actually motivated the exercise of power
The onus of proof lies with those alleging the breach of duty (Australian Metropolitan Life Assurance Co Ltd v Ure)
Judicial attitude: Courts are generally reluctant to interfere in the internal management of a company unless improper purposes are clearly demonstrated (Australian Metropolitan Life Assurance Co Ltd v Ure)
Issuing shares
Proper purpose: Raising capital for the company, providing consideration for the purchase of property, providing a means of remunerating employees
Improper purpose:
● Issue of shares so as to cause:
o Maintenance of a majority’s control (Ngurli v McCann)
o Dilution of shareholdings and creation of a new majority (Howard Smith v Ampol). This is so even where the directors may honestly believe their actions are in the best interests of the company
(Howard Smith v Ampol)
Takeover battle for the control of Miller between Howard Smith and AmpolBulkships. To give Howard Smith’s takeover bid a chance of success, Miller’s directors issued sufficient shares to reduce AmpolBulkships majority shareholdings to a minority position.
