Topic 8 – Directors’ Duties
This problem relates to directors duties. The sources of law that applies to director’s duties are CL & statute.
[OR does it say just CL or just statutory]1. Who can bring the action? If question asks or doesn’t tell you - The company by virtue of:
o Its board of directors (s 198A)
o Its liquidator, where company is insolvent (Kinsela)
o ASIC (s 50 ASIC Act allows ASIC To bring proceedings in the company’s name) - ASIC in its own name
- An individual member in limited circumstances (Glavanics) à TOPIC 10 2. Is the person a Director of Officer? Go through each person separately A) Director
- On the facts, X is bound by Part 2D.1 bc he/she falls under the definition of director in s 9 by virtue of:
o (a)(i) being appointed as director (MD – definitely have duties) o (a)(ii) being appointed alternate director
o (b)(i) acting as a de facto director (appear to be acting in position of director either been error in appointment or someone ceases to be director but keeps acting in role) o (b)(ii) acting as a shadow in which the directors of co act in accordance with X’s
instructions (ASIC v Nominees) (does not include lawyers, auditors or accountants) B) Officer
- More subject to discussion
- X will be bound by Part 2D.1 if falls within the definition of officer in s 9:
o (b)(i) making decision which affect a substantial part of the business of the co o (b)(ii) having the capacity to significantly affect co’s financial standing o (b)(iii) the directors acting in accordance with X’s instructions
o (c) receiving the property of co o (d) being the administrator of co
o (e) being an administrator by virtue of a deed of company arrangement executed by co
o (f) being the liquidator of co
o (g) being a trustee administering arrangement made b/w co and 3P
- If applicable: remember a company can be a director (under broad definition in s.9(b) NB à Employee have duties under:
- Duty not to misuse position (s 182) or info (s 183)
- Duties of fidelity and loyalty as an employee: able to make enquiries about and apply for alternative employment without telling his employer, unless there was any express contractual agreement otherwise.
3. List conduct & duty that may have been breached
- In exam, clearly state on the fact in list form all of the dodgy things the director has done - Eg:
o By whom
§ Act: failure to renew software licence
§ Duty that has been breached: duty of care, skill and diligence
4. Explain the breaches & apply statutory and GL to the facts DETAILED ANALYSIS
Duty to exercise powers for proper purposes
There is no substantive difference between the CA and fiduciary law so they will be analysed together: Howard Smith; s 181(1)(b)
1. What is the company power that has been exercised?
The power being exercised here is _____________ apply to facts - Issue of shares per s 254A(1)
o To prevent takeover maybe - Entering a joint venture
- General power of management: s 198A
o Deciding to pursue a project, ie: entering into a K for something o Buy and sell property
o Employ staff o Set business goals
o Commence/defend litigation o Making or pursuing a gain (Adler)
§ Personal interest was the actuating motive, wasn’t bona fide for the benefit of the co
2. Can the proper purpose be identified?
Can go to next step but use this to help you with that step Power to issue shares
- Cases have defined what are proper and improper purposes - Proper purpose =
o Raise capital or funds for the company (Hogg) o To provide consideration for a purchase
o Part of employee remuneration
o Comply with statue (obiter in Whitehouse) - Recognised improper purpose =
o Maintain control of a company
o Defeat a takeover bid (Howard Smith)
o Create/destroy voting power of majority shareholders (mother in that case) (Whitehouse)
o Dilute shareholding Entering a JV
- Proper purpose =
o To give the SHs an alternative that was more advantageous to them than the
plaintiff’s takeover bid and to advance the commercial interests of the co in relation to the development of land it owned: Darvall
- Recognised improper purpose = o Defeat another’s takeover bid General power of management: s 198A
- Eg: decision to pursue new business venture (dodgem cars) and ditch another one o Was there an objects clause in the constitution which outlined the purpose of the
company?
o Was it different to business origins?
3. Was the power exercised for a proper purpose?
A) DEALING WITH ONE PURPOSE
- On the facts there is only one purpose for which the power was exercised - Therefore, the test set out in Howard Smith may be applied
As a matter of law the power may be exercise to _________ (see above) As a matter of fact, the power appears to be exercised for __________
- Look behind what the directors SAY is the purpose – what is the actual purpose? (Howard Smith)
- Motives are irrelevant, only matters what the purpose is (Whitehouse; Howard Smith) Therefore, as the factual purpose is/is not within (one of) the permitted legal purposes, exercise is/is not in breach of the duty
B) DEALING WITH MIXED PURPOSES
- [Director/officer] appears to have multiple purposes for [acting this way].
o List the purposes
§ 1 – proper or improper
§ 2 – proper or improper
- In Australia, two tests have emerged. The ‘but for’ test is more accepted, however the HC has yet to authoritatively state which is better. I will apply both as per Ipp J in Wheeler
Test 1: The Substantial Purpose Test - Howard Smith Ltd
o The substantial purpose for the decision was _______
o This is improper/proper ______
o If the substantial purpose for which the power was exercised is improper, then there is a breach
o Eg – contentious issue of shares à substantial purpose probably won’t be to raise capital bc could have issued to someone else if just wanted to raise capital Test 2: But For Test
- Whitehouse v Carlton Hotels endorsing comments by Dixon CJ in Mills v Mills
o But for ______ improper purpose, would the directors have ____ [decision] and acted in the way they did?
o If answer is no – there is a breach o If answer is yes – no breach
___ (dir) ___ (did/did not) breach his to exercise his powers for a proper purpose
- If relevant: this situation can be aligned/distinguish from Darvall where the action was prompted by an improper purpose (defeating a take over) but was in the end, done for the proper purpose of advancing the company’s interest
4. Consequences for breach/conclusion
- S 181 is a designated civil penalty provision (s.1317E) thus the court has the power to impose a civil penalty order on any person who is involved in a contravention of s 181(1).
- S 184(1): it is a criminal offence if director/officer acts recklessly or intentionally dishonestly
