Topic Ten: Director’s Duties
Director’s Fiduciary Relationship Fiduciary Duty
Directors stand in a fiduciary relationship with their company (Regal (Hastings) Ltd v Gulliver [1967]).
Equity imposes the following duties upon directors:
- to act honestly and in the company’s best interests - not to fetter their discretions
- to exercise their powers for their proper purposes; and - to avoid conflicts of interest.
The Corporations Act 2001 (Cth)
- s181(1)(a): to act in good faith and in the company’s best interests - s181(1)(b): to exercise their powers for proper purposes
- s182, 183, 191: to avoid conflicts of interests - s180: to act with due care and diligence
- s588G: to prevent the company engaging in insolvent trading
It is for directors to determine what is in the best interest of the company and a court cannot substitute its own view with the benefit of hindsight (Re Smith & Fawcett Ltd [1942]).
Duty to Act Bona Fide& in Best Interests of the Company Test
Charterbridge Corp Ltd v Lloyds Bank Ltd [1970]:
‘Whether an intelligent and honest man in the position of a director of the company
concerned could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.
- Honesty element is subjective
- the company’s best interests determined by an intelligent director in that position is quasi-objective
Company’s Interests
Generally the interests, whilst solvent, are those of the ‘corporators as a whole’ (Greenhalgh v Arderne Cinemas [1951]). This notion does not equate to the interests of the majority of shareholders (Henry v Great Northern Railway (1857)).
Directors do not owe a duty to individual shareholders (Percival v Wright [1902]).
There may be a special factual relationship between the directors and the shareholder(s) that is capable in itself of giving rise to a fiduciary relationship (Australian Innovation Ltd v
Petrovsky (1996)). Such a relationship will only exist where the directors are brought into close contact with the shareholder(s) in a manner capable of giving rise to a fiduciary duty, requiring ‘dealings, negotiations, communications or other direct contact between directors and members’.
Where the company is a two person company, such a relationship exists; directors will owe a fiduciary duty to the other shareholder/director as much as the company (Mesenberg v Cord Industrial Recruiters Pty Ltd (1996)).
Nominee directors have both a duty to the company and loyalty to the class of shareholders they represent. Where these interests conflict, the nominee director must place the
interests of the company before hose of their shareholder class (Scottish Co-operative Society v Meyer [1959]).
Where a person directs multiple companies, they must consider the needs of each individual company and not those of the group as a whole (Reid Murray Holdings v David Murray Holdings (1972)). If the interests of one company are placed over another, or of the group, they breach their duty to act in the latter company’s best interests (Reid Murray Holdings v David Murray Holdings (1972)).
Exception: where acting in the interests of one company benefits the company(s) to which the duty is owed (Equiticorp Financial Services Ltd v Bank of New Zealand (1993)).
Statutory Exception: s187
Allows the director of a wholly-owned subsidiary company to act in the best interests of the holding company if:
- the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company
- the director acts in good faith in the best interests of the holding company; and
- the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the directors act.
Where interests of the company and creditors coincide, the director may consider the needs of the creditor (Walker v Wimborne (1976)).
Where the company is solvent, failure to consider creditors interests will only amount to breach of director’s duties where it also involves a failure to act in the company’s best interests (Kinslea v Russel Kinslea Pty Ltd (in liq) (1986)).
Where the company is insolvent or solvency is doubtful, creditors’ interests displace those of shareholders/company and the directors must have regard to creditors’ interests (Kinslea v Russel Kinslea Pty Ltd (in liq) (1986)).
Cases:
A
ABC Development Learning Centres Pty Ltd v Wallace [2006]
Facts: A child escaped from the care of child-minding facilities, and was found by a neighbour and returned unharmed. The company was charged and convicted with breaches of the Children’s Services Act 1996 (Vic); the staff were not charged. The legislation required the company and staff to ensure that they take every reasonable precaution to protect a child from any hazard and that all children were adequately supervised. The company contended that the staff alone were entirely to blame.
Held: The Supreme Court found that the terms of legislation and underlying policy indicated the company was correctly attributed with the failings of lower level employees. The Court of Appeal later found that where an employer has a statutory duty to do something and fails to comply, it is the employer that commits the physical element of the offence and is personally, not vicariously liable.
ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (1990)
Facts: Qintex raised $185m by issuing unsecured debentures. Q facilitated a deed in favour of ANZ, the terms of which included an undertaking to have its subsidiaries guarantee the indebtedness. Q failed before the subsidiaries executed those guarantees and ANZ sought specific performance of the undertaking; at the time of hearing the subsidiaries were insolvent.
Held: The court refused to order specific performance; while ultra vires in the narrow sense had been abolished, this did not free members and directors from ensuring that the rules of the company are complied with.
Ultra vires in this wide sense had not been abolished and prevented the members and directors of the subsidiaries gifting the company’s property, which would be the effect of the guarantees. The courts would not allow the members and directors to do such an illegal act.
