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ACC204

Corporation Law
Lecture 06
Directors Duties 3 & 4
COMMONWEALTH OF AUSTRALIA
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Course Objectives
• Duty to act in good faith in the best interest of the co.
• Duty to act for a proper purpose
• General law rule against conflict of interest or duty
• Modifying the rule in the company’s constitution
• Statutory regulation of situations of conflict
• Consequences of breach

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“Best Interest” duty
• D must act in good faith in the best
interests of the company
• Statutory duty contained in s.181
• Also a general law duty
• 2 issues:
– What is good faith?
– What are the company’s interests?

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What does the duty require?
• Director must act in good faith, ie honestly
• Must do what they believe is best for the
company, not themselves or a particular
stakeholder group (eg majority of members)
• Directors need to understand what is meant
by the “interests of the company”

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Interest of the company
• Company’s have many stakeholders. From whose
interests are those of the company concerned with?
• Is it the:
– members
– company as a commercial entity separate from its
members
– creditors
– other company’s within a corporate group
– employees, customers, suppliers & the community?

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Generally, look to the interests of
the members overall…
• Generally, the interests of a solvent company are
those of its members
• Directors must look to the company “as a whole”,
& balance competing interests
• Must act fairly as between members of different
classes

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Separate Commercial entity
• Are Directors entitled (or required) to look to the long
term viability of the company as a commercial entity,
not just at the short term benefit to current
shareholders?
• Issue not resolved, although sometimes creeps into
takeovers cases
Creditors’ interests
• When a company is insolvent or “nearing insolvency”,
the creditors’ interests become those of the company
Kinsella; Walker
• Note this is not a duty to creditors – it is a duty to the
company
• For example, no removing assets 8
Corporate groups
• Do Directors have to consider the interests of each
subsidiary separately, or can they do what is best for
the group overall?
• For some wholly-owned subsidiaries, Directors are
allowed to act in interests of holding company if the
requirements of s.187 are met

Effect of s.187
• Directors are taken to meet the requirements if:
– constitution expressly authorises
– act in good faith in best interests of holding company
– company not insolvent or made insolvent
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Other group companies
• Where s.187 does not apply, each company’s separate
interests prevail
• Test: whether a person in the position of the Director
could have reasonably believed the decision would
benefit the company: Charterbridge
• Equiticorp: can be an indirect benefit

Interest of other stakeholders


• Can Directors take into account the interests of
employees, customers, suppliers and the community?
• Technically, cannot receive priority over interest of
members: Parke v Daily News
• Corporate governance standards may be
changing 10
Duty to act for a proper purpose
• S.181 – also a general law duty
• Even if Director’s actions are in company’s best
interests, may still be a breach of duty if a power is
not exercised for a proper purpose

Two step test


• See Howard Smith case:
- Q of law - for what purpose was the power conferred?
- Q of fact - for what purpose was the power exercised?
• Mixed purpose: if more than one, use the “but for” test
– Kokotovich, Whitehouse 11
Example – share issue power
• Normally a power of the board of Directors
• Proper purposes include:
– to raise capital
– for an employee share scheme
– as consideration for purchase of an asset
• Improper purposes include to:
– entrench the existing board of Directors
– fight off a hostile takeover bidder
– make a majority member a minority member

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Other Examples
• Advance Bank – used company money to fund re-
election campaign
• Permanent Building Society – improperly used
power to enter into contract to acquire land from
Tower. Purpose was to put Tower in funds to
purchase business from JCLD (which benefited
Directors)

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Consequences of breach
• S.181 is a civil penalty provision
• Declaration of contravention & orders
• Note the criminal (offence) provision in
s.184 – reckless or intentionally dishonest
• General law duties – company’s right to equitable
compensation for breach of duty

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DD: 4 General law conflict rule
• Director must not place himself/herself in a position
where there is an actual or substantial possibility of
conflict between a personal interest & the Director’s
duty to act in the interests of the company
• Unless the permission of the company is obtained or
the constitution allows it
• A very strict duty – designed to protect shareholders.
Can arise, eg where Director:
– contracts with the company
– makes personal profit as a result of his/her position
as a Director
– misuses confidential co information
– works for a competitor 15
Transaction with the company
• Very common situation triggering the general law
conflict rule
• Director’s interest in the transaction may be:
– direct
– indirect, eg through another co or a partnership
(Aberdeen Railway)

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Taking corporate property,
information or opportunity
• Examples: Furs Ltd; Cook v Deeks; Peso Silver
Mines
• Director will be in breach even if the company
cannot itself take up the opportunity,
• unless the company agrees: Regal (Hastings)
• When can a Director resign to take up an
opportunity? Canadian Aero Service

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Conflict of duties
• Director may not place herself/himself in a position where
there is an actual or substantial possibility of a
conflict between the D’s duty to the co & the D’s duty to
someone else (eg another company)
• See South Australia v Marcus Clark
Other conflicting interests
Other Conflicting interests
Competing companies:
– Non-executive Director can be on boards of
competing companies if no breach of duty (ie no
actual conflict of duties) & no disclosure of confidential
information
• Nominee Directors: duty to the company prevails over
duty to nominator
But will not be a contravention if..
• Company consents:
– full disclosure made to members in general
meeting and members “ratify” by passing an
ordinary resolution approving, or
– constitution permits it with full disclosure to
board, and full disclosure is made (eg RR s194)
OR
• The constitution modifies the duty

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Effect of constitution
• Constitution may include provisions allowing conflict
with full disclosure to, and consent of, the board
– For proprietary companies, see RR s.194
• Modification of nominee Director’s duty eg Levin v
Clark

Statutory regulatory
• Disclosure of interests by Directors
• Restrictions on voting by Directors of public companies
• Prohibition on improper use of position or information
• Financial benefits given by public companies to related
parties, including Directors 20
Disclosure of interest
• See ss.191-194
• Directors must disclose material personal interest
to the board, unless exempt
• Matter must relate to affairs of the company, &
potential for conflict must be real & substantial
• Does not apply to single Director proprietary
company

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Voting restriction – public co
Ds
• S.195: A director with a material personal interest
in a matter being considered by the board must
not be present or vote at the meeting unless the
other Directors (or ASIC in limited circumstances)
allows it
• Remember, other Directors’ decision to allow
must be in best interests of company

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Improper use of position or
information
• Directors are not allowed to use:
– their position (s182), or
– information obtained in that position (s183) to
gain advantage for themselves or someone else,
or to cause detriment to co

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Related party transaction
• Chapter 2E restricts ability of public company, or
entity controlled by public company, to give a
financial benefit to (among others) the public
company’s Directors, their family or entities
controlled by them
• Unless the benefit is exempt or approved by
ordinary resolution of general meeting
• Exempt benefits include:
– benefits within wholly-owned groups
– reasonable remuneration for officers or employees
– benefits given on arm’s length terms
– benefits to members that do not discriminate
unfairly between them 24
Consequences of breach
• General law duty – company may have civil
remedy eg claim for damages, account of profits
• Statutory provisions:
– s.191: fine $1,700 and/or 3 months prison
– s.195: fine $850
– s.182: civil penalty provisions (also note offence
provision in s.184)
– Chapter 2E: civil penalty provision

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