Directors' and Officers' Duties

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Directors’ and
Officers’ Duties 16
Overview of Duties 00
Directors’ Duties 00
To whom are directors’ duties owed? 00
Corporate social responsibility 00
Fiduciary Duties 00
Overview 00
Duty to act in good faith and in the company’s best interests 00
Duty to avoid conflicts of interest 00
Secret profits 00
The proper purpose rule 00
Statutory duties under the Corporations Act 00
Defences: Disclosure 00
Relief from liability 00
Common Law Duties 00
Duty of care and diligence 00
The modern duty of care and diligence 00
Statutory codification of the duty of care and diligence 00
Statutory defences 00
Remedies for Breach of Common Law and Fiduciary Duties 00
General law remedies 00
Statutory remedies 00
Criminal Actions Against Directors 00
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Other Statutory Duties 00

Related party transactions 00
Miscellaneous statutory duties 00
Duty to Avoid Insolvent Trading 00
Background to the insolvent trading prohibition 00
The current prohibition 00
Defences to insolvent trading 00
Recovering repayment for debts incurred during insolvency 00
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LEARNING OBJECTIVES
After completing this chapter you should be able to:

• Appreciate the difference between equitable fiduciary duties, statutory duties
and the common law duties of directors and officers.
• Identify the overlap between the various duties imposed upon all directors and
officers and apply appropriate duties to particular factual problems.
• Explain the role of ASIC in ensuring that directors’ and officers’ statutory
duties are complied with.
• Discuss the scope of the duty to exercise care and diligence at common law
and under the Corporations Act with reference to modern standards and
community expectations.
• Explain the role and operation of the business judgment rule under the
Corporations Act.
• Discuss the scope of the fiduciary duties of loyalty and good faith at general
law and under the Corporations Act.
• Discuss the manner in which directors and officers may obtain relief from
breaches of duty at general law and under the Corporations Act.
• Discuss the remedies available for breach of directors’ and officers’ general
law and statutory duties.
• Provide an overview of the related party transaction provisions under the
Corporations Act.
• Explain how directors and officers may be liable for insolvent trading under the
Corporations Act.
• Explain the statutory defences to, and consequences of, insolvent trading
under the Corporations Act.
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KEY CASES
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171
ASIC v Plymin (2003) 46 ACSR 126; [2003] VSC 123
ASIC v Rich (2003) 44 ACSR 341; [2003] NSWSC 85
ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC 738
AWA v Daniels (1992) 9 ACSR 383
Brunninghausen v Glavanics (1999) 46 NSWLR 538
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Daniels v Anderson (1995) 37 NSWLR 438
DCT v Clarke (2003) 57 NSWLR 113; [2003] NSWCA 91
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Metropolitan Fire Systems v Miller (1997) 23 ACSR 699
Mills v Mills (1938) 60 CLR 150
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Rich v ASIC (2004) 50 ACSR 242; [2004] HCA 42
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213; [2001] NSWSC 621
Spies v R (2000) 201 CLR 603; [2000] HCA 43
Vines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75
Vrisakis v Australian Securities Commission (1993) 11 ACSR 162
Whitehouse v Carlton Hotel Pty Ltd (1987) 70 ALR 251
KEY SECTIONS
180, 181, 182, 183, 184, 189, 191, 195, 588G, 588H, 1317E, 1317G, 1317H, 1317S, 1318
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INTRODUCTION
Previous chapters have examined the fundamental nature of companies. They are
juristic persons (artificial but recognised in the eyes of the law) and are
dependent upon human beings to make decisions on their behalf. In the previous
chapter, we looked at the different types of officers and directors, including the
chair, the non-executive directors, the executives and the company secretary,
as well as senior employees/managers who act on behalf of the company.
Upon being deemed by the law to be an officer, a number of legal duties will flow
from holding that position within the company. Directors, who control and
manage the company, are in a powerful position and it is easy for their extensive
powers to be abused, for example, through fraud or mismanagement. The law
recognises the company’s vulnerability to abuse by directors and officers.
For purposes of accountability and to minimise risk of wrongful or illegal
behaviour, the law imposes stringent duties on officers and directors. Essentially,
the legal duties imposed on officers and directors are to ensure that they act not
for their own benefit but for the benefit of the company. These legal duties are
derived from three distinct sources of law:
1. traditional common law (including the law of negligence);
2. the principles of equity (particularly the law of fiduciary obligations); and Fiduciary:
a fiduciary is a
3. the statutory duties, under the Corporations Act, imposed by Parliament. person upon
whom the law of
equity imposes
The first two sources are commonly called ‘general law’ and overlap with the third obligations
because of the
source ‘statutory law’. power, influence
and responsibility
that the fiduciary
has over another
vulnerable person
(known as the
principal).
A company
director occupies
a fiduciary
position over
the company
as principal.
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OVERVIEW OF DUTIES
16.1 All directors and officers of a corporation are bound by a number of general law and
statutory duties. The Corporations Act clarifies and codifies the existing judge-made legal
duties that are imposed upon directors and officers.1 As a result, there are similarities between
the judge-made rules (that is the rules from common law and equity) and the statutory rules.
All directors owe the company equitable duties of loyalty and good faith. As part of
that duty, directors must:
1. act in good faith in the interests of the company;
2. act for a proper purpose;
3. avoid conflicts of interest; and
4. retain discretion.2
In addition, directors must exercise care, skill and diligence in the performance of their
duties. This is similar to the common law duty to avoid negligence resulting in reasonably
foreseeable harm: Donoghue v Stevenson [1932] AC 562.
These general law duties are reinforced under the Corporations Act. For example, the
duties to act in good faith and for a proper purpose are reinforced in s 181 of the
Corporations Act. Sections 182 and 183 reinforce the duty to avoid conflicts of interest by
prohibiting directors from making improper use of their office and information. Section
180(1) reinforces the duty of care by imposing the same objective standard that arises under
common law.
A key difference, however, lies in the enforcement of these duties and the remedies that
flow from the different sources of law. The company, as plaintiff, enforces the duties owed at
general law.This is a consequence of the duties being owed to the company, which at law is
a separate person. In practice, it is the board of directors, as part of their management power
who decide to litigate in the company’s name. This can be problematic in instances where
it is alleged that the directors themselves have breached a duty owed to the company.
The Corporations Act addresses such difficulties by empowering shareholders to litigate on
the company’s behalf in certain circumstances via a statutory derivative action under Pt 2F.1A.
The rights of shareholders, in particular, to enforce duties imposed on directors and other
officers, is discussed further in Chapter 17 ASIC enforces the statutory duties arising under
the Corporations Act.The different remedies and consequences are identified and discussed
below.
The fundamental duties that are imposed on all officers, which naturally overlap with one
another, can be best illustrated in a Venn diagram. Figure 16.1 is an overview of officers’
duties and shows the interrelationship between the Corporations Act, the common law and
equitable duties. The overlapping areas represent how the Corporations Act in Pt 2 D.1
(duties of company officers) reflects parts of the general law principles. For example, the
prohibition against a director having a conflict of interest can be found under the
1 As noted in the previous chapter, s 9 of the Corporations Act defines an ‘officer’ to include a director.
2 The duty to retain their discretion to make decisions in the best interests of the company requires the directors not to
bind themselves to vote in a particular manner as such an agreement may be against the interests of the company at the
time of the meeting.This duty is rarely an issue in litigation and will not be considered further.
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Directors’ and Officers’ Duties
Corporations Act (s 191) and at general law expressed as a fiduciary duty. In other instances,
duties are specifically laid out in statute. For example, the prohibition on insider trading is
found in s 1043A. Some duties are applied exclusively to directors. For instance, a specific
example that is applied to directors (and not all officers) is the positive duty to not trade
while the company is insolvent as required by s 588G.This provision is an enhancement of
the common law duty to consider creditors in times of financial trouble, as affirmed by the
High Court in Spies v R (2000) 201 CLR 603; [2000] HCA 43.
The bottom two circles of the diagram represent the civil actions that could be brought
under either the common law (such as a breach of contract or the tort of negligence) or under
the equitable fiduciary duty (such as a conflict of interest). The top circle represents the
imposition of statutory duties by Parliament through the Corporations Act which may give
rise to a criminal offence (as found in ss 184 and 1043A). Where the circles overlap, there
may be a choice of legal actions under the common law and equity or with the statutory
duties, which are stated to be a civil penalty (for example ss 180–183) by virtue of s 1317E.
Section 185, found where the three circles intersect in Figure 16.1, provides that the
duties imposed by the Corporations Act are additional to the duties imposed at common
law and in equity, rather than exclusive of them.Thus a director could be sued for all three
types of actions rather than just the Corporations Act or the common law/equitable
principles that have been breached.
FIGURE 16.1 Overview of Officers’ Duties
CA
s 184
s 588G(3)
s 1043A
s 180
s 182
s 588G(2)
s 183
s 181 s 185
Common law Equitable fiduciary

duties duties
An example of a director being held liable for all three types of actions occurred in South
Australia State Bank v Clark (1996) 16 ACSR 606. In that case, the CEO was held liable for
breach of negligence (a common law duty), breach of equity through a conflict of interest
and contravening his statutory duties as a director. All of these concepts will be discussed
further below.
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Australian Corporate Law
DIRECTORS’ DUTIES
To whom are directors’ duties owed?
16.2 The question of to whom are the duties of directors owed is normally answered by the
phrase ‘to the company as a whole’. This was interpreted by the UK Court of Appeal as
meaning not the company as an entity outside and apart from its shareholders, but rather the
general body of shareholders: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.
Individual shareholders
16.3 The principle that directors and other officers owe duties to the company as a whole
ordinarily means that whilst duties are owed to the collective body of shareholders, duties
are not owed to particular shareholders individually: Percival v Wright [1902] 2 Ch 421.
This has prevented individual shareholders from taking action against the board of directors
for breach of their duties, because the duties were owed not to particular shareholders, but
to the company as a whole.This meant that only the company could take action against the
directors. This became known as the ‘rule in Foss v Harbottle’ or ‘the proper plaintiff rule’:
[x-ref to members’ remedies].
The principle that only the company could enforce a breach of the directors’ duties leads
to the obvious practical problem that the company only acts on the initiative of the
directors, which led to numerous common law exceptions to the rule in Foss v Harbottle
(1843) 2 HARE 461; 67 ER 189.These exceptions have now largely become irrelevant as
Pt 2F.1A allows actions to be taken in the name of the company using a statutory derivative
action if leave is granted by the court under s 237: [x-ref to members’ remedies].
There have, however, been several cases where the nature of the relationship between
particular directors and particular shareholders has been said to be fiduciary in nature so that
fiduciary obligations are owed by those directors to those shareholders. Coleman v Myers
[1977] 2 NZLR 225 is an example of such a situation. In that case, the purchase of shares
by a director in a closely-held family company (that is a company with few shareholders)
was found to give rise to a fiduciary relationship between the purchaser (director) and the
seller (shareholder) because of the trust and reliance elements in their relationship.
This decision was followed in Australia in Brunninghausen.
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KEY CASE
Brunninghausen v Glavanics (1999) 46 NSWLR 538
New South Wales Court of Appeal
Facts: B and G were the shareholders and directors in a family company, however after a
disagreement between them G took no active part in the management of the company until
their mother-in-law intervened to make peace. Shortly thereafter, G agreed to sell his shares
to B. However, G was not aware that B was negotiating to sell the company to another
person for a higher price per share than B was offering G. Thereafter, B sold the business
and profited from the higher price to the detriment of G.
Decision: The relationship between B and G was fiduciary in nature because G had been
effectively locked out of the company and had no way of verifying the true value of his
shares in the company. These elements of vulnerability and control in a small family
company give rise to fiduciary obligations on B to provide full disclosure to G regarding the
potential sale of the business.
Employees
The courts have consistently held that officers do not owe a duty to consider the company’s 16.4
employees ahead of shareholder interests. In the famous case of Parke v Daily News Ltd [1962]
Ch 927, the court found that bonus payments to employees as compensation for their dismissal
following a sale of the company’s business was not a proper use of the company’s funds.
KEY STATEMENT
Parke v Daily News Ltd [1962] Ch 927
Chancery Division (UK)
Plowman J
The view that directors ... are entitled to take into account the interests of its employees,
irrespective of any consequential benefit to the company, is one which may be widely held
... but no authority to support that [view] as a proposition of law was cited ... such is not
the law ...
The law does not say there is to be no cakes and ale, but there are to be no cakes and ale
except such as are required for the benefit of the company. (The company may provide extra
benefits to employees but only if that delivers a benefit to the company.)
However, in more recent times, the protection of employee entitlements (such as wages)
have become a hot topic. The Patrick’s waterfront dispute in the late 1990s (where a
company that employed hundreds of workers was stripped of its assets to prevent the
workers being paid their full entitlements) and the collapse of Ansett (where thousands of
aviation workers were compensated by the federal government after the Ansett group of
companies became insolvent) sparked widespread debate about the protection of employee
entitlements such as wages and superannuation. Part 5.8A of the Corporations Act now
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provides for director liability where they have allowed the company to enter into a
16.5 transaction designed to defeat worker entitlements.3
Nominee directors
In the last chapter, we considered the range of different directors and officers, including
nominee directors. A nominee director is an example of a director who is appointed by a
particular shareholder to represent their interest. Occasionally, a company’s constitution may
also provide for the appointment of a director to represent employees. Nominee directors
are obliged to act in the best interest of the company that they are serving as directors.
This, of course, allows the nominee director to act in the best interest of his or her
appointing shareholder, providing that the interests of that shareholder do not conflict with
the best interests of the company.
CASE EXAMPLE
Re Broadcasting Station 2GB Pty Ltd [1964–1965] NSWR 1648
New South Wales Supreme Court
Facts: This case concerned the legality of the actions of several nominee directors who had
been appointed by the company’s majority shareholder. The claim was based on minority
oppression (see [x-ref to members’ remedies]) and alleged that the directors had failed to
act in the best interests of the company because they acted only in consideration of the
majority shareholder’s interests.
Issue: Did the directors breach their duty to act in the best interest of the company?
Decision: The directors had not breached their duty because their actions were not done
against the interest of the company. The court said that the directors’ conduct would have
been in breach of duty had it been proven that the directors would have acted for the
nominee even if that would have harmed the company’s interest.
In subsequent cases the courts have stressed that directors need to consider the interests of
the company separately to any other interests. Clearly, the interests of the company must
remain paramount.
Corporate groups
16.6 Modern corporations often use subsidiaries (particularly subsidiaries which are ‘wholly-
owned’ by a corporate shareholder) to promote the interests of the overall group, rather than
Subsidiary: to promote the interests of the subsidiary.4 Directors of companies that are part of larger
this is defined in
s 46 of the
corporate groups are placed in a particularly difficult position.The High Court’s decision in
Corporations Act. Walker v Wimborne (1976) 137 CLR 1 at 6 requires directors of subsidiary companies to act
3 See further Noakes D,‘Dogs on the Wharves: Corporate groups and the waterfront dispute’ (1999) 11 Australian Journal of
Corporate Law 27; Gronow M, ‘Insolvent Corporate Groups and their Employees:The case for further reform’ (2003) 21
Company and Securities Law Journal 188; Symes C,‘Will There Ever Be a Prosecution Under Pt 5.8A?’ (2002) 3(1) Insolvency
Law Bulletin 17.
4 A study by Ramsay and Stapledon in 2001 revealed that the majority of the top 500 ASX listed companies had at least
one controlled entity (for example a subsidiary company) with an average of 28 controlled entities per corporation:
Ramsay I and Stapledon G, ‘Corporate Groups in Australia’ (2001) 29 Australian Business Law Review 7.
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in the best interests of those companies, and not merely for the benefit of the larger
corporate group. However, it will often be the case that actions done to benefit the
corporate group will also provide a benefit for the subsidiary (albeit often an indirect
benefit). In the leading decision in Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993)
11 ACSR 642, the provision of funds from the subsidiary to pay debts owed by other
companies within the group was held not to be a breach of directors’ duties because the
financial stability of the group provided a benefit to the subsidiary.
Section 187 provides that directors of ‘wholly-owned’ subsidiaries may act in the best
interests of the holding company (that is the company that owns all of the shares in the
subsidiary) provided that:
• the subsidiary’s constitution expressly authorises the directors to act in the interests of the
holding company;
• the director acts in good faith;
• the director in fact acts in the best interests of the holding company; and
• the subsidiary remains solvent.
Creditors
Ordinarily, a company’s creditors may not seek payment from the directors of the debtor 16.7
company. A company, after all, is a separate legal entity with the rights and powers of a real
person: s 124. Therefore, this includes the right to borrow money and be sued for its
repayment by a creditor. However, the notion of benefiting ‘the company as a whole’ has at
various times been found to include an obligation upon the directors to take into account
the interests of creditors in specific circumstances, namely, insolvency: see Kinsela below.
The view that directors could owe duties to consider creditors’ interest, gained momentum
when Mason J said in the High Court decision in Walker v Wimborne (1976) 137 CLR 1 at
6–7 that:
it should be emphasized that the directors of a company in discharging their duty to the
company must take account of the interest of its shareholders and its creditors. Any failure by
the directors to take into account the interests of creditors will have adverse consequences for
the company as well as for them.
However, 24 years later the High Court decision in Spies v R (2000) 201 CLR 603; [2000]
HCA 43 made it clear that this statement did not provide creditors with an independently
enforceable duty against directors.5 To demonstrate this, the court quoted the following
passage from Re New World Alliance Pty Ltd (1994) 122 ALR 531 at 550:
Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a
direct interest in the company and that interest cannot be overridden by the shareholders.
This restriction does not, in the absence of any conferral of such a right by statute, confer upon
creditors any general law right against former directors of the company to recover losses
suffered by those creditors ... the result is that there is a duty of imperfect obligation owed to
creditors, one which the creditors cannot enforce save to the extent that the company acts on
its own motion or through a liquidator.
5 See further Hargovan A,‘Directors’ Duties to Creditors in Australia after Spies v R: Is the development of an independent
fiduciary duty dead or alive?’ (2003) 21 Company and Securities Law Journal 390.
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Thus, outside of situations involving insolvent trading (where creditors are given the
statutory power to pursue the directors for repayment of debts ([x-ref to insolvent
trading]) directors’ duties are owed to the company and not to the creditors. However,
(as Mason J also said) the directors should take into account the creditors’ interests as the
creditors often provide the financial support vital for the company’s success. One result of
directors’ duties not being owed directly to creditors is that creditors generally cannot
enforce a breach of those duties (that is because the duties are owed to the company not the
creditors).
The exception to this is situations where the company is insolvent or approaching
insolvency, as demonstrated in the decision in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986)
4 NSWLR 722. In that case, the NSW Court of Appeal stated that ‘the directors’ duty to a
company as a whole extends in an insolvency context to not prejudicing the interests of
creditors’. Similar comments were made in Vrisakis v Australian Securities Commission (1993)
11 ACSR 162 at 213 per Ipp J.
Therefore it may be said that officers do not owe duties directly to creditors because their
duties are owed to the company. However, creditors play an important role in the continuing
success of the company because they provide funds to assist the company with acquisitions
16.8 and expansions and to manage its cashflow.The only time when it can be said that directors
owe duties directly to creditors is when the company is insolvent, in which case the creditors
may recover their debts directly, in certain circumstances, from the directors for insolvent
trading: see [16.54–16.66].
Corporate social responsibility

This discussion on to whom are the duties owed, however, raises several questions regarding
the company’s relationship with other key stakeholders such as employees, creditors and
individual shareholders. Should duties be owed to such a wider class of corporate
stakeholders? The following case study raises such broader issues.
CASE STUDY
James Hardie Ltd
Few companies in Australia have generated as much adverse corporate law publicity as
James Hardie Ltd (now James Hardie Industries NV due to its subsequent registration in the
Netherlands). James Hardie is a company that produced and distributed asbestos products
(primarily building products) for most of the twentieth century. Exposure to asbestos fibres
has been linked to lung cancer and other various respiratory illnesses, which has resulted
in thousands of negligence and product liability cases against James Hardie and other
former asbestos producers (such as CSR). It is widely accepted that claims arising out of
exposure to asbestos products will continue to increase in the coming decades, with some
estimates expecting in excess of 200,000 new cases of asbestos-related illness to develop
over the next 20 years. James Hardie therefore has a known exposure to asbestos litigation
that will only increase in the future.
In the late 1990s the board of directors of James Hardie decided to reorganise the
corporate group. This resulted in the asset rich companies in the group being relocated to
the Netherlands (which offers favourable tax advantages but also does not recognise
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Australian court decisions, which would prevent any liability imposed in Australia being
enforced in the Netherlands) and the companies with asbestos-related liability remained in
Australia. The remaining Australian companies were given several hundred million dollars to
establish a medical research and compensation fund to pay compensation claims arising
from asbestos-related liabilities of James Hardie companies. This fund was inadequate to
meet the claims of asbestos sufferers who used or worked with James Hardie products.
After much public debate about the propriety of James Hardie’s restructure, the New
South Wales government established a Special Commission of Inquiry to investigate the
matter. The Commission’s report was critical of the accuracy of various statements made by
senior officers of James Hardie, but did not find any breach of directors’ duties.
The James Hardie restructure has generated considerable public outrage relating to the
actions of Hardie’s company directors adopting a policy to deliberately minimise the
company’s exposure to asbestos liabilities, and thereby deny compensation to potentially
hundreds of thousands of asbestos victims. James Hardie’s board of directors have
consistently justified their conduct on the basis that the restructure maximises the interests
of shareholders. Community activists (such as victim support groups and the union
movement) have argued that the restructure is morally reprehensible because it denies
victims their legal entitlements to compensation. This demonstrates the tension between
promoting the interests of shareholders in maximising profits and the interests of other
stakeholders such as tort victims and creditors.
Since the completion of the Special Commission of Inquiry, James Hardie has agreed to
pay additional funds to the research and compensation fund to ensure that victims are
compensated.
The James Hardie restructure demonstrates the obvious tension between the legal
obligations of company directors (which are owed to the company and its shareholders)
and the community expectations of corporations to provide compensation to victims
harmed by corporate malfeasance.
At the time of writing, the Corporations and Markets Advisory Committee (CAMAC) had
recommended that no change be made to the statutory duties of officers to incorporate
corporate social responsibility.6 However, ASIC has commenced legal action against the
directors of James Hardie for breaching their duties to the company.
DISCUSSION
POINT
Should directors be permitted to disregard community interests in favour of promoting
shareholder wealth?
6 CAMAC papers may be obtained from its website <http://www.camac.gov.au>.

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FIDUCIARY DUTIES
Overview
16.9 The relationship between directors and their company is classed by the law as a ‘fiduciary
relationship’. The law of fiduciary relationships is derived from equitable principles and is
based upon imposing restrictions on those people in a position of power over others who
may be vulnerable to harm through the exercise of that power. In the High Court decision
of Hospital Products Ltd v United States Surgical Corporation (1984) 55 ALR 417 at 488,
Dawson J described a fiduciary duty in the following terms:
Inherent in the nature of the fiduciary relationship itself is a position of disadvantage or
vulnerability on the part of one of the parties which causes him to place reliance upon the other
and requires the protection of equity acting upon the conscience of that other. From that springs
the requirement that a person under a fiduciary obligation shall not put himself in a position
where his interest and duty conflict or, if conflict is unavoidable, shall resolve it in favour of
duty and shall not, except by special arrangement, make a profit out of his position. [Emphasis
added.]
Directors, like partners, trustees and agents, always owe a fiduciary duty to those persons
who are vulnerable to their actions and who may be easily harmed. That is, directors and
other officers owe a fiduciary duty to the company because it is vulnerable to their
actions and relies on the directors and officers to act properly. As a fiduciary, there are
four central obligations governing corporate behaviour:
1. to act in good faith, in the best interests of the company;
2. to avoid conflicts of interest;
3. to not make a secret profit; and
4. to act for a proper purpose.
All officers must avoid breaches of these equitable fiduciary duties, and a breach may result
in the officer becoming a constructive trustee.This means that all proceeds that the officer
has obtained from the breach of duty would be held on trust and returned to the company.
Alternatively, the officer may be liable to pay equitable damages or the company may rescind
any contract that was improperly made by the officer. In addition to these equitable
remedies, officers may also be liable for civil or criminal penalties under the Corporations
Act because these equitable duties are largely reproduced in ss 181–183. [x-ref to later
section on remedies].
Each of the above categories of fiduciary duty will be considered below by examining
the fiduciary duties first at general law and the statutory equivalents thereafter. ASIC v Adler
(2002) 41 ACSR 72; [2002] NSWSC 171 is the leading modern decision concerning breach
of fiduciary duties and will be used as a case study for discussing this topic.
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CASE STUDY
Facts: Adler obtained an unsecured loan from HIH (a company that he was a director and
shareholder of) to purchase shares in a company that he was involved in, which the court
held was in breach of his statutory duties. Adler also used some of the funds to buy more
shares in HIH in the hope of increasing the share price. ASIC alleged that Adler and Williams
(the founder and CEO of HIH) had breached the statutory equivalent of their fiduciary duties
owed to HIH (that is ss 181–182). The facts comprising the allegations of breach of fiduciary
duty included:
Adler: Acted for an improper purpose by attempting to gain an advantage for himself by
obtaining the unsecured loan from HIH to purchase shares in a company that he was
involved in. Furthermore, Adler acted improperly by seeking to obtain a benefit from the
loan by using part of the loan funds to purchase HIH shares on the stock market.
Williams: Sought to use his senior position in HIH in order to benefit Adler and himself
through the increased share price of HIH that would be achieved when Adler used part
of the loan funds to purchase HIH shares on the stock market.
Significance: This case considers the range of fiduciary breaches including conflicts of
interests (the conflict between the interests of HIH and the personal benefits sought by Adler
and Williams), making a secret profit (Adler and Williams deliberately sought to avoid proper
HIH internal processes to avoid detection of their activities) and acting for an improper
purpose (Adler was only motivated by trying to advantage himself at the detriment of HIH).
The Adler case will be referred to in greater detail under each of the categories of fiduciary
duty, discussed below.
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FIGURE 16.2 Overview of Fiduciary Duties
The law of equity Equity recognises that

examines the Law of Equity certain realtionships
fairness of a (such as director/company)
transaction require strict regulation
Fudiciary Obligations
Act in good faith Act for a proper Avoid conflicts No secret profits
and in best purpose of interest
interests of the
company
Ratification by Defences Relief from liability

shareholders (s 1318)
Breach of these duties

will allow company to seek Equitable Remedies
these remedies
Compensation Account of Injunction Constructive Rescission

profits trust of contract
Duty to act in good faith and in the company’s best interests

16.10 All fiduciaries (including company directors) have an obligation to act in good faith and in
the best interests of their principal (for directors and officers the principal is the company).
The meaning of the term ‘in the best interests’ of the company involves a consideration of
‘who’ the company is for the purposes of the law. At the start of this chapter, it was noted
that directors owe their duties to the company as a whole, and that this phrase generally
refers to the body of shareholders, rather than specific shareholders, and not creditors7 or
employees.Thus, it may be said that the fiduciary duty to act in the company’s best interests
is an obligation to act for the benefit of shareholders generally.
The requirement to act in ‘good faith’ is a common element of corporate regulation,8
and is generally taken to refer to an obligation to act honestly. However, it should not be
assumed that the honest director will be able to avoid liability. Far from it, both the law of
7 Except if the company is insolvent or approaching insolvency as noted above.

8 See for example the ‘business judgment rule’ defence in s 180(2) and the statutory derivative action discussed in s 237(2):
[x-ref to members’ remedies].
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fiduciary obligations and its statutory equivalents in ss 181–183 of the Corporations Act
contain rules that may be breached even by honest and well-intentioned directors. It is to
these rules that attention is now focused.
Duty to avoid conflicts of interest

A key responsibility of being a director, and thus having an equitable fiduciary duty, is the 16.11
need to avoid conflicts of interest.This was expressed in Aberdeen Railway Company v Blaikie
Bros (1854) 1 Macq 461 at 471–2, by Lord Cranworth LC, who said:
that no one, having fiduciary duty to discharge, shall be allowed to enter into engagements
in which he has, or can have, a personal interest conflicting, or which possibly may conflict,
with the interests of those whom he is bound to protect.
This principle and duty are very well established across all persons that hold a fiduciary
position and many cases have discussed the underlying nature of this duty.
KEY STATEMENT
Bray v Ford [1896] AC 44
House of Lords
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the
director of a charitable company, is not, unless otherwise expressly provided, entitled to
make a profit. The director is not allowed to put himself or herself in a position where his or
her interest and duty conflict.
[Similar comments were made by Lord Upjohn in Phipps v Boardman [1967] 2 AC 46
at 123.]
The rule that directors (as fiduciaries) cannot act under a conflict of interest (for example,
by making a secret profit out of the company’s dealings) extends to situations even where
the director only makes an indirect profit, as demonstrated by the Transvaal case.
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CASE EXAMPLE
Transvaal Lands Co v New Belgium (Transvaal) Lands & Development Co [1914] 2
Ch 488
Court of Appeal (UK)
Facts: Two directors of Transvaal were also involved in another company called New Belgium.
One of the directors (Samuel) was a shareholder and director of New Belgium, whilst the
other (Harvey) was only a shareholder (holding the shares as trustee for other persons).
The two directors of Transvaal persuaded the other directors to agree to have Transvaal
purchase property from New Belgium without disclosing their interest in that company or the
benefit that they would obtain from the purchase (as shareholders in New Belgium).
Issue: Did the two directors breach their duties to avoid conflicts of interest?
Decision: The directors had acted under a conflict between their duty to promote the
interest of Transvaal and their personal benefit in selling property to Transvaal through their
other company New Belgium. This was despite the fact that Harvey only held the shares as
trustee for other persons. The directors should have disclosed their interest in New Belgium
before Transvaal purchased the property. The purchase transaction was rescinded by
Transvaal.
Significance: This case demonstrates that the fiduciary obligation not to act under a conflict
of interest is very strong and extends to both direct and indirect conflicts.
Test for establishing a conflict of interest

16.12 The famous decision in Phipps v Boardman [1967] 2 AC 46 is authority for the following
statement of principles regarding how company officers should manage their conflicts of
interest:
• Company officers should assess the question of whether there is a real possibility of
conflict between their private interests and the interests of the company. In other words,
officers should assess whether the interests are compatible. Can the officer follow one
interest without harming the other?
• Company officers must make full disclosure of all potential conflicts, and abstain from
influencing deliberations. If an independent board of directors and/or the company's
members approve of the conduct, the officer can be said to have obtained the company's
informed consent.
The two most common situations involving the rule against conflict of interests are:
1. diversion of business opportunities; and
2. misappropriation of company property.
Diversion of business opportunities
16.13 It is a fundamental rule of equity that fiduciaries may only act for the benefit of their
principal. Therefore, directors and other company officers may not use their position as
directors to take away business opportunities that properly belong to the company.
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CASE EXAMPLE
Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1
Western Australian Full Supreme Court
Facts: Green was a senior manager of Bestobell, which was involved in construction
projects. Through his work for Bestobell, Green became aware that the construction project
that Bestobell was involved in was calling for a new round of tenders for new work. Without
first obtaining the approval of Bestobell, Green submitted a tender for the new construction
work through a company he set up called Clara Pty Ltd. Green knew that Bestobell would
also submit a tender, and he knew what Bestobell’s construction costs would be so he
ensured that Clara’s tender was for a lower price than Bestobell’s. After Green left his
position at Bestobell the construction contract was awarded to Clara Pty Ltd. Bestobell sued
Green for breaching his fiduciary duty and sought to claim the secret profit he made
(an ‘account of profits’).
Decision: The court found that Green had breached his fiduciary duty by acting under a
conflict of interest through the misappropriation of Bestobell’s business opportunity.
It is important to note that the breach of fiduciary duty does not arise merely because the
officer obtained a profit from diverting business opportunities from the company (although
this will often be the case): [x-ref to secret profit]. It arises because the officer has allowed
their personal interest to conflict with the company’s interests. The result of that conflict does
not determine liability, although it is relevant for determining the appropriate remedy.
Therefore, company officers can breach their fiduciary duty through conflicts of interest
even where they make no profit, or where the company suffers no loss, or even in cases
where the company makes a profit.This issue is discussed further below when the important
decision in Regal Hastings Ltd v Gulliver [1967] 2 AC 134 is considered.
Misappropriation of company property
Directors and other company officers (as fiduciaries) may only use the company’s property 16.14
for the purpose of benefiting the company, not for a private benefit. Where a company
officer uses company property for a private purpose without the company’s permission, the
officer breaches their fiduciary duty.
It is important to note that although knowledge is not always considered property,
the company’s property for the purposes of the conflict rule may include intellectual
property and trade secrets. For example, as noted above in Green v Bestobell Green (a senior
manager of Bestobell) misappropriated details of Bestobell’s construction costs so as to
formulate a lower tender offer for his competing company Clara Pty Ltd.
Cook v Deeks is a famous example of misappropriation of company property by directors.
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CASE EXAMPLE
Cook v Deeks [1916] 1 AC 554
Privy Council (UK)
Facts: In this case, several directors (including two Deeks brothers and another director) of
the Toronto Construction Company had a disagreement with one of the other directors
(Cook). The directors then negotiated a major construction project on behalf of the
company, but diverted that project to a new company that they had established in an
attempt to exclude Cook from the project (Cook was neither a shareholder nor director of
the new company). The directors then used their shareholdings to pass a resolution at a
members’ meeting declaring that the company (that is Toronto Construction) had no interest
in the project, effectively freezing out Cook from the project.
Issue: Did the directors breach their fiduciary duty by giving the business opportunity to the
new company rather than Toronto Construction?
Decision: The directors acted in breach of their fiduciary duty and the shareholders’
resolution was invalid because the directors/shareholders were acting under a conflict of
interest. As the court said (at 563):
[directors] who assume the complete control of a company’s business must remember that
they are not at liberty to sacrifice the interests which they are bound to protect, and, while
[apparently] acting for the company, divert in their own favour business which should properly
belong to the company they represent.
The obligation to disclose conflicts

16.15 Part of the fiduciary’s duty to the principal (in this case, the director’s duty to the company)
involves the requirement to give full and open disclosure of all material information.
This fiduciary obligation is also recognised under the Corporations Act: s 191.
There may however be some doubt as to whom the directors may give proper disclosure.
If the directors manage the affairs of the company (see s 198A), then is it right for a director
(or multiple directors) to make disclosure of conflicts to the other directors only? Should
directors be able to approve of their own conflicts? Certainly, following from cases such as
Cook v Deeks (above) the answer must be no, with disclosure to the shareholders being a
requirement. It was noted in the key case of Regal (Hastings) Ltd v Gulliver (discussed below),
that the director could protect themselves from a possible breach of duty by giving full
disclosure to the shareholders and obtaining permission from the shareholders in a general
meeting.
However, as also demonstrated in Cook v Deeks, even disclosure to the general body of
shareholders may be insufficient if the majority of shareholders are involved in the conduct
(as in that case, where the majority shareholders were also its controlling directors). In such
a situation, the actions of the majority shareholders in approving of director conflicts may
itself constitute minority oppression: [x-ref to members’ remedies].9
9 It should be noted that there is some authority for the view that directors may give proper disclosure to the board only:
see Queensland Mines Ltd v Hudson (1978) 18 ALR 1. However, that case concerned a company that was virtually a joint
venture and other decisions where the shareholders have not had such a close relationship have demanded disclosure to the
shareholders as a whole rather than merely the board of directors: see for example, Furs Ltd v Tomkies (1936) 54 CLR 583.
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Where a director fails to give proper disclosure to the company, that breach of duty does
not render the contract void. Rather, the breach renders the contract voidable at the option
of the company and renders the director accountable (to the company) for any secret profit
that he or she has made: Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 585 per Denning LJ.
There are some important exceptions to this rule that are outlined in s 191(2), such as
matters arising because the director is also a member of the company or in respect of the
director’s remuneration.
Secret profits
The restriction on directors from making secret profits is another aspect of the broad 16.16
equitable fiduciary duty imposed on company directors. It is permissible for a director to
make a profit, but the issue of breach of fiduciary duty often relates to disclosure and this
will vary depending upon the circumstances.
A good example of a realisation of a profit that was deemed to be ‘secret’ occurred in
Regal (Hastings) Ltd v Gulliver.
KEY CASE
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
House of Lords
Facts: Regal owned a cinema in Hastings in England and the directors of Regal were keen
to purchase the two competing cinemas in Hastings. The directors of Regal established a
subsidiary company to purchase the competing cinemas. The subsidiary had only a small
amount of paid up capital, because it was intended that Regal (that is the parent company)
would own all of the shares in the subsidiary. However, the landlord who owned the land
where the other two competing cinemas were situated asked for the subsidiary company to
have its capital fully paid up to a value of £5000, or alternatively for the directors to provide
personal guarantees to ensure the payment of the rent. Unfortunately, Regal could only
contribute £2000 to the subsidiary and so the directors of Regal (and their solicitor) decided
to give the remaining £3000 to the subsidiary to make up the £5000 required by the
landlord. Therefore, the directors of Regal and Regal’s solicitor became the owners of shares
in the subsidiary which were intended to have been the property of Regal (the parent).
The shares in the subsidiary were later sold at a profit. When new directors were appointed
to Regal the former directors and solicitor were sued for breach of fiduciary duty.
Regal sought an account of profits from the directors and solicitor.
Decision: The House of Lords found that the directors of Regal were in a fiduciary
relationship with Regal and therefore were liable to account for the profit made by selling
the subsidiary’s shares. The House of Lords found that the solicitor was not acting in a
fiduciary capacity with respect to financing the subsidiary and therefore was not liable to
account for the profit he made. The House of Lords rejected an argument put by the
directors that they should not be liable to account because Regal was incapable of making
the profit because it could not contribute the full £5000 required by the landlord. Lord
Russell said (at 144–5):
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The rule of equity which insists on those, who by use of a fiduciary position make a profit,
being liable to account for that profit, in no way depends on fraud, or absence of bona fides,
or upon such questions or considerations as whether the profit would or should otherwise have
gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit
for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff,
or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises
from the mere fact of a profit having, in the stated circumstances, been made. The profiteer,
however honest and well intentioned, cannot escape the risk of being called to account.
The proper purpose rule

16.17 Despite the extensive powers given to directors, they do not have unlimited power. As part
of their fiduciary duty, directors must exercise their powers for a proper purpose.The proper
purpose rule can be traced to the historical principle of fraud on a power as stated in the
High Court case of Mills v Mills (1938) 60 CLR 150: [x-ref to members’ remedies].
The general rule is that directors, as fiduciary agents of the company, are required to exercise
their powers only for the benefit of the company. Any use of power by directors that is
not undertaken for the benefit of the company is an improper use of that power and
therefore a breach of fiduciary duty.
An exercise of power that is designed to secure some private advantage for the director
is considered to be an improper purpose because it is outside of the purpose of benefiting
the company: Mills v Mills (1938) 60 CLR 150 at 185 per Dixon J.
KEY CASE
Mills v Mills (1938) 60 CLR 150
High Court of Australia
Facts: The directors of Charles Mills (Uardry) Ltd passed a resolution which increased the
voting power of the managing director by providing the company’s dividend distribution to
be by way of bonus shares to ordinary shareholders (which included primarily the managing
director). The minority director (who held only preference shares with triple voting rights)
challenged the validity of the resolution on various grounds including on the basis that the
majority directors did not act bona fide in the best interests of the company.
Decision: The court found that the resolution was made bona fide in the best interests of
the company despite the fact that the directors received a benefit under the transaction.
Latham CJ considered the issue of when directors may act in a manner that benefits
themselves (at 163):
it is generally desired by shareholders that directors should have a substantial interest in the
company so that their interests may be identified with those of the shareholders of the
company. Ordinarily, therefore, in promoting the interests of the company, a director will also
promote his own interests. [Directors are not] prohibited from acting in any matter where their
own interests are affected by what they do in their capacity as directors. Very many actions of
directors who are shareholders, perhaps all of them, have a direct or indirect relation to their
own interests. It would be ignoring realities and creating impossibilities in the administration of
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companies to require that directors should not advert to or consider in any way the effect of a
particular decision upon their own interests as shareholders. A rule which laid down such a
principle would paralyse the management of companies in many directions.
Therefore Latham CJ found that directors will not necessarily breach their duties if they act
in a manner that benefits a class of shareholders in which they themselves are
shareholders.
The court will undergo a two-step process to decide whether a director has used a power
for an improper purpose:
1. Determining what the purpose of the power is (that is why does the power exist?).
This process will also disclose, by implication, what purposes the power may not be used
for (that is by identifying that the power to issue shares exists primarily to raise capital
for the company, it is clear that a purpose other than this is improper — see below for
more detail).This step is essentially a question of identifying the legal scope of the power.
2. Deciding (as a matter of fact) what purpose the director had for exercising the power and
whether that purpose is within the range of permissible purposes.
This two-step analysis was proposed in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC
821.
Assistance in applying this two-step test can be gained from Ipp J’s comments in
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109, where his Honour
summarised the law in this area:
1. Fiduciary powers granted to directors are to be exercised for the purpose for which they
were given, not collateral purposes.
2. It must be shown that the substantial purpose of directors was improper or collateral to
their duties as a director.The issue is not whether business decisions were good or bad;
it is whether directors have acted in breach of their fiduciary duties.
3. Honest or altruistic behaviour does not prevent a finding of improper conduct.Whether
acts were performed for the benefit of the company is to be objectively determined.
However, evidence as to the subjective intentions or beliefs is nevertheless relevant.
4. The court must determine whether, but for the improper or collateral purpose,
the directors would have performed the act in dispute.
Mixed purposes
In many cases of alleged improper actions by the board, it may be said that there are a range 16.18
of possible purposes that could have motivated the board to act in that manner.The decision
in Mills v Mills clearly stated that the board may only exercise their powers for the purpose
for which those powers exist. However, Mills also made it clear that the mere possibility of
an improper purpose (that is a purpose that the power was not created for such as to secure
a personal benefit for the directors) does not render the exercise of power improper.
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The real question is what actually motivated the exercise of power. Dixon J in Mills v
Mills used an approach known as the ‘but for’ test. This approach asks whether the power
would still have been exercised if the improper purpose did not exist.To put it another way,
if the directors were not going to receive a benefit would they still have acted the same way?
If the answer is yes, then the motivation is not improper (that is because the directors still
would have acted in the same way even if they had not received a benefit). If the answer is
no, then the directors are really motivated by the improper purpose resulting in a breach of
duty. The use of the ‘but for’ test was applied by the High Court in Whitehouse v Carlton
Hotel Pty Ltd (1987) 162 CLR 285 at 294 per Mason, Deane and Dawson JJ.
Share issues
16.19 The area where legal disputes relating to alleged improper purposes arise most often
concerns the exercise of the power of directors to issue shares. Companies are given the
specific power to issue shares under s 124, with directors given the power to manage the
company’s affairs under s 198A. Therefore, directors have the right to issue the company’s
shares. Given the power of voting attached to most shares ([x-ref to share capital]), there
is the potential for the power to issue shares to be used by directors to manipulate control
of the company.
KEY STATEMENT
Ngurli Ltd v McCann (1953) 90 CLR 425
The power must be used bona fide for the purpose for which it was conferred, that is to say,
to raise sufficient capital for the benefit of the company as a whole. It must not be used
under the cloak of such a purpose for the real purpose of benefiting some shareholders or
their friends at the expense of other shareholders or so that some shareholders or their
friends will wrest control of the company from the other shareholders.
The directors of a company cannot ordinarily exercise a fiduciary power to allot shares
for the purpose of defeating the voting power of existing shareholders by creating a new
majority.
The power to issue shares has often created problems where the directors attempt to use that
power to manipulate the voting power by issuing more shares to retain control over voting
at a members’ meeting.The Whitehouse case is a classic example of this occurrence.
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Chapter 16 쏋
KEY CASE
Whitehouse v Carlton Hotel Pty Ltd (1987) 70 ALR 251
Facts: The Carlton Hotel company was owned by the Whitehouse family. Mr Whitehouse was
the ‘governing director’, which meant that he had control over the management of the
company. Control over the voting in the company was achieved by maintaining three classes
of shares:
• Class A shares — held by Mr Whitehouse and had unrestricted voting powers.
• Class B shares — held by Mrs Whitehouse, and only permitted voting after the death of
Mr Whitehouse.
• Class C shares — held by the children of Mr and Mrs Whitehouse, which provided profit
sharing but no voting rights.
After Mr and Mrs Whitehouse divorced, Mr Whitehouse issued Class B shares to his two
sons (who sided with him, whilst his daughters sided with Mrs Whitehouse). This was done
to attempt to ensure that his sons maintained control over the company after he died.
Mr Whitehouse subsequently fell out with his sons and directed the company to challenge
the share issue as being for an improper purpose (that is Whitehouse used the company to
challenge the share issue that he himself made).
Issue: Was the share issue invalid as being for an improper purpose?
Decision: The share issue was invalid because Mr Whitehouse’s purpose in issuing the
shares was to dilute the control of the company away from his wife and daughters after his
death. It was not a proper purpose to issue shares for the purpose of manipulating control.
As Mason, Deane and Dawson JJ said (at 254):
The reason why ... it is impermissible for the directors of a company to exercise a fiduciary
power to allot shares for the purpose of destroying or creating a majority of voting power ...
[lies in the fact that] it is simply no part of the function of the directors as such to favour one
shareholder or group of shareholders by exercising a fiduciary power to allot shares for the
purpose of diluting the voting power attaching to the issued shares held by some other
shareholder or group of shareholders.
There are a number of significant cases concerning share allotments. Those cases
demonstrate the following:
• Proper uses of the power of allotment include:
– to raise capital (Ngurli v McCann (1953) 90 CLR 425);
– to foster business connections (Harlowe’s Nominees Pty Ltd v Woodside (Lake Entrance)
Oil Co (1968) 121 CLR 483);
– for an employee share scheme; and
– as consideration for the purchase of an asset (Winthrop Investments Ltd v Winns Ltd
(No 2) (1979) 4 ACLR 1).
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• Improper purposes may include:

– to entrench the existing board of directors (Whitehouse v Carlton);
– to fight off a hostile takeover bidder (Howard Smith);
– to discriminate against particular shareholders or classes of shareholders (Mills v Mills);
and
– to reconfigure the majority shareholdings in the company (Howard Smith).
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 is a key case concerning the issue of
shares for an improper purpose.
KEY CASE
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Privy Council (UK)
Facts: This case involved the takeover contest for a company called Miller. Howard Smith
and Ampol were competing to take complete control of Miller. Ampol and its associate
owned approximately 55% of the shares in Miller. The directors of Miller wished to attract a
higher bidder and so they issued shares to Howard Smith on the basis that Howard Smith
would offer more for the company than Ampol. The effect of the share issue was to dilute
Miller’s share capital so as to turn Ampol’s majority shareholding in Miller into a minority
interest and thereby make Howard Smith’s bid more likely to succeed. Ampol sought a
declaration from the court that the share issue was undertaken for an improper purpose.
Issue: Were Miller’s directors acting for a proper purpose when they issued shares to assist
with Howard Smith’s takeover?
Decision: The shares were issued for an improper purpose because it was primarily engaged
in to dilute the majority shareholdings.
Harlowe’s Nominees is another case concerning the issue of shares for a proper purpose.
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CASE EXAMPLE
Harlowe’s Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968) 121 CLR 483
Facts: Woodside entered into a lucrative joint venture with another company and sought to
further consolidate that business relationship by issuing shares to that other company.
Harlowe’s (a substantial shareholder in Woodside) sought a declaration from the court that
the share issue was not for a proper purpose on the basis that Woodside did not require
further capital.
Decision: The shares were issued for a proper purpose. The court stated that:
although primarily the power is given to enable capital to be raised when required for the
purposes of the company, there may be occasions when the directors may fairly and properly
issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the
company as a whole, as distinguished from a purpose, for example, of maintaining control of
the company in the hands of the directors themselves or their friends.
The share issue provided Woodside with greater financial flexibility to enable better planning
for future undertakings. Such financial stability made a continuing commercial relationship
with its joint venture partner more likely.
Managing conflicting interests between classes of securities

In Mills v Mills (1938) 60 CLR 150, Latham CJ pointed out that in situations where a 16.20
company has different classes of securities (such as both ordinary and preference shares),
actions by directors have the real potential to cause conflict between the different classes,
so that any action by the board will necessarily cause detriment to one of the classes.
In that scenario, the High Court found that the duty of company directors is to act in a
manner that does not unreasonably discriminate against one particular class of securities.
As Latham CJ stated (at 164): ‘the question which arises is sometimes not a question of the
interests of the company at all, but a question of what is fair as between different classes of
shareholders.’
Statutory duties under the Corporations Act

Since the implementation of the national corporate legislation, attempts have been made to 16.21
codify the common law duties and to impose harsher penalties. However, in 1993, there was
a change in the enforcement strategy for breaches of the Corporations Act in an effort to
secure greater success at enforcement. Generally, Parliament favoured an approach to
decriminalise the statutory provisions, except for the most deserving cases, by adopting a
new concept called civil penalties. This concept entails a hybrid of civil penalties
(compensation, pecuniary penalty and banning orders) and criminal penalties for breaching
the statutory officers’ duties. The CLERP Act 1999 rewrote the entire officer’s duties
provisions, in order to clearly distinguish between the civil, criminal and civil penalty
provisions. It is important to note that s 185 recognises that an officer may be sued for
breaches of the common law, equity or the statutory duties.
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FIGURE 16.3 Comparison Between Fiduciary Duties and Statutory Duties
Equitable Fiduciary Duty Statutory Equivalent
Act in good faith, in the best interests of the company s 181(1)(a)

Act for a proper purpose 181(1)(b)
Avoid conflicts of interest/no secret profit ss 182, 183
Requires impropriety
If one of the statutory duties under ss 181–183 is breached a director or officer may face:
Statutory Remedies
Pecuniary penalty Disqualification order Compensation

(s 1317G) (s 206C) (s 1317H)
Both require a
declaration under
s 1317E
However, the court has the power to grant relief from liability under these sections under
s 1317S.
Statutory duty of good faith and proper purposes (s 181)

16.22 The duty under s 181 requires all directors to exercise their duties and powers in good faith
for the best interests of the company and for a proper purpose. Although these duties are
expressed as two separate tests, there may be overlap in certain cases (for example, the
exercise of a power to benefit the directors rather than the company will breach both limbs
as it is not in good faith and not for a proper purpose).
The principles that apply under this section are the same as those that apply under fiduciary duties
in equity, discussed earlier. Thus, the requirements of good faith, in the best interests of the
company and to act for a proper purpose are defined by reference to the fiduciary duty cases
discussed above.
However, a significant difference between the statutory duty and its fiduciary equivalents
lies in the consequences for breach. A breach of this section is a civil penalty provision.
The severity of the penalty will depend upon whether there was any intention to deceive
or defraud the company, members or creditors. If there is an attempt to be reckless or
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intentionally dishonest, a separate criminal offence may be committed under s 184(1).

These remedies may be enforced either by the company or by ASIC.
A breach of the fiduciary duties will allow the company (not ASIC) to sue the directors
for equitable compensation, rescission of contract, an account of profits, a constructive trust
or an injunction.These remedies are discussed below.
Statutory duty to avoid conflicts of interest (ss 182 and 183)

Sections 182 and 183 provide that an officer or employee must not improperly use their 16.23
position (s 182) or information (s 183) obtained because of their position:
• in order to either gain a benefit for themselves or someone else; or
• to damage the company.
These duties reflect the fiduciary duties discussed above relating to the no conflict and no
secret profit rules. These rules prevent directors from keeping advantages that properly
belong to the company.
These provisions are widely drafted and have been interpreted broadly by the courts.
In Chew v R (1992) 173 CLR 626; 107 ALR 171 the High Court found that the sections
do not require proof that the officer actually achieved his or her purpose in attaining a
benefit for themselves or another person (this was applied by the subsequent decision in
R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529). Rather, the sections require
proof that the officer believed that the intended result would be an advantage for himself or
herself or for some other person or a detriment to the corporation.
The High Court reviewed the concept of improper use of a director’s position in
R v Byrnes and Hopwood.
KEY CASE
R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529
Facts: Byrnes and Hopwood were directors of a company called Jeffcott Investments Ltd.
Jeffcott was heavily in debt and its directors resolved to issue more securities to help fund
the repayment of Jeffcott’s debts. However, the securities issue could only be made if the
company obtained sufficient underwriting support and underwriters would only participate in
such a risky venture if they were assured of not incurring a loss on the underwritten
securities. Byrnes and Hopwood therefore decided to use another company that they were
directors of (Magnacrete) to provide a guarantee to obtain a loan to assist with the
underwriting of the securities issue. This transaction was entered into solely for the benefit
of Jeffcott, not Magnacrete and without the knowledge or approval of the other directors of
Magnacrete.
Issue: Did Byrnes and Hopwood improperly use their position as directors of Magnacrete to
gain an advantage for someone else (that is Jeffcott).
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Decision: Byrnes and Hopwood improperly used their position as directors of Mangacrete
to gain an advantage for Jeffcott. Evidence of the impropriety was found in the fact that they
actively concealed their actions from the rest of the Magnacrete board.
The court found that impropriety must be assessed objectively (that is not merely by
statements made by the officer or employee that they thought they were doing the right
thing). The court stated that impropriety will exist where an officer allows the company to
enter into transactions with a third party in which the officer has an interest and the officer
fails to disclose that conflict to the company.
The Vizard case is a good illustration of the enforcement of the statutory no conflict rule,
the civil penalty provisions and the application of the precedent in the Regal Hastings case
(discussed above) which demonstrates that a director can still be liable for breach of fiduciary
duty, despite no loss or harm being caused to the company.
CASE EXAMPLE
ASIC v Vizard (2005) 145 FCR 57; [2005] FCA 1037
Federal Court of Australia
Facts: Vizard was a non-executive director of Telstra. During his time as director, Vizard
obtained information from board meetings and internal briefing documents that outlined a
strategy of acquisitions in other IT firms. Vizard then established a family trust, managed by
his accountant, to purchase shares in firms that Telstra had intended to takeover or acquire
large stakes in. Most of these share trades were losses, and no Telstra funds were used for
the acquisitions (that is Telstra did not suffer any losses from the share trades). ASIC sued
Vizard for breach of s 183 (and its predecessor provision).
Decision: Vizard admitted liability and was ordered by the court to pay close to $400,000
in pecuniary penalties and was disqualified from being a company director for 10 years.
The court, relying on the precedent in Regal Hastings, said (at [28]): ‘a director is denied
the ability to use such information for his or her own purposes. It does not matter that the
director’s action causes no harm to the company or does not rob it of an opportunity which
it might have exercised for its own advantage.’
DISCUSSION
POINTS
1. Given that directors’ duties are owed to the company, why should directors be liable for
breach of fiduciary duty even where the company suffers no loss?
2. Do directors’ duties have a public interest value that extends beyond mere protection of
the company and its investors?
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The statutory duties found in ss 182 and 183 (avoidance of conflicts of interest) are wider
than those equivalent duties under the common law or equity.The common law and equity
only impose duties on a directors, whereas the words used in the Corporations Act extend
the duty to cover directors, officers and even employees. There is no suggestion that this
means all employees, but is limited to senior managers: [x-ref officers chapter].
Both ss 182 and 183 are civil penalty provisions under s 1317E and have a limited range of
remedies that can be brought by ASIC and/or the company: see 16.49.Additionally, a serious
contravention which is dishonest or reckless may result in a criminal liability under s 184(2).
This is a more serious legal action and may be brought by the Commonwealth Director of
Public Prosecutions, rather than the company or even ASIC.
DEFENCES: DISCLOSURE
The general rule is that a fiduciary (such as a company director) may avoid liability at general 16.24
law for acting improperly due to a conflict of interest if the fiduciary has given full disclosure
to their principal (in the case of a director the principal is the company) and the principal
consents to the fiduciary acting under the conflict. This principle is also reflected in the
Corporations Act: s 191 (which requires directors to disclose material personal interests).
However (as noted above), the key question is whether it is sufficient for a director to
disclose the conflict to the board of directors only, and not to the shareholders. In the
Adler case ((2002) 41 ACSR 72; [2002] NSWSC 171 at [735]), Santow J stated that where
a director under a conflict has significant power and influence over the board of directors
(in this case Williams had control over the board of directors) then ‘mere disclosure of a
conflict between interest and duty and abstaining from voting is insufficient to satisfy a
director’s fiduciary duty’. The director may also be under a positive duty to take steps to
protect the company’s interest such as by using such power and influence as he or she had
to prevent the transaction going ahead, or at least warn the other directors of the known
risks involved in the transaction: see for example Permanent Building Society v Wheeler (1994)
11 WAR 187, where the managing director was found liable for breaching his duties by
failing to warn the board over a transaction from which he had absented himself due to a
conflict of interest.
Members’ consent
It is logical that if all the members of the company agree to ratify a breach by the officers, 16.25
it may be possible to correct the previous, or future, contravention of the law. Ratification Ratification:
the shareholders
by the members will not be effective to forgive a breach of duty where: may agree to
approve of the
• the members have not given fully informed consent; directors’ conduct
provided they
• the ratification constitutes minority oppression; have been given
full information.
• the company becomes insolvent (because the duties of directors change in insolvency to Such an approval
become owed to creditors); is known as
ratification.
• the acts are illegal (that is criminal acts) or are beyond the power of the company
(for example, issuing shares for an improper purpose); or
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• the acts represent a misappropriation by the directors of the company’s property (as this
would allow the shareholders to misappropriate the company’s property which is also not
permitted).
Ratification may occur through a formal members’ meeting (such as the AGM) or through
the ‘the doctrine of unanimous consent’. This doctrine is also referred to as the Duomatic
principle because it was recognised in the decision Re Duomatic Ltd [1969] 2 Ch 365.
Duomatic decided that the consent of the members may be presumed where all of the
members know about a breach of duty but act in a manner consistent with their approval
(or ratification) of that breach. In that case, the directors drew their remuneration in breach
of the corporate constitution, but fully reported their conduct in the annual report to the
members, which was approved at the members’ meeting. When the company’s liquidator
sued the directors to recover the payments, the directors were able to show that the
members’ approval of the accounts in the meeting demonstrated their acceptance and
ratification of their acts, thereby preventing a breach from arising. This case established the
basic principle that if all the members agree, even without a formal meeting, a binding
decision can be made on behalf of the company. In Australia this principle was applied
by the Full Bench of the Victorian Supreme Court in Brick and Pipe Industries Ltd v Occidental
Life Nominees Pty Ltd (1991) 6 ACSR 464.
Tensions between the general law and statutory duties

16.26 There is a connection between the requirements of corporate disclosure and the necessary
consents provided by directors and other officers under the Corporations Act, as well as
under the equitable fiduciary duty. Several recent decisions have generated debate regarding
the relevance of disclosure and consent where the statutory duties (that is ss 180–184) have
been breached rather than the general law duties. In one line of cases, the courts have found
that the informed consent of the members may prevent an action being taken against
directors for breach of their statutory duties: see for example, Pascoe Pty Ltd (in liq) v Lucas
(1999) 75 SASR 246; [1999] SASC 519.
However, other cases (see for example, Forge v ASIC (2004) 52 ACSR 1; [2004] NSWCA
448) have disagreed with this view and stated that whilst informed consent of the members
may prevent the company from pursuing a breach of directors’ duties at general law,
informed consent does not prevent the directors being sued for breach of the statutory
duties.This view is based on the fact that the statutory duties are different and distinct from
the general law duties because they can give rise to criminal penalties and therefore serve a
public purpose, whereas the general law duties only serve a private purpose (this is to benefit
shareholders). The High Court has recently stated that ‘the shareholders of a company
cannot release directors from the statutory duties imposed by [the former equivalent
provisions to ss 180(1) and 182]’: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53
ACSR 208; [2005] HCA 23 at [32] per Gleeson CJ and Heydon J.10
10 The court left open the question as to whether the company members’ consent could prevent the company from bringing
an action to recover compensation under the statute.
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However, it is clear that where the directors have obtained the prior permission of the
shareholders to engage in certain conduct (provided that the shareholders freely consented
and were fully informed), that this will be an important factor in determining if a penalty
(such as a disqualification order or pecuniary penalty) should be imposed. It may even
restrict the scope of duty so that any act done with permission could not be ‘improper’ for
the purposes of ss 181–183.
DISCUSSION
POINT
What is the difference between the general law and statutory duties? Should shareholders
be able to prevent ASIC from enforcing statutory duties if the shareholders approve (or ratify)
the directors’ conduct?
Relief from liability

It is possible for an officer to apply to the court for relief from a contravention of the 16.27
Corporations Act under ss 1317S and 1318.This provision only applies to civil matters (that
is not criminal prosecutions) and requires that:
• the person has acted honestly; and
• having regard to all the circumstances of the case, including those connected to the
person’s appointment, the person ought to be excused from liability.
The court may relieve the person either wholly or partly from liability on such terms as the
court thinks fit. An example of this type of court relief occurred in Edwards v Attorney-
General (NSW) (2004) 22 ACLC 1,177, where the court granted relief to the directors of
the Medical Research and Compensation Foundation established by the James Hardie
company to fund asbestos compensation claims.The directors of the foundation had applied
for court relief as they feared that allowing the foundation to continue paying compensation
claims could lead to insolvent trading.
Indemnification and insurance

Section 199A(1) of the Corporations Act prohibits a company from granting a blanket 16.28
indemnification to officers (which includes directors under s 9) for breaches of duty.
Therefore, a company cannot have a provision in its constitution that automatically excuses
directors from any future breach of duty.Whilst a company will usually indemnify an officer
for liability incurred in the proper performance of their role, s 199A(2) prohibits an
indemnity (other than for legal costs) for liability owed to the company (that is where the
company may sue the officer for acting improperly), liabilities owed in respect of civil
penalties (under s 1317G–HA), or for liabilities owed to third parties (that is not the
company) in respect of acts not done in good faith. Indemnification for legal costs are
however prohibited under s 199A(3) for:
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(a) defending or resisting proceedings in which the person is found to have a liability for
which they could not be indemnified under subsection (2);
(b) defending or resisting criminal proceedings in which the person is found guilty;
(c) defending or resisting proceedings brought by ASIC or a liquidator for a court order if
the grounds for making the order are found by the court to have been established; or
(d) proceedings for relief to the person under this Act (for example under ss 1317S or 1318)
in which the court denies the relief.
In addition to restrictions on indemnification by the company, s 199B prohibits the
company paying for an officer’s insurance coverage in respect of liability for wilful breach of
duty or a contravention of ss 182 and 183. Directors’ and officers’ insurance policies will
typically have specific exclusions to cover these types of situations. However, the precise
wording of these exclusions will need to be examined as occurred in Wilkie v Gordian
Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17, where the court found that the insurance
company was obliged to fund Mr Wilkie’s defence to criminal charges, despite an exclusion
in the policy relating to criminal liability. The court found that the exclusion only applied
to a finding of criminal liability and the insurance company was therefore liable to fund
Mr Wilkie’s defence of the charges as liability had not yet been determined.
COMMON LAW DUTIES

Duty of care and diligence
16.29 The common law duty of care, skill and diligence that is expected by the courts has
Objective traditionally been set at a very low standard. The basic test, which can be contrasted with
standard:
an objective
the higher modern test in the AWA cases discussed below, was laid down in Re City Equitable
standard is Fire Insurance Co Ltd [1925] Ch 407. In that case, Romer J (whose judgment was approved
determined
by what a
of by the UK Court of Appeal) considered claims made against the directors of an insolvent
reasonable company who had signed fraudulent cheques produced by the managing director.The issue,
person would
do or would
therefore, was whether the directors had breached their duties by failing to detect the fraud
have believed, before signing the cheques.The significance of the case lies in the principles that Romer J
not what the
director actually
provided for assessing the duty of care and diligence.
did or actually
believed, which
is a subjective
standard.
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KEY STATEMENT
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
Chancery Court (UK)
Romer J
Directors must exercise such degree of skill and diligence as would amount to the
reasonable care, which an ordinary man might be expected to take, in similar circumstances,
if the business were their own. However, directors need not exhibit in the performance of
their duties a greater degree of skill than may reasonably be expected from a person of their
particular knowledge and experience.
Directors are not bound to give continuous attention to the affairs of the company
because the duties of directors are of an intermittent nature to be performed at periodical
board meetings, and at meetings of any committee to which the directors may be
appointed, and though not bound to attend all such meetings the directors should attend
them when reasonably able to do so.
Directors may properly rely on the actions of company officials, unless there are
reasonable grounds for suspecting that the officials are not adequately performing their
roles.
This was a subjective test that relied upon the individual officer’s skill, knowledge and
experience. This can now be compared with the objective statutory standard of care that
was introduced into the Corporations Act in 1993: see now s 180(1). Until this time,
the common law duty for directors was the lowest standard for any professional person.
However, it must be noted that the nature of corporate governance, and indeed public
perceptions and expectations concerning corporate governance standards, have changed
dramatically since 1925 when Romer J made these famous statements that are summarised
above. This can be seen from the following influential comments by Kirby P (now on the
High Court of Australia) in Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315
at 318–19:
The time has passed when directors and other officers can simply surrender their duties to the
public and those with whom the corporation deals by washing their hands, with impunity,
leaving it to one director or a cadre of directors or to a general manager to discharge their
responsibilities for them.
These comments strike at the third principle stated by Romer J in Re City Equitable Fire
Insurance Co, that is that directors may protect themselves by delegating their responsibilities
to other company officers (as long as they do not have a suspicion of wrongdoing). Similar
comments have been made in numerous cases involving the pursuit of directors for
breaching the prohibition on insolvent trading. In Commonwealth Bank of Australia v Friedrich
(1991) 5 ACSR 115 at 126,Tadgell J said that:
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As the complexity of commerce has gradually intensified (for better or for worse) the
community has of necessity come to expect more than formerly from directors whose task it
is to govern the affairs of companies to which large sums of money are committed by way of
equity capital or loan. In response, the parliaments and the courts have found it necessary in
legislation and litigation to refer to the demands made on directors in more exacting terms
than formerly; and the standard of capability required of them has correspondingly increased.
The modern duty of care and diligence

16.30 The imposition of statutory corporate governance duties on directors was initiated in the
1960s, and has progressively increased (especially since the corporate collapses of the 1980s)
over the years with changing community expectations of corporate responsibility. A central
driving feature of this trend of higher standards of directors’ performance has been the
corporate greed and excesses of the 1980s, resulting in spectacular corporate collapses and
putting at risk the retirement savings of millions of Australians. Tapping into community
sentiment, the judiciary and Parliament refashioned and elevated the standards of care and
diligence expected of directors.
The financial collapses around the world and, in particular, in Australia in the late 1980s
resulted in a review of the standards to be expected from boards of directors. The 1992
Cadbury Report into corporate governance in the UK, was followed in Australia by the
Bosch Report into corporate governance and by a higher expectation of directors’
performance standards from the courts.
Many of the cases discussed below arose out of the major corporate collapses in 2001,
such as HIH Insurance, One.Tel and the earlier takeover of GIO by AMP. There is clear
evidence that, under the modern approach, the courts are taking into account community
expectations and demanding a higher standard of care than was thought necessary in the
past.
Any doubts that may have existed with regard to the continued relevance of the
somewhat lax principles expressed in Re City Equitable Fire Insurance Co to modern
corporate governance (see for example, the quote from the Friedrich decision above) were
brought to attention in the AWA litigation. The AWA litigation generated two important
decisions:
1. the original trial decision of Rogers CJ (NSW Supreme Court, Common Law Division)
in the AWA case — AWA v Daniels (1992) 9 ACSR 383; and
2. the subsequent appeal decision of Sheller and Clarke JJA in Daniels v Anderson (1995) 37
NSWLR 438.
It is fair to state that these decisions created a fundamental shift in the assessment of common
law directors’ duties in Australia.
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KEY CASE
AWA v Daniels (1992) 9 ACSR 383
Trial Decision
Facts: The AWA case concerned the assessment of responsibility for large losses incurred
by AWA on the foreign currency market. AWA derived nearly 25% of its profit from foreign
exchange currency trading. The company officer in charge of the foreign exchange currency
trading (Koval) was allowed to operate within the company without any effective supervision.
Koval then concealed losses made in these transactions by making unauthorised loans to
cover the losses, which eventually amounted to nearly $50 million. At all times AWA had
engaged Daniels, an accountant (who worked for the firm that is now Deloittes) to audit the
company’s accounts and internal processes. The audit conducted by Daniels did not result
in the lack of internal controls over Koval’s activities being immediately reported to AWA’s
directors. AWA sued Daniels and his firm for negligence in failing to report the deficient
internal controls over the foreign exchange trading activities. Daniels then counter-sued the
directors of AWA (including both executive and non-executive directors) for contributory
negligence.
Issue: Had the directors of AWA acted in breach of their duty of care, skill and diligence?
Decision: Rogers CJ found the auditors and executive directors liable in negligence.
His Honour found that the directors of AWA had failed to put in place an effective internal
system to enable them to monitor the proper conduct of the audit, which had contributed
to the failure to report the irregularities. His Honour recognised that the exact nature of this
obligation would change according to the size and complexity of the company involved.
In other words, the larger and more complex the company is, the broader the level of
monitoring will be required. His Honour however found that the non-executive directors were
not negligent.
Significance: Rogers CJ’s decision moved away from the traditional formulation of directors’
duties expressed above by Romer J. Particularly, Rogers CJ noted that the duty of executive
directors to act with proper care, skill and diligence was to be objectively assessed (whereas
Romer J allowed a subjective assessment). Rogers CJ thus drew a distinction between
executive and non-executive directors and imposed a lesser standard upon non-executive
directors (just as Romer J had done). His Honour also agreed with Romer J that directors
may properly rely on the advice given by the company’s internal auditors without breaching
their duty. This was particularly important in his assessment that the non-executive directors
were not negligent (that is because they had relied on the advice of the executive directors).
While the AWA case was being determined, the Commonwealth Parliament was
investigating and reviewing a change to the statutory duties of reasonable care and diligence.
The introduction of the Corporate Law Reform Act 1992 (Cth), rewrote the previous
statutory provision and introduced s 232 (which has been refined and replaced by the
present s 180(1)). The new statutory duty provides a more objective standard of care than
the previous common law and equivalent provisions had required.
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KEY CASE
Daniels v Anderson (1995) 37 NSWLR 438
Appeal Decision
Decision: On appeal, Sheller and Clarke JJA delivered the majority judgment largely
affirming what Rogers CJ found during the trial decision. Indeed, the Court of Appeal agreed
that the executive director acted in breach of his duties and that the non-executive directors
had not acted in breach of their duties.
However, there are some differences in the approach of the trial and appeal decisions.
Principally, the Court of Appeal disagreed with Rogers CJ’s seeming application of Romer J’s
statement that the duties of directors were to be assessed subjectively (Rogers CJ had
made the comment that a non-executive director did not have to turn himself into an
accountant, chief executive officer or the chairman in order to fulfil his duties). Sheller and
Clarke JJA stated that:
There is no doubt reason for establishing a board which enjoys the varied wisdom of persons
drawn from different commercial backgrounds. Even so a director, whatever his or her
background, has a duty greater than that of simply representing a particular field of
experience. That duty involves becoming familiar with the business of the company and how
it is run and ensuring that the board has available means to audit the management of the
company so that it can satisfy itself that the company is being properly run. [Emphasis added.]
Their Honours also dismissed the notion that the duty of directors was intermittent (that is
that it need only be assessed according to how many board meetings the particular directors
attended). Their Honours said:
the board should meet as often as it deems necessary to carry out its functions properly.
The question is what in the particular case are the duties and responsibilities of the directors
and then what time is required of them as a board to carry out these duties and
responsibilities. It is not a matter of tailoring the extent of the duty or function to pre-fixed
intervals between board meetings.
Finally, their Honours stated that:

a person who accepts the office of director of a particular company undertakes the
responsibility of ensuring that he or she understands the nature of the duty a director is
called upon to perform. That duty will vary according to the size and business of the
particular company and the experience or skills that the director held himself or herself
out to have in support of appointment to the office. [Emphasis added.]
Significance: The importance of the AWA appeal case cannot be underestimated. The most
significant consequence of the decision is the clear principle that directors’ duties are
assessed OBJECTIVELY, and ignorance by directors (either through inexperience or
unreasonable delegation of responsibility) of internal problems will not be a defence.
This case is also authority for the rule that the same standards are imposed on the executive
and non-executive directors.
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The influence of the AWA case has been much debated both by academics and also by the
courts in subsequent cases.11 More recently, the debate as to the standard of care of executive
directors has been clearly articulated in ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC
738, which is discussed below.
Assessing whether a breach has occurred

One difficulty with the objective nature of the standard of care, skill and diligence is that 16.31
each person, each company and each managerial position is different and no universally
consistent benchmark can be set to measure and assess the conduct of company directors.
However, the courts have recognised that whilst the standard is objectively assessed (that is
what would a reasonable person have done, not what the individual company director was
in fact capable of doing), the actual requirements of that standard will depend upon what
sort of role that person was performing in the company: Vrisakis v Australian Securities
Commission (1993) 11 ACSR 162 at 213 per Ipp J.
In the Vines case, Austin J worked with extensive evidence from professional accounting
firms in order to determine what the common activities of a Chief Financial Officer of a
large corporate group of insurance companies would be. The purpose of this was to
determine what a ‘reasonable’ executive director would have done in Mr Vines’ position.
Extensive evidence was also given in that case of Mr Vines’ actual roles in the corporate
group. It should be noted that the AWA case (discussed above) recognised that the standard
of care will be influenced by the size and nature of the company, and the director’s position
and responsibilities within that type of company.
Therefore, it is important to determine:
1. the size and complexity of the company;
2. what the defendant director did within the company; and
3. would a ‘reasonable director’ have done the same thing in that situation (this may be
based on evidence of what other directors within similar companies typically do).
Do non-executive directors owe a lesser standard of care?

The answer to this, according to the most recent cases such as ASIC v Rich (2003) 44 ACSR 16.32
341; [2003] NSWSC 85 (see below for a summary), is no. Non-executive directors cannot
avoid liability by claiming that their non-executive status allows them to perform their
functions to a lesser standard than executive directors. The standard of care is always
objective, regardless of whether the director is executive or non-executive.The significance
of non-executive status lies in the fact that the nature of the obligations imposed upon
company directors (that is the legal requirements that are actually demanded of them) are to
be determined in accordance with the director’s actual role within the company, which is
determined by whether the director is executive or non-executive. It is clear that an
executive director will have greater responsibility within a company than a non-executive
director and therefore, the legal obligations imposed on that director will be more onerous.
This does not mean however, that non-executive company directors can avoid liability
by taking no actual role within the company.The legal principle established in cases, such as
11 See Rogers A, ‘AWA to HIH: Asleep at the post?’ (2002) 54 Keeping Good Companies 597. Further articles on this issue
appear at the end of the chapter.
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Friedrich, AWA and Daniels, is that ALL company directors owe the basic duty of sufficiently
monitoring the company’s affairs by maintaining an awareness of the company’s activities
and financial status. Such knowledge is a necessary component of the director’s appraisal of
and agreement to the company’s annual reporting requirements.
KEY CASE
Facts: ASIC sued several directors of the insolvent telephone company One.Tel for breach
of statutory duties. The directors sued by ASIC included Rich (an executive director) and
also Greaves, who was a non-executive director and chairman of the company. Greaves
defended ASIC’s case against him by arguing that his conduct as an officer was not in
breach of any legal duty. Greaves’ defence was based on the notion that the conduct of
non-executive chairmen did not come under similar legal duties as executive officers.
Greaves however, was a very experienced company officer and was also the chairman of the
company’s finance and audit committee. It is important to note that this was not a trial of
whether Greaves (or any of the other officers) were actually negligent, but rather whether
ASIC could sue Greaves by alleging negligence in similar terms to the alleged negligent
conduct of the executive directors.
Decision: The court found that Greaves’ non-executive status did not prevent him from
owing duties to the company not to behave negligently. Greaves’ conduct in failing to remain
informed of the company’s financial position was capable of giving rise to a claim that
he had breached his duty of care and diligence. Greaves’ background and experience,
in addition to his important role within the company (as Finance and Audit Committee
Chairman) both contributed to the formulation of the requirements of his duties owed to the
company. He could not rely on his non-executive status to justify failing to satisfy the basic
requirement to remain properly informed regarding the company’s financial position.
Attendance at board meetings

16.33 As mentioned above, Romer J in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
believed that directors owed only intermittent duties to the company. One of the
consequences of this intermittent duty was that directors were not bound to attend every
board meeting. Romer J stated (at 429) that directors were not bound to attend all board
meetings ’although [directors] ought to attend whenever in the circumstances [they are]
reasonably able to do so’. The majority decision of the WA Court of Appeal in Vrisakis v
Australian Securities Commission (1993) 11 ACSR 162 at 170 rejected this traditional belief by
stating that ‘a director is expected to attend all meetings unless exceptional circumstances,
such as illness or absence from the State prevent him or her from doing so’.
12 This Rich case is not to be confused with the litigation involving Rich that went to the High Court concerning whether
ASIC could seek pre-trial disclosure against Mr Rich in civil penalty proceedings: see ASIC v Rich [2004] HCA 42.
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CASE EXAMPLE
Sheahan v Verco (2001) 37 ACSR 117; [2001] SASC 91
South Australian Supreme Court
Facts: Verco and Hodge were non-executive directors, who wished to take no part in the
company’s management so they failed to hold any directors’ meetings for several years.
They simply left the management of the company to the managing director.
Decision: The directors, breached their common law and statutory duties by failing to hold
any directors’ meetings until shortly before the company became insolvent.
Special board positions

There has been much debate as to whether all officers are equal or whether there are some 16.34
distinctions based upon the precise position held, such as chief executive or chair of the
board.The general consensus is that all officers are equal in their duties but the level of skill
and care expected may change depending upon the position held. As noted in the last
chapter, there are various types of company officers, including the chairperson, managing
director, and non-executive directors.
In a particular case the officers (such as the chair of the board) may have certain powers
and responsibilities, such as participating on special committees (for example the audit
committee). The possession of particular powers and responsibilities will be taken into
account when determining whether the officer has complied with the duty of care, skill and
diligence (and its statutory equivalent in s 180(1)). In ASIC v Rich (see below) the chairman,
Mr Greaves, was held to hold a special position that must reflect his skills and diligence.
This has also been applied to a chief financial officer in the Vines case (see below).The role
of chair is further discussed in Chapter [x-ref Officers].
Chairman 16.35
CASE EXAMPLE
Facts: The basic facts in Rich were discussed above. In addition to those facts: Greaves also
argued that the role of chairman was largely ceremonial. Greaves argued that in light of this
it was perfectly reasonable to rely on the executive officers to properly monitor the company.
Decision: Austin J found that the position of chairman that Greaves occupied was not, in
contradiction to Greaves’ arguments, a purely ceremonial position. Austin J said: ‘if the duty
to keep informed exists for all company directors, it must be a duty imposed on the
company chairman.’ His Honour also stated that just as community expectations of
corporate governance standards for directors had become more onerous in modern times
and ‘the court’s role, in determining the liability of a defendant for his conduct as company
chairman, is to articulate and apply a standard of care that reflects contemporary
community expectations’.
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16.36 Managing director
CASE EXAMPLE
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
Western Australian Full Supreme Court
Facts: In this case, several directors of PBS had knowledge that PBS was purchasing
property from another company in which the directors had an interest. The case was
therefore primarily based on the no conflict rule (discussed above). However, one of the
issues that also arose was what standard of care the managing director owed to the
company.
Decision: The managing director had failed to exercise due care and diligence as the
company’s general manager. The court found that the managing director’s disclosure of his
conflict of interest was not sufficient to discharge his duty of care, skill and diligence as he
should have taken steps to ensure that the rest of the directors were properly informed of
the possible harm that may have been caused to the company by the acquisition and to
point out possible methods of reducing the risk of the transaction.
16.37 Chief financial officer
CASE EXAMPLE
ASIC v Vines (2003) 48 ACSR 322; [2003] NSWSC 1116
Facts: ASIC sued Vines, who had been the chief financial officer of GIO when that company
suffered substantial losses, for breaching the former provision equivalent to s 180(1).
ASIC sought to prove its claim that Vines had been negligent by relying on expert evidence
as to what a reasonable chief financial officer would have done in similar circumstances.
Vines challenged the use of the expert evidence on the basis that evidence of what other
chief financial officers might do was not relevant to whether he had breached his statutory
duty as chief financial officers operate in different companies, with different circumstances
so that the expert evidence was not relevant.
Decision: Austin J found that the expert evidence was relevant to the question of whether
Vines had acted negligently. His Honour followed the AWA case in stating that the nature
and scope of a particular officer’s legal duties is determined by reference to the tasks that
they are engaged to perform. The role of chief financial officer was not so unique that other
chief financial officers would not perform similar functions, or have similar competencies,
to Vines. Austin J determined that Vines’ position as chief financial officer was based upon
an assumed set of skills and competencies that all chief financial officers would be assumed
to possess. Thus, the evidence of other chief financial officers about what they would have
done in Vines’ situation was relevant to determining what a reasonable chief financial officer
would have done in Vines’ situation.
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Chapter 16 쏋
The 2003 Vines decision was a preliminary trial regarding the acceptability of the expert
evidence concerning the role of chief financial officers. In 2005, Austin J handed down the
final decision in this case (ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC 738), which
held that Vines had failed to act with care and diligence in relation to the accuracy of profit
forecasts given during the takeover battle for GIO (of which Vines was the Group CFO).
That decision was largely confirmed on appeal in Vines v ASIC (2007) 62 ACSR 1; [2007]
NSWCA 75, although the court overturned some of the contraventions found by Austin J,
based upon a different view of the significance of some evidence provided to the court.
DISCUSSION
POINT
What factors should court taken into account when determining the appropriate standard of
care imposed on directors?
Proving damage
It must also be remembered that merely proving that a director has failed to act according 16.38
to the required standard of care and diligence does not, automatically, entitle the company
to damages. As with ordinary negligence cases (such as Donoghue v Stevenson [1932] AC 562
— the famous snail in the bottle case) the company must prove that the director’s breach of
duty caused the company to suffer loss or damage. The question then, will be whether
(on the balance of probabilities — that is is it more probable than not) the company still
would have suffered the loss had the director acted according to the required standard:
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 at 162 per Ipp J.The issue
of remedies for breach of directors’ duties is dealt with below.
Statutory codification of the duty of care and diligence

The common law principles are incorporated into the legislation under s 180(1). 16.39
FIGURE 16.4
Duty of care, Section 180(1)

skill and diligence duty of care
at common law and diligence
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Section 180(1)
A director or other officer of a corporation must exercise their powers and discharge their
duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation
as, the director or officer.
It will be seen that s 180(1) uses the words ‘care and diligence’ but not ‘skill’.This statutory
formulation may be contrasted with the traditional common law rule which refers to the
duty of ‘care, skill and diligence’. This may perhaps imply that there is still no objective
statutory standard of skill. But the Explanatory Memorandum to the Corporate Law
Reform Act 1992 (which reworded the statutory provision) seemed to assume that an
objective standard of skill had been achieved by the statutory provision.
There is judicial authority to support the view that the statutory words of s 180(1)
(and its predecessors) incorporates an objective standard of skill for executive directors:
see ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171.
Skill was defined by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438
at 667 to mean ‘that special competence which is not part of the ordinary equipment of the
reasonable man but the result of aptitude developed by special training and experience’.
The standard applied by Austin J in ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC 738
at [1058] was stated as:
The statutory formulation adopts an objective standard of care, measured by reference to what
a reasonable person of ordinary prudence would do, enhanced where an appointment to the
board of directors is based on the appointee having some special skill, by an objective standard
of skill referable to the circumstances.
The NSW Court of Appeal confirmed this view: Vines v ASIC (2007) 62 ACSR 1; [2007]
NSWCA 75.
Expert evidence can be used by the court to help the judge determine what a reasonably
competent chief financial officer or other special position of an officer would do in certain
assumed circumstances. Each officer will owe a duty of care and diligence at an objective
level based upon their purported skills and expertise in the context of the corporation’s
circumstances.
The duty requires that the judge looks at a ‘like’ position, so as to compare a particular
officer with a person holding a similar position.This enables the court to look at both any
special expertise held by an individual director and the distribution of functions within the
corporation.13 The words the ‘corporation’s circumstances’ in s 180(1) relate to ‘the type of
company, the size and nature of the company’s business, the composition of the board and
the distribution of its work between the board and other officers’ as stated in the case of
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115.
13 This was discussed in detail in ASIC v Rich (2003) 44 ACSR 341; [2003] NSWSC 85.
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Chapter 16 쏋
Common law vs statutory negligence

As noted above, there are three sources of directors’ duties: 16.40
1. statutory duties;
2. common law duties, such as care, skill and diligence; and
3. equitable fiduciary duties.
The statutory duty imposed on company directors to act with care and diligence under
s 180(1) of the Corporations Act is similar, but not identical, to the common law duty not
to act negligently.
ASIC v Vines makes a clear link between the statutory duty of care under the
Corporations Act and the developments within the common law tort of negligence.
Austin J relied upon the famous High Court negligence case of Wyong Shire Council v Shirt
(1980) 146 CLR 40 to help determine what a reasonable person would do. Consideration
of the magnitude of the risk and the degree of probability of its occurrence, along with the
expense, difficulty and inconvenience of taking alleviating action and any other conflicting
responsibilities the defendant may have, are important in determining what a reasonable
director would do.This view was confirmed on appeal in Vines v ASIC (2007) 62 ACSR 1;
[2007] NSWCA 75, where Spigelman CJ noted that a breach of the statutory standard
generally involves no greater threshold than that which applies to common law negligence.14
The Vines case concerned profit forecasts issued by GIO during a time when its
shareholders were considering a takeover offer from AMP.The profit forecasts turned out to
be incorrect due to huge losses (particularly reinsurance losses) suffered after a run of natural
disasters (particularly hurricanes and earthquakes) and several plane crashes. Forecasting in a
reinsurance business is a difficult and uncertain process, where there is much room for
differences of opinion and small variations of inputs can produce widely different outcomes.
The defence of the takeover bid by GIO against AMP was based upon a due diligence
process and the provision of accurate information to the shareholders. The due diligence
committee was relying upon the senior executives, including the defendants pursued by
ASIC to give their conscientious and careful attention to the documents and information
provided. Austin J found that they failed to act up to the appropriate standard of care as
required by the corporate legislation. The Court of Appeal, took a different view with
respect to the reasonable basis of certain initial public statements made by Vines,
but confirmed that the later information provided to shareholders was not at the appropriate
standard because Vines (and others) had acted without due care and diligence.The Court of
Appeal overturned Austin J’s order for disqualification and reduced his Honour’s pecuniary
penalty (to $50,000) in light of the strong references given in support of Mr Vines and
because of the lack of dishonesty or impropriety in Mr Vines’ conduct.
In Vrisakis v Australian Securities Commission (1993) 11 ACSR 162, Ipp J compared the
tests for assessing breach of the common law standard and the statutory provision and found
that the two are not the same. This is because common law negligence is centred on the
duty to avoid causing harm by engaging in conduct that unreasonably creates a risk of harm.
However, Ipp J stated that the statutory duty of care and diligence involves an assessment of
14 His Honour did however note that the punitive consequences of breaching the statutory duties (that is disqualification
orders and pecuniary penalties) would involve a consideration of ‘a higher level of seriousness’: at [146].
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whether the company director acted in a manner that no reasonable director would have
acted, in light of the extent of the risk of harm to the company that the conduct created.
This risk must be balanced against the potential benefit that the company could have received
through the conduct. Ipp J said (at 212):
The mere fact that a director participates in conduct that carries with it a foreseeable risk of
harm to the interests of the company will not necessarily mean that he has failed to exercise
a reasonable degree of care and diligence in the discharge of his duties.The management and
direction of companies involve taking decisions and embarking upon actions which may
promise much, on the one hand, but which are, at the same time, fraught with risk on the
other.That is inherent in the life of industry and commerce.The legislature undoubtedly did
not intend by [the 1993 equivalent of s 180(1)] to dampen business enterprise and penalise
legitimate but unsuccessful entrepreneurial activity.
What then are the differences between common law and statutory negligence?
16.41 As has been discussed above, the content of the duty to exercise care and diligence (s 180(1))
is substantially similar to the common law standard of care, skill and diligence.The primary
differences between the common law and statutory requirements relate to the consequences
of breaching the duties rather than the content of the duties.
A breach of the statutory provision may result in the imposition of a civil penalty order
provision under s 1317E and may result in the director being disqualified from office under
s 206C or being forced to pay compensation under s 1317H. The common law duty,
however, provides the remedy of damages for loss caused to the company.The remedies and
consequences of breach of directors’ duties are discussed further below.
Should directors’ duties extend below the board of directors?

16.42 The legal issues in Vines (discussed above) also raise questions regarding the accountability
of non-director employees. The report of his Honour Justice Owen on the HIH Royal
Commission examined these developments and, whilst reiterating the principles concerning
the statutory requirements discussed above, did not recommend any extension of these
principles. In its April 2006 report, the Corporations and Markets Advisory Committee
(CAMAC) recommended that the Corporations Act be amended to extend the duties in
ss 180 and 181 beyond directors and officers to persons who take part in the management
of the corporation. At the time of writing, no proposal had been announced to amend the
Act in line with this recommendation.
Statutory defences
16.43 There are three main defences that a director may invoke in respect of an alleged breach of
duty under s 180(1) or the common law equivalent.These are:
1. delegation of responsibility to others;
2. reliance upon others; and
3. business judgment rule.
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Chapter 16 쏋
Delegating responsibility to others

The ability to delegate responsibilities and rely on subordinates to carry out tasks is an 16.44
essential part of effective management under s 198D. Company directors are given the
responsibility for either managing the company’s business or, in larger companies,
monitoring the performance of management. In either case, the directors will need to rely
on others, including in some cases other directors, to implement management decisions.
Given that directors will not necessarily have expertise in all areas of the company business,
it is a legitimate question to ask whether directors may be able to act with due care and
diligence by relying on others who are more qualified?
Romer J in Re City Equitable Fire Insurance Co found that directors were not negligent if
they relied on a delegate (that is someone to whom a function has been delegated) to
perform sufficiently, provided that the directors had no grounds to suspect that delegate was
acting improperly. This position was applied by Rogers CJ in the AWA case. However,
the AWA appeal (Daniels v Anderson) found that directors could only rely on delegates if they
were sufficiently monitoring the company’s affairs so as to be aware if there were irregularities.
CASE EXAMPLE
Sheahan v Verco (2001) 37 ACSR 117; [2001] SASC 91
Facts: Verco (V) and Hodge (H) were non-executive directors of a company that owned and
operated service stations. V and H did not wish to take an active part in the management
of the company and left the running of the company to the managing director. V and H failed
to hold any directors’ meetings and trusted the managing director to completely manage the
business unsupervised. When the company became insolvent, the liquidator sued V and H
for failing to act with care and diligence (the managing director had become bankrupt).
Decision: V and H breached their common law and statutory duties to act with care and
diligence by comprehensively failing to play any role in monitoring the activities of the
managing director. The court stated that V and H were not justified in relying on others such
as the company’s solicitor and accountant to monitor the managing director. The court said:
The extent to which they, as non-executive directors, were justified in trusting and relying upon
the chief executive officer or managing director depends upon the nature and circumstances
of the company as they existed, not as Mr Verco and Mr Hodge thought them to exist. This is
so because of their failure to inform themselves about the affairs of the company. Had they
done so and found it to be financially healthy and well managed with appropriate procedures
for reporting through the chief executive officer to the board of directors, it may be expected
that they could have left many matters to the managing director and staff of the company
without being in breach of their duty as directors. They were content to leave the
management of the company entirely to the managing director without having made any
relevant enquiries about the company, including its financial position, management structure
and business. However, such was not the case. While it may be accepted that as non-executive
directors they were not under an obligation to carry out a detailed inspection of the day-to-day
activities of the company, they were obliged to be aware of the true financial position and
capability of the company and to act appropriately if there are reasonable grounds to expect
that the company will not be able to pay its debts. [Emphasis added.]
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It is clear from decisions such as AWA, Daniels and Sheahan v Verco that directors have a
positive obligation to monitor the company’s performance and to ensure that management
are held accountable. There is a difference between delegating tasks to subordinates
(particularly in large, complex corporations), and abdicating the role of director by totally
relying upon management without independent supervision.
Under statute, s 198D provides that directors may delegate powers and functions to a
subcommittee of the board of directors. However, directors are responsible for the actions
of the persons to whom they delegate their powers and functions: s 190.
Section 190(2) states that a director is not responsible for the decisions which have been
delegated under s 190 if:
• the director believed on reasonable grounds that at all times the delegate would exercise
the power in conformity with the duties imposed upon directors of the company by
both the Corporations Act and the corporate constitution; and
• the director believed on reasonable grounds and in good faith and after making proper
inquiries (if the circumstances indicated the need for an inquiry) that the delegate was
competent and reliable.
Reliance on others
16.45 Section 189 states that directors can reasonably rely on information or advice provided by
others only if:
• the reliance is made in good faith; and
• the director only relied on the information or advice after making an independent
assessment of the information or advice in the context of the director’s position and the
company’s operational complexity.
It can be seen from Sheahan v Verco, above, that the directors in breach of their duties could
not comply with s 189 because they failed to make any independent assessment of how the
managing director was managing the company.
The people that a director can rely upon for information, professional or expert advice
under s 189 are expressly stated in the Corporations Act as:
• an employee, whom the director believes on reasonable grounds to be reliable and
competent in relation to the matter;
• a professional advisor or expert in relation to matters that the director believes on
reasonable grounds to be within the person’s professional or expert competence;
• another director or officer in relation to matters within their director’s or officer’s
authority; or
• a committee of directors on which the director did not serve in relation to matters
within the committee’s authority.
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Chapter 16 쏋
Business judgment rule

In March 2000, when Parliament introduced the refined statutory duty of care and diligence 16.46
in s 180(1), they also introduced a statutory business judgment rule as a director’s defence
against decisions resulting in commercial failure and causing harm or loss to the company:
s 180(2).
At common law, there was reluctance by the courts to second guess the decisions of
management when there is the benefit of hindsight rather than the commercial imperatives
that a board must face at each meeting.As long ago as 1883 Bowen LJ in Hutton v West Cork
Railway (1883) 23 Ch D 654 at 671 said:
Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs
of the company, and paying away its money with both hands in a manner perfectly bona fides
yet perfectly irrational.
This ‘honest lunatic’ test was further refined by the Privy Council in Howard Smith Ltd v
Ampol Petroleum Ltd [1974] AC 821 at 832:
There is no appeal on merits from management decisions to courts of law: nor will courts of
law assume to act as a kind of supervisory board over decisions within the powers of
management honestly arrived at.
In the USA, the Delaware Courts established a ‘safe harbour rule’ for directors making
commercial decisions which, in 1992, was incorporated into the American Law Institute’s
Principles of Corporate Governance: Analysis and Recommendations. The USA defence is much
broader than the construction adopted by the Australian Parliament which is now found in
s 180(2).15
The statutory business judgment rule in s 180(2) is narrow in its application. It can
only be relied upon as a defence relating to the reasonable care and diligence under
s 180(1) or the equivalent under the common law. This is a defence for all officers who
are to be taken as complying with the duties in s 180(1) and their common law equivalents
if all the following conditions are satisfied:
• the business judgment was made in good faith for a proper purpose;
• the officer does not have a material personal interest in the events;
• they inform themselves about the subject matter; and
• they rationally believe that the judgment is in the best interests of the corporation.
15 For a further discussion of the ALI principles see Austin R P, Ford H A J and Ramsay I M, Company Directors: Principles of
Law and Corporate Governance, LexisNexis Butterworths, 2005, ch 6.
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KEY CASE
Facts: Adler obtained an unsecured loan from HIH (a company that he was a director and
shareholder of) to purchase shares in a company that he was involved in, which the court
held was in breach of his statutory duties: ss 180(1)–182. Adler raised the defence of the
statutory business judgment rule to avoid liability for breaching s 180(1). Adler also used
some of the funds to buy more shares in HIH in the hope of increasing the share price.
Decision: The court decided that Adler could not rely on the business judgment rule defence
in s 180(2) because he clearly had a material personal interest in the transaction that gave
rise to the breach of duty because of his connection with the company that the loan funds
were used to purchase. Adler also had a material personal interest in increasing HIH’s share
price which gave him a material personal interest in the transaction, preventing the
application of s 180(2).
At the time of writing, the Commonwealth Treasury had released a discussion paper that
raised the possibility of extending the business judgment rule to cover potentially all
statutory officers’ duties. However, no formal legislation has as yet been put forward.
REMEDIES FOR BREACH OF COMMON LAW AND FIDUCIARY

DUTIES
General law remedies
Care, skill and diligence

16.47 The common law duty of care, skill and diligence provides a remedy for the company to sue
for damages (that is compensation) provided that it can prove that the director’s negligence
caused it to suffer loss.
16.48 Fiduciary duties

The fiduciary duties relating to acting in good faith in the best interests of the company,
acting for a proper purpose, avoiding conflicts of interest and not making secret profits may
give rise to the following remedies:
• Equitable compensation — similar, but not identical, to common law damages.
• An account of profits — which strips the director of any profit made, regardless of any loss
suffered by the company, that is even where the company suffers no loss.
• An injunction — which stops the director from continuing to breach his or her fiduciary
duties.This is used particularly where the director works for a competing business.
• A constructive trust — which provides that any gain, including property, made from the
breach may be held for the benefit of the company under a trust created by the court.
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• Rescission of contract — which allows the company to reverse a contract previously entered
into, for example where the director sold property to the company without giving
proper disclosure.
Statutory remedies
A breach of ss 180–183 and 588G requires the court to issue a declaration of contravention 16.49
under s 1317E.The issuing of a declaration is significant because it allows ASIC to apply for
a pecuniary penalty order under s 1317G, and to apply to the court for an order that the
director be disqualified from managing corporations under s 206C.
The court may also order that:
• The director pay damages to the company: s 1317H.
• An injunction be imposed restraining the future breach of duty: s 1324.
• A receiver be appointed over the property of the company: s 1323.
The civil penalty regime in Pt 9.4B represents an attempt by the Parliament to provide a
flexible sanction regime that is not as severe as imposing criminal law punishment on
directors who fail to meet community standards of conduct. Prior to the introduction of
civil penalties in 1993, the statutory criminal regulation of directors’ duties made it difficult
to prosecute breaches, given the extensive protections offered to accused persons under the
criminal law (including a higher burden of proof where the prosecution had to prove its case
beyond a reasonable doubt).
The Federal Government was aware of some of the complex issues in pursuing
white-collar criminal offences under the corporations’ legislation. One approach, borrowed
from the Trade Practices Act 1974 (Cth), was to develop a civil penalty regime which is a
hybrid between the civil and criminal law system. Civil penalties offer the major benefit of
operating using civil court procedures (and the lesser civil burden of proof — on the balance
of probabilities) rather than the criminal procedures with a judge and jury.
However, the High Court in 2004 ruled in Rich v ASIC (2004) 50 ACSR 242; [2004]
HCA 42 that a civil penalty proceeding for disqualification is similar to a criminal matter
and therefore should provide similar protections (in that case, the privilege against giving
documents to the prosecuting authority prior to trial). This has subsequently been
overturned by s 1349, a new provision inserted into the Corporations Act in 2007.
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KEY CASE
Rich v ASIC (2004) 50 ACSR 242; [2004] HCA 42
Facts: Rich was a director of One.Tel, a large telecommunications company that collapsed
with $Billions in unpaid debts. ASIC commenced civil proceedings against Rich and another
director seeking a declaration under s 1317E for breach of directors’ statutory duties (which
are ‘civil penalty provisions’). ASIC also sought compensation and disqualification orders.
During proceedings ASIC applied for access to documents held by Rich (called a discovery
order). Rich opposed the production of the documents on the basis that such an order
would breach the privilege against penalties. Both the trial judge and NSW Court of Appeal
found that civil penalty orders were protective in nature rather than penalties. Rich appealed
to the High Court to resist disclosure.
Issue: Were civil penalty orders actually penalties, or rather were they protective in nature?
If civil penalty orders were penalties, did Pt 9.4B exclude the privilege against penalties?
Decision: The High Court found that civil penalty orders were indeed penalties and therefore
the privilege would apply if not removed by the statute. The court found that the privilege
was not removed by the wording of the Act because s 1317L specifically provides that civil
procedure rules (including the common law privileges) apply to civil penalty proceedings and
therefore ordered that Mr Rich could refuse to give discovery to ASIC.
It should be noted that at the time of writing the Federal Government had announced a
review of sanctions against directors and officers, seeking submissions regarding whether the
current sanctions (penalties and remedies) under the Corporations Act were appropriate.16
CRIMINAL ACTIONS AGAINST DIRECTORS

16.50 If the directors of the corporation have acted criminally, that is, if their actions or omissions
to act are deemed to be dishonest or reckless, causing the company detriment or gaining for
themselves a personal advantage, then a prosecution may be launched.ASIC, with the aid of
the Australian Federal Police, will conduct the criminal investigation, following strict
procedures as to how evidence is collected and making determinations as to whether a
prosecution should be completed. If it is a minor contravention of the law, ASIC will
conduct the actual prosecution in the lower criminal courts. If the matter is more serious,
with the potential for an officer being sent to gaol, then the case is usually passed to the
Commonwealth Director of Public Prosecution.
All the provisions of the Corporations Act 2001 are in fact criminal, unless the specific
provision in question states otherwise: s 1311. An example of such an exception concerns
the statutory duty of care and diligence which is not subject to criminal penalties: s 184.
A list of criminal penalties is provided in Sch 3 of the Act.Although the corporate entity itself
can commit a crime, it usually operates through humans and they can be caught, as well.
16 The paper is available at <www.treasury.gov.au>.

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A person involved in (aiding and abetting) a corporation’s criminal behaviour may also be
liable: s 79.
There are some overriding criminal principles that should be noted in understanding the
operation of the criminal provisions of the Corporations Act.These points include:
• Subject to Sch 3, the standard criminal penalty is five penalty units ($550): s 1311(5) and
s 4AA of the Crimes Act 1914 (Cth) defines a penalty unit as $110.
• Maximum criminal penalties for individual offenders found in Sch 3 are set at 2000
penalty units ($220,000) and/or five years imprisonment.
• Corporate offenders face fines of five times the amount specified for an individual, in lieu
of a term of imprisonment: s 1312. Thus, currently the maximum penalty faced by
corporate criminal offenders is $1.1 million.
• Penalty notices may be issued by ASIC: s 1313.
Criminal prosecutions may be commenced by ASIC or the DPP: s 1315. Prosecutions must
be commenced within five years of the contravention: s 1316. Chapter 2 of the Criminal
Code Act 1995 (Cth), which contains general principles of criminal responsibility and
defences, applies generally to the Corporations Act under s 1308A. There is a special
provision for corporate criminal responsibility provisions (Pt 2.5) of the Criminal Code
which does not apply to Ch 7 of the Corporations Act: s 769A.Thus, conduct engaged in
on behalf of the corporation is taken to be conduct carried out by the corporation itself for
the purposes of Ch 7 of the Corporations Act under s 769B.
ASIC’s annual report for 2005–06 shows that it is becoming more active in criminal
enforcement of the Corporations Act. In 2005–06 ASIC secured criminal convictions
against 27 individuals, and commenced 74 criminal proceedings. ASIC’s overall success rate
in enforcement proceedings (both civil and criminal) is 94% (as indicated in the 2005–06
annual report).
The double jeopardy rule

It is quite possible to imagine that Mr Adler and Mr Williams thought the legal proceedings 16.51
against them were over when they were ordered to pay compensation to HIH, pecuniary
penalty orders and were disqualified from managing corporations. However, ASIC, with the
DPP also laid criminal charges against them. Mr Adler raised the defence of of double
jeopardy. Double jeopardy is defined as the ‘placing of an accused person in peril of being
convicted of the same crime in respect of the same conduct on more than one occasion’ in
Nygh and Butt, Butterworths Concise Australian Legal Dictionary (1998) at p 125.
Australian courts have taken a strict line against these arguments and have distinguished
the officers’ civil duties to the company from those of the criminal law. In this case a criminal
prosecution was allowed to proceed based on similar events to the civil penalties.
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CASE EXAMPLE
Adler v DPP (2004) 51 ACSR 1; [2004] NSWCCA 352
New South Wales Court of Criminal Appeal
Facts: Adler was disqualified from being a director and ordered to pay substantial
compensation for various breaches of civil penalty provisions. The Commonwealth DPP then
commenced criminal proceedings against Adler for breaches of the criminal law arising out
of the same conduct. Adler argued that the criminal proceedings should be terminated
because they were an abuse of process as they constituted double jeopardy as criminal
sanctions would effectively punish Adler twice for the same conduct.
Issue: Should the criminal proceedings be terminated in circumstances where the conduct
providing the basis of the criminal charges has already given rise to civil penalty orders?
Decision: The court found that the criminal charges were not an abuse of process because,
despite the punitive nature of civil penalties, obtaining civil penalty orders was not a
‘prosecution’ of Adler. The court based its decision on the ‘civil nature’ of civil penalties
(that is the fact that civil evidence rules and not criminal evidence rules applied) and the
fact that the elements required to be proved under the criminal charges were not the same
as those relevant to proving a breach of the civil penalty provisions.
Note: The High Court refused Adler’s application for special leave to appeal against the
NSWCCA’s decision and Adler then changed his plea to guilty.
During the 2004–05 financial year ASIC jailed 22 people, with an average term of
3.68 years.This could be interpreted to mean that both Mr Adler and Mr Williams received
above average jail terms.The longest sentence imposed of these recent corporate criminals
is Ms Donna Tung Sing Ho who was sentenced to nine years’ jail, with a non-parole period
of three years, after pleading guilty to nine charges of dishonestly using over $1.5 million of
investors’ money between August 1997 and April 1999. Ms Ho was convicted in October
2004 by the Queensland Supreme Court.
On average, over the last 10 years, 6.8 people per year have been sentenced to between
two and four years jail, while 4.8 people have been sentenced to between four and eight
years jail. Further research shows that over the past 10 years, only four people have been
sentenced to imprisonment for longer than 10 years, while nine people have been given
sentences between eight and 10 years long.
On 15 December 2004 Mr Williams pleaded guilty to three criminal charges for being
reckless and failing to use his powers for a proper purpose in signing a letter, knowing it to
be misleading on 19 October 2000. He also authorised the issue of a prospectus that
contained a material omission on 26 October 1998 and authorisation statements in the
1998–99 HIH Insurance annual report, which he knew were misleading by overstating the
operating profit by $92.4 million. Mr Adler waited until the beginning of his criminal trial
on the 16 February 2005 to plead guilty to four criminal charges.These charges related to
two counts of disseminating false information on 19 and 20 June 2000 that were likely to
induce a person into buying HIH shares. He also pleaded guilty to one count of obtaining
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money by false statements under the Crimes Act 1900 (NSW) and one count of being
intentionally dishonest by not acting in the best interests as a director of HIH under s 184
of the Corporations Act.
On 14 April 2005 Mr Adler was sentenced to four and a half years imprisonment,
with a non-parole period of two and a half years for the charges in R v Adler (2005) 53
ACSR 471; [2005] NSWSC 274. A day later, Mr Williams was sentenced to four and a half
years, with a non-parole period of two years and nine months in R v Williams (2005) 53
ACSR 534; [2005] NSWSC 315. Under the sentencing guidelines, the judges had to take
into account the different sentencing regimes under the Commonwealth law and under the
New South Wales state laws, as well as a discount in jail term for the guilty plea. Mr Williams
in fact received a 25% discount for his early plea, where as Mr Adler only received a 10%
discount for his guilty plea on the first day of the criminal trial.
These high profile sanctions may be contrasted with those imposed on other HIH
officers such as the Managing Director of HIH Insurance being sentenced to only 15 months
jail and Chief Financial Officer Dominic Fodera being sentenced to two years jail.
OTHER STATUTORY DUTIES

Related party transactions
There are a number of other statutory provisions within the Corporations Act which have 16.52
a direct impact on directors, including the prohibitions against financial benefits without
disclosure and trading whilst insolvent (discussed below).
A public company must comply with Ch 2E, which is entitled ‘Financial benefits to
related parties’. Chapter 2E was introduced in 1992 and requires a public company and its
controlled entities which seek to give a financial benefit to directors or other related parties
to obtain prior approval of shareholders.The effect of these provisions is that full disclosure
must be made to shareholders and the transaction is only permitted if the statutory
procedure in Ch 2E is followed.These statutory provisions arose out of some inappropriate
transactions conducted between Mr Christopher Skase and his company Qintex, which
caused the shareholders and creditors to lose millions of dollars in assets. More recently,
the leading decision in ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 also involved
contraventions of the related party transaction provisions.
Financial benefit is defined in s 229 as a broad interpretation and it can include the
following situations:
• giving a financial benefit indirectly;
• giving a financial benefit by making an informal agreement; or
• giving a financial benefit that does not involve payment of money.
Only certain people will be classified as related parties for the purposes of s 208 and Ch 2E.
These are defined in s 228 as:
• a controlling entity of the public company;
• directors of the public company or its controlling entity and their spouses and de facto
spouses, parents and children;
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• an entity controlled by a related party;

• an entity that was a related party during the previous six months; or
• an entity that acts in concert with a related party on the understanding that the related
party will receive a financial benefit if the public company gives the entity a financial
benefit.
However, the related parties are still allowed to gain a financial benefit if they follow the
procedures laid down in Ch 2E or if the transaction fits within the statutory exceptions.
Under s 208, it is necessary for a public company or an entity it controls to give a financial
benefit to a director or other party, the company must obtain the approval of its members
and give the financial benefit within 15 months of the approval. The approval process
involves convening a members’ meeting and a simple majority passing the resolution. The
related party that is receiving the benefit must not vote on the resolution.
The exceptions to the rule in s 208 include:
• transactions at arm’s length on ordinary commercial terms (s 210);
• remuneration or reimbursement for officers and employees (s 211);
• indemnities, exemptions, insurance premium and legal cost (s 212);
• small scale benefits, under $5000 (s 213);
• benefits provided to or by closely-held subsidiaries (s 214);
• ‘fair’ benefits to related parties as members (s 215); and
• court ordered financial benefits (s 216).
If a related party of a public company is found to be in contravention of s 208, it does not
mean that the validity of any contract or transaction connected with the giving of the
benefit is actually affected: s 209. But the person who is involved in a contravention of s 208
contravenes a civil penalty provision: s 1317E.
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KEY CASE
Facts: HIH paid $10 million for a unit in a trust controlled by Adler (a director of HIH).
Adler controlled the trust through two companies (Adler Corp and PEE) both of which he
controlled. The unit trust was managed by PEE, whose sole shareholder was Adler Corp,
which was ultimately controlled by Adler. The assets in the trust that PEE managed were
technology stocks worth substantially less than $10 million. PEE used part of the $10 million
to purchase HIH shares. Adler Corp had substantial shareholdings in HIH. At no time was
shareholder approval sought for the loan.
Issue: Was the $10 million loan by HIH a financial benefit given to a ‘related party’? If so,
was the transaction ‘at arm’s length’ so as to provide a defence against a breach of the
related party transactions provisions?
Decision: The court found that the $10 million payment was a financial benefit provided to
PEE, Adler Corp and Adler in breach of s 208, because no member approval was obtained
prior to the payment. The payment could not be characterised as being an ‘arm’s length
transaction’ so as to take advantage of the defence in s 210, because the payment was
unsecured, inadequately documented and allowed for the self-acquisition of securities by HIH.
Miscellaneous statutory duties

There are additional criminal provisions within the Corporations Act, aimed at enforcing 16.53
disclosure. Sections 191–194 require directors to disclose to the board their holding of any
another office; s 195 prohibits voting as an interested public director; ss 200A and 200B
require the disclosure of directors’ benefits for the loss or retirement from office; and s 202B
requires the disclosure of all directors’ emoluments.
ASIC maintains a register of disqualified directors and will prevent a dishonest director
from being appointed as an officer of another company. ASIC can prosecute for additional
offences such as fraud by officers (s 596); falsification of books (s 1307); making false
statements (s 1308); lodging false reports (s 1309); and even obstructing the regulator
(s 1310).
DUTY TO AVOID INSOLVENT TRADING

Background to the insolvent trading prohibition
As noted above, when a company becomes insolvent the duties of directors change from 16.54
being owed to the company (that is the shareholders) to being owed to creditors. However,
the general law obligation to creditors in insolvency is supplemented by a statutory duty to
avoid insolvent trading (that is to prevent the company from incurring debts during
insolvency).This duty was first introduced into Australia in the 1960s and was modelled on
UK legislation dealing with debts incurred without a reasonable belief that the debts could
be repaid.
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The insolvent trading provision means that corporations, through the directors, are
prohibited from trading while insolvent, as this unfairly places creditors at risk. Ordinarily,
the company as a separate legal entity (with the power to enter into legally binding
contracts) is liable for the debts it incurs.This is a consequence of the decision in Salomon’s
case, discussed earlier in [x-ref to registration]. However, as noted earlier in [x-ref to
registration] the Corporations Act allows for the ‘veil of incorporation’ to be lifted where
insolvent trading occurs. For the purposes of director accountability and creditor protection,
Parliament has imposed a duty that if the company is unable to pay its debts, then the
directors should be personally liable for debts incurred after the date of insolvency: s 588J.
The insolvent trading provisions allow an individual creditor, with liquidator or court
consent, to sue the directors of an insolvent company to recover the repayment of their debt:
s 588M.
The insolvent trading provision came to prominence following the major corporate
collapses of the late 1980s. However, the cases arising under that former provision (s 592)
highlighted that the need to establish an expectation of insolvency was often too difficult to
prove. Subsequent reforms led to the refinement of the statutory provision, currently found
in s 588G, which provides a positive duty not to engage in insolvent trading where there is
only a ‘reasonable suspicion’ of insolvency. Section 588G also differs from the previous
section in that it only applies to directors (where s 592 applied to officers). The reformed
s 588G commenced operation on 23 June 1993 and applies to all liquidations and creditors
after that date.
A breach of s 588G is a civil penalty provision under Pt 9.4B. However, where the
insolvent trading occurs due to dishonesty, there is a separate criminal offence under Sch 3,
which may incur up to a $220,000 fine and/or five years imprisonment.
The insolvent trading provision has also been extended to holding and subsidiary
companies under s 588V. However, there has been very little litigation using the insolvent
trading provisions against holding companies.
DISCUSSION
POINT
Why should directors be responsible for insolvent trading?
The current prohibition

16.55 The requirements for insolvent trading are stated in s 588G(1), which may be summarised
as follows:
• a person is a director at a time when the company incurs a debt;
• at that time, the company is insolvent or becomes insolvent by incurring that debt; and
• at that time, a reasonable person would have grounds to suspect that the company was
insolvent or would become insolvent by incurring that debt.
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A person is a director of the company

This was discussed in Chapter [x-ref to officers], where it was noted that s 9 provides a 16.56
broad definition of director that includes both shadow and de facto directors.
When is a debt incurred?

A debt is incurred when a binding obligation to pay money arises. 16.57
KEY STATEMENT
Hawkins v Bank of China (1992) 7 ACSR 349
A debt is incurred when a company enters into a contract by which it subjects itself to an
unavoidable obligation to pay a sum of money at a future time, even if that obligation is
conditional.
It should also be noted that s 588G(1A) provides for a range of ‘deemed debts’ such as the Contingent
debts: this is
declaration of a dividend. If the alleged debt is not a deemed debt, then the court must a debt that is
examine the nature of the (usually contractual) liability to pay.The Hawkins case is significant subject to a
pre-existing legal
because it recognises that contingent debts are debts for the purposes of insolvent trading. obligation
There is some debate within the cases as to whether or not incurring a debt must involve (for example a
binding contract)
the choice by the debtor company to subject itself to the obligation to incur a debt.17 but the actual
However, the present state of the authorities appears to favour the view that a debt is payment of the
debt depends on
incurred even where the debtor company has no choice but to incur the debt (such as tax the happening
liabilities): Fryer v Powell (2001) 37 ACSR 589; [2001] SASC 59. of a future event,
even if the future
One problematic issue concerns the relevance of creditor delays in enforcement. On one event may or
view, it could be argued that a debt is not due until a creditor seeks to actively enforce may not happen.
The classic
the debt. However, that view is not reflected in the case law. One of the leading recent example is a
decisions to consider this issue was Southern Cross Interiors Pty Ltd (in liq) v DCT . guarantee where
the guarantor
has an existing
legal obligation,
but may not need
to make payment
if the principal
debtor complies
with the loan.
17 Compare Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290 (choice is needed) with
Shepherd v Australia and New Zealand Banking Group Ltd (1996) 20 ACSR 81 (no choice is needed).
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KEY CASE
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213; [2001] NSWSC
621
Facts: Mr and Mrs Clark were the sole directors of Southern Cross Interiors, although
Mrs Clark took no part in the management of the company. The company suffered financial
difficulties, despite the fact that many of the company’s creditors were not enforcing
payment within the standard 30-day payment terms. A liquidator was eventually appointed
and he took action against the DCT for recovery of tax payments as voidable preferences.
The Deputy Commissioner of Taxation then brought an action against the Clarks to seek
recovery of any tax payments that might need to be repaid to the liquidator.18
Issue: As part of the overall question as to when the company became insolvent, an issue
was raised as to whether debts had been incurred in light of the lack of enforcement by the
creditors.
Decision: Palmer J found that debts had been incurred despite the fact that creditors might
not have actively enforced the repayment of those debts.
Although the Southern Cross Interiors case was overturned on appeal (see DCT v Clarke
below), however, the appeal did not relate to Palmer J’s discussion of when a debt is incurred.
When is a company insolvent?

16.58 The test for insolvency is contained in s 95A which provides that a company is insolvent
where it is unable to pay its debts as and when they become due and payable.
The traditional view was that solvency had to be assessed on the basis of the company’s
own funds, which relied on a cash flow test rather than a balance sheet test: see Bank of
Australasia v Hall (1907) 4 CLR 1514. Over time however, the courts have come to accept
that a company is not insolvent merely because it does not have sufficient cash to pay its debts:
see Rees v Bank of New South Wales (1964) 111 CLR 210.The courts recognise that the real
question is whether the company is able to pay its debts, whether the funds are derived from
cash reserves, assets sales or borrowed funds.
The assessment of solvency, for the purposes of the insolvent trading provision, was
summarised by the Full South Australian Supreme Court in Fryer v Powell.
18 Section 588FGA provides that a director must indemnify the Commissioner of Taxation where the Commissioner is
forced to repay tax payments under the voidable transaction provisions in Pt 5.7B Div 2.
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KEY STATEMENT
Fryer v Powell (2001) 37 ACSR 589; [2001] SASC 59
1. The assessment of a company’s solvency must be undertaken by considering the
commercial reality of the company’s financial position. The court should not simply use
a temporary lack of liquidity. Regard should be had not only to the company’s cash
resources immediately available, but also to moneys which it can procure by realisation
by sale, or borrowing against the security of its assets, or otherwise reasonably raise
from those associated with, or supportive of, it. It is the inability, utilising such resources
as are available through the use of assets or which may otherwise realistically be raised
to meet debts as they fall due which indicates insolvency.
2. It is legitimate to take into account any indulgences extended to a company by its
creditors as to trading terms. However, absent a firm arrangement with all of its creditors
for an extension of terms of trade, the court will usually apply the normal terms of trading
when assessing solvency. It is not normally proper to base an assessment on a mere
failure of creditors (or of some creditors) strictly to enforce payment obligations at a
given point in time.
3. It is not appropriate to base an assessment on the prospect that the company might be
able to trade profitably in the future, thereby restoring its financial position. The question
is whether it, at the relevant time, is able to pay its debts as they become due —
not whether it might be able to do so in the future, if given time to trade profitably.
One problematic issue concerns the extent to which directors may be able to rely on
non-enforcement of repayment by creditors. This issue was mentioned in the above
summary from Fryer v Powell, but it received detailed consideration in Southern Cross Interiors
Pty Ltd (in liq) v DCT.
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KEY STATEMENT
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213; [2001] NSWSC
621
In assessing solvency, the court acts upon the basis that a contract debt is payable at the
time stipulated for payment in the contract unless there is evidence, proving to the court’s
satisfaction, that:
• there has been an express or implied agreement between the company and the creditor
for an extension of the time stipulated for payment; or
• there is a course of conduct between the company and the creditor sufficient to give rise
to an estoppel preventing the creditor from relying upon the stipulated time for payment;
or
• there has been a well established and recognised course of conduct in the industry in
which the company operates, or as between the company and its creditors as a body,
whereby debts are payable at a time other than that stipulated in the creditors’ terms of
trade or are payable only on demand.
Reasonable ground to suspect insolvency

16.59 For the court to determine under s 588G whether there is a reasonable ground for
suspecting that the company is insolvent, there will be an application of an objective test
rather than the directors’ actual subjective knowledge of the insolvency.
In ASIC v Plymin (2003) 46 ACSR 126; [2003] VSC 123 at [386], Mandie J provided a
list of relevant factors that may be used to assist in determining whether there are reasonable
grounds for suspecting insolvency. Of course, no single factor is necessarily determinative on
its own.The list is:
1. continuing losses;
2. liquidity ratios below 1;
3. overdue taxes;
4. poor relationship with the bank;
5. no access to alternative finance;
6. inability to raise further equity capital;
7. suppliers placing company on cash on delivery (COD), or otherwise demanding special
payments before resuming supply;
8. creditors unpaid outside trading terms;
9. issuing of post-dated cheques;
10. dishonoured cheques;
11. special arrangements with selected creditors;
12. solicitors’ letters, judgments or warrants issued against the company;
13. payments to creditors of rounded sums that are not reconcilable to specific invoices; or
14. inability to produce timely and accurate financial information to display the company’s
trading performance and financial position, and make reliable forecasts.
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KEY CASE
Facts: The Millers were directors of a company called Raydar, which specialised in commercial
electrical work. Raydar accepted a contract from Reed to install the electric systems in a
large lecture theatre at the University of New South Wales. When Raydar accepted this
contract it had a number of unpaid creditors. Raydar was unable to complete the entire job
and contracted with Metropolitan Fire Systems (MFS) to perform some of the work on the
lecture theatre. MFS completed its work but Raydar could not pay for the work that MFS
had done as Raydar had not yet been paid by Reed for the work. Mr Miller (the primary
director of Raydar) was assured by Reed that payments would soon be made to Raydar in
respect of the electrical work on the lecture theatre. However, the payment from Reed failed
to arrive before one of Raydar’s creditors issued a statutory demand demanding payment
for previous supplies. MFS then sought a court declaration that Raydar was insolvent and
that the Millers breached s 588G by allowing Raydar to incur debts to MFS.
Decision: Raydar was insolvent as it had large amounts of unpaid debts when it incurred
liability to MFS. It had $200,000 in assets and $400,000 in liabilities. The directors should
have suspected that the company was insolvent because of the lack of incoming
payments and the continued accumulation of business debts that were not paid. Therefore,
the directors breached their duty under s 588G.
KEY STATEMENT
ASIC v Plymin (2003) 46 ACSR 126; [2003] VSC 123
Victorian Supreme Court
“Reasonable” in this context imports the standard of reasonableness appropriate to a
director of reasonable competence and diligence, seeking properly to perform his duties as
imposed by law (when viewed as a whole) and capable of reaching a reasonably informed
opinion as to a company’s financial capacity.
Preventing insolvent trading

One of the key issues that has arisen in numerous cases concerns the power imbalance 16.60
between executive and non-executive directors.That is, non-executive directors do not play
a significant role in the day-to-day management of the company and therefore are heavily
reliant upon the advice and information given by the executive management team.
What then does this mean for the obligation imposed upon all directors under s 588G(2),
including non-executive directors, to stop the company from trading whilst it is insolvent?
The Water Wheel case considered this issue.
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CASE STUDY
ASIC v Plymin (Water Wheel case) (2003) 46 ACSR 126; [2003] VSC 123
Trial Decision
Facts: ASIC brought action against three directors of the Water Wheel group of companies,
which were involved in the milling of rice and wheat. The three directors were: Elliott (a non-
executive director), Plymin (the managing director) and Harrison (the chairman). Harrison
admitted liability, whilst Elliott and Plymin defended their actions. Water Wheel went into
voluntary administration in February 2000, with ASIC alleging that the company traded
whilst it was insolvent in late 1999. During 1999, Water Wheel incurred various substantial
commercial debts for stock purchases, transport costs and to obtain additional storage
capacity.
In late 1998, Water Wheel was unable to pay all of its debts and one of its suppliers
stopped supplying to it.
Issue: Did Elliott and Plymin breach their statutory duty to prevent insolvent trading?
Arguments: Elliott argued in defence against the allegations of insolvent trading that he was
unable to prevent the insolvent trading because he was a non-executive director.
Decision: Mandie J rejected Elliott’s argument on the basis that the obligation under s 588G
requires individual directors to take reasonable action necessary to prevent insolvent
trading. As Mandie J said: ‘the essence of a failure by a director to prevent a company from
incurring a debt is a failure by that director to take all reasonable steps within his power to
prevent the company from incurring such debt.’ His Honour found that neither Elliott nor
Plymin had taken any steps to prevent Water Wheel’s insolvent trading and therefore both
of them had breached their duties under s 588G. As a result of breaching s 588G, Plymin
was banned from being a director for 10 years and fined $25,000 and Elliott was banned
for four years and fined $15,000.
Significance: The significance of this decision is the recognition that s 588G imposes a
positive obligation on the directors to stop the company’s insolvent trading. Where the
directors cannot prevent insolvent trading they have an obligation to resign immediately.
ASIC v Elliott (2004) 48 ACSR 621; [2004] VSCA 54

Victorian Court of Appeal
Appeal Decision
Facts: Elliott and Plymin appealed against Mandie J’s decision which found that they had
breached their obligations under s 588G and also appealed against the severity of the ban
from acting as directors and the fines imposed. Elliott and Plymin challenged the basis of
Mandie J’s decision by arguing that a breach of s 588G could only be established where the
particular directors sued under that section were aware that the company had incurred a
specific debt, and had a duty to prevent the incurring of that particular debt whilst the
company was insolvent. Mandie J had found a breach of s 588G on the basis that all of the
directors of Water Wheel had allowed the company to continue incurring debts when there
were reasonable grounds for suspecting the company’s insolvency due to the large number
64 of unpaid bills that the company had.
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Decision: The Victorian Court of Appeal largely dismissed the appeal. The court found that
s 588G did not require proof that individual directors owed a particular duty in respect of
each and every debt incurred by the company, nor was it necessary to prove that the
individual directors actually knew of the existence of each particular debt. The court
therefore agreed with Mandie J’s approach to assessing breaches of s 588G.
The court did however reduce Plymin’s ban on acting as a director from 10 to seven
years due to the fact that he had a substantial prospect to rehabilitate himself due to his
comparatively young age.
The Court of Appeal said:
it is in our view clear that the effect of s 588G(2) is that a director contravenes the section
“by not preventing” or “by failing to prevent” a company from incurring a debt, and that a
director will be taken to have so failed if debts are incurred by a company at a time when there
are reasonable grounds for suspecting that the company is insolvent.
Following this decision, John Elliott has been declared a bankrupt and has had to sell off
much of his personal property to satisfy debts.
Despite the recent media attention given to non-executive directors such as Elliott, the
prosecution of non-executive directors for insolvent trading has a long history. One of the
leading cases is Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423 where the court
decided that a non-executive director (the mother of the company’s managing director)
should pay $165,290 towards the corporate debt of $300,000 incurred by her son, as
director.
Defences to insolvent trading

Section 588H contains a number of defences to insolvent trading.The defences in s 588H, 16.61
which are examined below in turn, are:
• reasonable expectation of solvency (s 588H(2));
• reliance on others providing the information on the solvency of the company
(s 588H(3));
• illness or some other good reason resulting in absence from management (s 588H(4));
and
• reasonable steps to prevent the company from incurring any debts (s 588H(5)).
Reasonable grounds to expect solvency (s 588H(2))

The defence of reasonable grounds to expect solvency means more than a mere hope or 16.62
possibility that the company will be solvent. It requires that the directors have reasonable
grounds for being confident that the company is solvent.This issue arose in Metropolitan Fire
Systems v Miller.
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KEY CASE
Facts: See above.
Issue: Were there reasonable grounds for expecting that Raydar was solvent when the debt
to Metropolitan Fire Systems for its assistance on the UNSW project was incurred?
Decision: The court found that there were no reasonable grounds for the Millers to
expect that Raydar was solvent when the debt to Metropolitan Fire Systems was incurred.
Both Mr and Mrs Miller should have been aware that Raydar was unable to pay its debts
due to the lack of money being paid to Raydar and the increasing number of unpaid invoices
being sent to Raydar.
The court found that an expectation requires something more than mere hope, and
implies a measure of confidence in the company’s solvency.
KEY STATEMENT
Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201; [1999] NSWSC 581
Expectation, as required by s 588H(2), means a higher degree of certainty than mere hope
or possibility of suspecting: ... The defence requires an actual expectation that the company
was and would continue to be solvent, and that the grounds for so expecting are reasonable.
A director cannot rely on complete ignorance of or neglect of duty ... and cannot hide behind
ignorance of the company’s affairs which is of their own making or, if not ..., has been
contributed to by their own failure to make further necessary inquiries.
Directors who are passive and remain ignorant of their company’s financial affairs without
asking for figures or information on a regular basis will not succeed under this defence:
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 (discussed below). The Victorian
Court of Appeal dismissed an appeal against this decision and confirmed that the days of the
sleeping directors are over: Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423.
These decisions were also influential in raising the standards of care, skill and diligence
expected of the modern director and were relied upon in the AWA case and, on appeal, in
Daniels v Anderson discussed earlier.
Reasonable reliance on others (s 588H(3))

16.63 This defence is similar to the defence given to directors, in respect of breaches of s 180(1),
who reasonably rely upon information provided by others: see s 189. This recognises the
common issues running between insolvent trading and general statutory directors and
officers duties. In this defence the following elements must be proved:
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• the director relied upon information provided by another person;

• the director had reasonable grounds to believe that the other person had the
responsibility of providing the director with information about the company’s solvency
and was competent and reliable in performing this role; and
• the information provided allowed the director to expect that the company was solvent
and would remain solvent even if it incurred the debt.
Given that most of the insolvent trading cases involve hopelessly insolvent companies that
have traded whilst insolvent for extended periods (such as the Water Wheel case), establishing
this defence has been very difficult to prove. Where there are numerous indicators of
insolvency (such as creditor demands, withdrawal of credit, changes to cash on demand
payment terms or rejected credit applications) it will be difficult for directors to rely upon
either s 588H(2) or (3) to escape liability.
Absence from management (s 588H(4))

An example of the claimed defence of the absence of management of the company occurred 16.64
in Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405, decided under the predecessor
to ss 588G and 588H.
CASE EXAMPLE
Statewide Tobacco Services v Morley (1990) 2 ACSR 405
Facts: Mrs Morley was a director of a small family company run primarily by her husband
until shortly before his death. After her husband died, the company was run by Mrs Morley’s
son and another director with Mrs Morley and her daughter remaining as directors and
shareholders but taking no part in the management of the company. Mrs Morley did receive
income from the business and did sign documents in her capacity as a director but she
made no effort to monitor how the company was managed by her son. During 1988, the son
caused the company to incur debts to Statewide Tobacco Services (the creditor) at a time
when the Morley family company was insolvent. The creditor sued Mrs Morley for breaching
her statutory obligation not to allow the company to trade whilst it was insolvent.
Issue: Could Mrs Morley use her reliance on her son to properly manage the company as
a defence to insolvent trading?
Decision: The court decided that Mrs Morley could not rely on her lack of participation in
the management of the family company to excuse her from the statutory obligation.
Ormiston J stated:
It is thus apparent ... that a director is obliged to inform himself or herself as to the financial
affairs of the company to the extent necessary to form each year the opinion required for the
director’s statements. Although that is only an annual obligation, it presupposes sufficient
knowledge and understanding of the company’s affairs and its financial records to permit the
opinion of solvency to be formed.
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The Victorian Court of Appeal dismissed an appeal against this decision: Morley v Statewide
Tobacco Services Ltd [1993] 1 VR 423.
A director’s total reliance on their spousal director for management due to their love,
faith and confidence would not entitle reliance on the ‘some other good reason’ aspect of
the defence in s 588H(4).The court has not been sympathetic to this line of argument for
being absent from management, as it is in conflict with the basic expectation of all directors
to ordinarily participate in management: see DCT v Clark (2003) 57 NSWLR 113; [2003]
NSWCA 91.
KEY CASE
DCT v Clarke (2003) 57 NSWLR 113; [2003] NSWCA 91
Facts: This was a husband and wife company where the wife did not take part in
management. The trial decision held she was allowed not to take part in the management
as she relied on her husband.
Issue: Could Mrs Clarke rely on s 588H(4) to avoid liability for insolvent trading on the basis
that she left the company’s affairs to her husband? Could the delegation by a director of
the entire management of the company constitute ‘some other good reason’ for the
purposes of s 588H(4)?
Decision: Mrs Clarke could not avoid liability for insolvent trading on the basis that leaving
the business to her husband was ‘some other good reason’. The words ‘some other good
reason’ must be read down so that they did not conflict with the obligation of directors
generally to participate in the management of the company. They must be read down in
accordance with the scope and purpose of the legislation in which they appeared. Reasons
which caused a director never to participate in management were not capable of
constituting ‘some other good reason’ for not participating at a particular point in time.
Significance: The effect of Clarke and the earlier decisions such as Morely, Friedrich and
Daniels are that a director who fails to actively montior the management of the company
will not be able to escape liability for insolvent trading on the basis that they did not possess
the required skills necessary to monitor the management.
Reasonable steps to prevent company incurring the debt (s 588H(5))

16.65 This defence provides that a director may avoid insolvent trading if they took all reasonable
steps to prevent the company incurring the debt. In most cases, this defence may be
established if the directors have decided to appoint a voluntary administrator to take over
the management of the company. As noted above, the Water Wheel case demonstrates that a
director will not be able to escape liability merely because they are unable to prevent the
debt from being incurred. In such circumstances the director’s obligation is to resign.
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Chapter 16 쏋
Recovering repayment for debts incurred during insolvency

Section 588M gives the liquidator a statutory action for recovery against the director who 16.66
has contravened the insolvent trading provision in s 588G.This can occur even if the director
has not been subject to a civil penalty order or conviction brought by ASIC or the DPP.
A certificate under s 588Q can assist proof of the contravention to the unsecured creditor
after liquidation has commenced.
The amount recoverable is the amount of the creditors’ loss or damage. The amount
recovered is a debt due to the company. The time frame for bringing the action is limited
to six years from the beginning of the winding up: s 588M(4). In Aris v Express Interiors Pty
Ltd (in liq) [1996] 2 VR 507 the question arose as to whether the proceedings should be
brought by the liquidator or the creditor. The court stated that the proper plaintiff is the
company and thus it should be the liquidator. For the creditor to bring the case against the
director under s 588M, their liquidator must consent in writing (s 588R) or the creditor
must obtain leave of the court.
SAMPLE QUESTIONS
Revision Questions
1. What are the sources of directors’ duties?

2. Who are the parties that can enforce a breach of directors’ duties?
3. Explain the concept of fiduciary duty.To whom are such duties owed in corporate law?
4. When would a civil action under the common law and equity be used instead of a
statutory action?
5. What must be proved in a statutory negligence action against an officer under s 180(1)?
6. How can the propriety of an officer’s purpose be established?
7. What have the cases held about the meaning of ‘misuse’ in ss 182 and 183?
8. When will directors be criminally liable for breach of their duties?
9. When may a director be in breach of the duty to prevent insolvent trading and what
defences may be available?
10. What is the relevance of Daniels v Anderson for company law?
Problem Question
AccountCo Ltd is a successful computer software company in Sydney which specialises in
accounting and business management software and maintains roughly 20% of the market.
Managemart Ltd is a large competitor of AccountCo Ltd with 50% of the market in Sydney
for business management software applications. Managemart Ltd is interested in acquiring
AccountCo Ltd’s market share to create the dominant player in the Sydney market.
Managemart Ltd announces on 1 January 2006 that it has acquired 19% of the shares in
AccountCo Ltd and is making a full takeover offer for AccountCo Ltd because ‘in its
opinion the current management of AccountCo Ltd are not providing value for
shareholders’. In the takeover offer Managemart Ltd proposes to:
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chapter 16 18/10/07 3:07 PM Page 70
(a) remove the entire management team of AccountCo Ltd;

(b) fully integrate AccountCo Ltd’s management software business into Managemart Ltd’s
business structure which will involve significant redundancies in AccountCo Ltd; and
(c) allow AccountCo Ltd’s accounting software business to remain in its current state with
a view to a possible sell off in the future.
The directors of AccountCo Ltd, who are also shareholders in AccountCo Ltd, are
extremely worried by the proposed takeover as they fear for their positions and the future
direction of the company.
On 5 January 2006 AccountCo Ltd announces a new share issue proposal that will only
apply to shareholders that were registered on 31 December 2001 or before (which
specifically excludes Managemart Ltd).The proposal is in the form of a bonus issue that will
provide three free shares for each existing share that a member holds.The effect of the issue
is that Managemart Ltd’s shareholding will be substantially diluted and will make it very
difficult to mount a successful takeover. All eligible shareholders will receive a substantial
benefit by accepting the free shares. The proposed share issue will cost the company
$500 million to implement and is likely to eliminate the company’s profit for 2005.
Advise whether the directors of AccountCo Ltd have breached their common law and
statutory duties under the Corporations Act.
GUIDE TO ANSWERING PROBLEM QUESTIONS

When answering a problem question concerning directors’ duties, we suggest that the
following method may be helpful:
1. Determine whether the person involved in the question is a director or officer for the
purposes of the s 9 definitions.
2. Determine what type of company is involved (that is public or proprietary, large or
small, complex or simple).
3. Determine what roles and responsibilities the director or officer had within the
company (particularly for cases involving s 180(1)).
4. Determine exactly what contravening act the person has done — have they acted to
give themselves a benefit? If so, then ss 181–183 may be relevant. If they have failed to
act, then s 180(1) or s 588G may be relevant. And then discuss the statutory provisions
and relevant cases (at least one leading case per issue) for that issue (that is negligence,
fiduciary duties or insolvent trading).
5. Work through the legal test for that particular duty.
6. Determine if any defences may apply: for example s 180(2).
7. Comment on what consequences (that is remedies and penalties) may apply.
8. Discuss any relevant defences: for example s 1317S, ratification by shareholders.
9. Most directors’ duties problems tend to involve multiple breaches of duties (such as
negligence and acting for an improper purpose).The key step is working out what duties
70 may have been breached, which you can usually determine in steps 3 and 4 above.
chapter 16 18/10/07 3:07 PM Page 71
Chapter 16 쏋
FURTHER READING
Academic Journals
Agardy P, ‘Who Wants to be a Deemed Director?’ (2004) 12 Insolvency Law Journal 104.
Anderson H, ‘Director’s Personal Liability to Creditors:Theory vs Tradition’ (2003) Deakin
Law Review 209.
Arsalidou D, ‘ “To Be Active or Inactive’’: Is this a “new” question for company directors?’
(2003) 8 Deakin Law Review 335.
Baxt R,‘Escaping the Dilemma of Conflict — Is Resignation the Only Course?’ (1997) 15
Company and Securities Law Journal 326.
Cassidy J, ‘An Evaluation of s 232(4) of the Corporations Law and Directors Duty’ (1995)
23 Australian Business Law Review 184.
Cassidy J, ‘Has the Sleeping Director Finally Been Laid to Rest?’ (1997) 25 Australian
Business Law Review 102.
Cassidy J, ‘Divergence of Duty of Care in United States and Australia’ (2000) 28 Australian
Business Law Review 180.
Cassidy J, ‘ “Sexually Transmitted Debts”: The scope of defences to directors’ liability for
insolvent trading’ (2002) 20 Company and Securities Law Journal 372.
DeMott D,‘Directors’ Duty of Care and the Business Judgment Rule: American precedents
and Australian choices (1992) 4 Bond Law Review 133.
Goldman D, ‘Directors Beware! Creditor protection from insolvent trading’ (2005) 23
Goode R, ‘Insolvent Trading Under English and Australian Law’ (1998) 16 Company and
Securities Law Journal 170.
Hargovan A,‘Directors’ Duties to Creditors in Australia After Spies v R: Is the development
of an independent fiduciary duty dead or alive?’ (2003) 21 Company and Securities Law
Journal 390.
Hargovan A,‘Geneva Finance and the “Duty” of Directors to Creditors: Imperfect obligation
and critique’ (2004) 12 Insolvency Law Journal 134.
Heath W,‘The Director’s “fiduciary duty” of Care and Skill:A misnomer’ (2007) 25 Company
and Securities Law Journal 370.
Herzberg A, ‘Why Are There So Few Insolvent Trading Cases?’ (1998) 6 Insolvency Law
Journal 77.
James P, Ramsay I and Siva P,‘Insolvent Trading — An Empirical Study’ (2004) 12 Insolvency
Law Journal 210.
Keay A, ‘Director’s Duty to Take into Account the Interests of Company Creditors:
When is it triggered?’ (2001) 25 Melbourne University Law Review 315.
Kirby J,‘The History and Development of the Conflict and Profit Rules in Corporate Law
— A Review’ (2004) 22 Company and Securities Law Journal 259.
Langton R and Trotman L, ‘Defining “the Best Interests of the Corporation”: Some
Australian reform proposals’ (1999) 3 Flinders Journal of Law Reform 163.
Law L, ‘Business Judgment Rule in Australia: A reappraisal since the AWA case’ (1997) 15
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Mannolini J,‘Creditors’ Interests in the Corporate Contract: A case for the reform’ (1996) 6
Australian Journal of Corporate Law 14.
Mescher B, ‘Company Directors’ Knowledge of the Insolvent Trading Provisions’ (1998) 6
Insolvency Law Journal 186.
Mosley J, ‘Insolvent Trading: What is a debt and when is one incurred?’ (1996) 4 Insolvency
Law Journal 155.
Sealy L, ‘Directors’Wider Responsibilities’ (1987) Modern Law Review 164.
Sievers S, ‘Directors’ Duty of Care: What is the new standard’ (1997) 15 Company and
Securities Law Journal 392.
Sivehla J, ‘Directors’ Fiduciary Duties’ (2006) 27 Australian Bar Review 192.
Stapledon G, ‘CLERP Proposal in Relation to Section 232(4): The duty of care and
diligence’ (1998) 16 Company and Securities Law Journal 144.
Welsh M and Anderson H, ‘Directors’ Personal Liability for Corporate Fault: An alternative
model’ (2006) 26 Adelaide Law Review 299.
Whincop M, ‘An Economic Analysis of the Criminalisation and Content of Directors’
Duties’ (1996) 24 Australian Business Law Review 273.
Whincop M, ‘Critique of the Modern Reformulation of Directors’ Duties of Care’ (1996)
6 Australian Journal of Corporate Law 72.
Whincop M,‘Of Fault and Default: Contractarianism as a theory of corporations law’ (1997)
21 Melbourne University Law Review 187.
Practitioner Journals
Murray M,‘The Criminal Offence of Insolvent Trading’ (2002) 2 Insolvency Law Bulletin 169.
Practitioner Works
Allens, Arthur Robinson, Directors’ Duties during Insolvency, 2nd ed, Lawbook Co, 2006.
Austin R P, Ford H A J and Ramsay I, Company Directors: Principles of Law and Corporate
Governance, LexisNexis Butterworths, 2005.
Coburn N, Coburn’s Insolvent Trading, 2nd ed, Lawbook Co, 2003.
Redmond P, ‘Safe Harbours or Sleepy Hollows: Does Australia need a statutory business
judgment rule? in Ramsay I (ed), Corporate Governance and the Duties of Company Directors,
Melbourne University Centre for Corporate Law and Securities Regulation, 1997, p 185.
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chapter 16 18/10/07 3:07 PM Page 1

Other Statutory Duties 00

After completing this chapter you should be able to:

FIGURE 16.1 Overview of Officers’ Duties

Common law Equitable fiduciary

Australian Corporate Law

Australian Corporate Law

Australian Corporate Law

Corporate social responsibility

6 CAMAC papers may be obtained from its website <http://www.camac.gov.au>.

Australian Corporate Law

Australian Corporate Law

FIGURE 16.2 Overview of Fiduciary Duties

The law of equity Equity recognises that

Ratification by Defences Relief from liability

Breach of these duties

Compensation Account of Injunction Constructive Rescission

Duty to act in good faith and in the company’s best interests

7 Except if the company is insolvent or approaching insolvency as noted above.

Duty to avoid conflicts of interest

Australian Corporate Law

Test for establishing a conflict of interest

Australian Corporate Law

The obligation to disclose conflicts

Australian Corporate Law

The proper purpose rule

Australian Corporate Law

Australian Corporate Law

• Improper purposes may include:

Managing conflicting interests between classes of securities

Statutory duties under the Corporations Act

Australian Corporate Law

FIGURE 16.3 Comparison Between Fiduciary Duties and Statutory Duties

Equitable Fiduciary Duty Statutory Equivalent

Act in good faith, in the best interests of the company s 181(1)(a)

Pecuniary penalty Disqualification order Compensation

Statutory duty of good faith and proper purposes (s 181)

intentionally dishonest, a separate criminal offence may be committed under s 184(1).

Statutory duty to avoid conflicts of interest (ss 182 and 183)

Australian Corporate Law

Australian Corporate Law

Tensions between the general law and statutory duties

Relief from liability

Indemnification and insurance

Australian Corporate Law

COMMON LAW DUTIES

Australian Corporate Law

The modern duty of care and diligence

Australian Corporate Law

Finally, their Honours stated that:

Assessing whether a breach has occurred

Do non-executive directors owe a lesser standard of care?

Australian Corporate Law

Attendance at board meetings

Special board positions

Australian Corporate Law

16.36 Managing director

16.37 Chief financial officer

Statutory codification of the duty of care and diligence

Duty of care, Section 180(1)

Australian Corporate Law

Common law vs statutory negligence