BLAW20001 Lecture Notes - Lecture 6: Current Liability, Cash Flow, Pricewaterhousecoopers
6 Jun 2018
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Lecture 6
CLAW Lecture 6 - Company Directors’ and Officers’ Duties
S198A: the business of the company shall be managed by and behalf of the directors
General law (case law) duties
Duties are owed to the company by directors and fiduciaries
In exceptional circumstances, a duty may be owed to a shareholder - Brunninghausen v Glavanics
Brunninghausen owed 5/6 shares; Glavanics 1/6
There was an outside offer for shares of the company made to Brunninghausen
He went to Glavanics and offered to buy 1/6 shares (they were on bad terms)
Glavanics sold it to Brunninghausen
Brunninghausen then sold the whole lot and gained a huge profit
Effect of transaction was to cut Glavanics out of the profit of selling the shares
Held in this case: Brunninghausen owed a duty to Glavanics who was the minority shareholder
Generally speaking, there is no duty of directors owed to shareholders; only to company
Who owes the statutory duties?
Directors: properly appointed via vote of company in general meeting in ordinary resolution
De facto: not properly appointed but act in the role as director
Shadow: people in accordance with whose instructions or wishes the directors are accustomed to act
All are subject to the statutory duties (all included in the obligations of directors, i.e., have to behave a certain way)
Most statutory duties also apply to officers (have a significant degree of influence over the affairs financial and
operating of companies)
S9: officers definition includes directors (director doesn’t include officer)
S191: disclosure at meetings - only applies to directors
S588G: insolvent trading duty - only applies to s9 directors
Statutory duties imposed on employees:
S182: misuse of position
S183: misuse of information
Who enforces duties?
Statutory duties: ASIC; or company can also seek compensation
General law: company; or liquidator if company is being wound up
Content of duties are same where they overlap
So why do we have both general law and statute?
Statute allows ASIC to be involved in enforcement; different remedies available under statute and general law
Consequences of breach of the statutory duties
Statutory duties are “civil penalty provisions” - pt 9.4B of the Act
Civil penalty provisions: two parties against each other in court / not criminal; punishment not jail
Following a declaration of contravention, a court may impose:
S1317G: pecuniary penalty up to $200,000
S206C: disqualification (banning) order
S1317H: compensation to company (company may also seek this)
Criminal consequences in some cases for breach of duty:
Not for breach of duty of care
Yes for breaches of some other duties where done with intentional dishonesty or recklessness: S184 -> offences
Offence: crime; contravene: breach (civil or criminal)
Contravention is an offence - criminal penalty of prison and/or a fine: $420,000
Duty of care, skill and diligence
Sources of duty:
general law negligence cases
find more resources at oneclass.com
find more resources at oneclass.com
s180(1): care and diligence
Contract of employment: for executive directors and other executive officers
A director or other officer breaches this duty if they are “negligent”
The standard required of director X is the care that a reasonable person
Doing X’s job
In X’s company
Would exercise (largely “objective” test)
Reasonable person:
If director/officer of a corporation in the corporation’s circumstances (more is expected of you in distress times)
Occupied the office held by, and had the same responsibilities within the corporate as, the director or officer (ie., roles
CEO vs low role)
So what do directors have to do?
Daniels v AWA Ltd
AWA electronics company
Mid 1990s: tendency for companies with cash to invest in short-term money market
In AWA, against company policy to do this
Middle managers were playing with company’s spare finances
Senior management were either so detached or turning a blind eye - usually happens when company is making a lot of
money
It all ended badly: company lost money
Company then sued the auditors
Auditors counter-sued the directors
Daniels v AWA Ltd: increasing the duty of care of companies by directors
Every director must:
Obtain a basic understanding of their company’s business
Keep informed about and monitor the company’s activities
Regularly attend board meetings
Monitor the company’s financial position
Directors with special skills are held to the standard of a person professing to have those skills:
ASIC v Vines - CFO of company
The more you are involved, the more is expected of you
Executive directors’ greater involvement in business of company leads to an expectation of greater knowledge, focus
and awareness
Delegation and reliance defences
Directors may delegate any of their powers to any person, unless constitution restricts delegation: S198D
If delegate is negligent, director will be liable unless requirements of S190 satisfied (eg., director believed on reasonable
grounds that delegate was reliable and competent)
Reasonable grounds
Good faith
After making proper inquiry if the circumstances indicated the need for inquiry
Responsibility: director is in singular (victim can choose to sue individual directors)
S189: director relies on information, or professional or expert advice from:
Employee, professional adviser/expert, another director/officer, committee of directors
Provided reliance was made: in good faith, after making independent assessment
ASIC v Healey
Centro group of shopping centres
Centro was exposed to US retail market (before GFC)
Financed expansion internationally on a lot of debt
Lenders happy to lend money as long as you have asset backing for loans (eg. Shopping centres worth billions, happy to
lend you billions secured against those retail real estate assets)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Claw lecture 6 - company directors" and officers" duties. S198a: the business of the company shall be managed by and behalf of the directors. Duties are owed to the company by directors and fiduciaries. In exceptional circumstances, a duty may be owed to a shareholder - brunninghausen v glavanics. There was an outside offer for shares of the company made to brunninghausen. He went to glavanics and offered to buy 1/6 shares (they were on bad terms) Brunninghausen then sold the whole lot and gained a huge profit. Effect of transaction was to cut glavanics out of the profit of selling the shares. Held in this case: brunninghausen owed a duty to glavanics who was the minority shareholder. Generally speaking, there is no duty of directors owed to shareholders; only to company. Directors: properly appointed via vote of company in general meeting in ordinary resolution. De facto: not properly appointed but act in the role as director.
