Transcript CHAPTER 11 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 1 – Duty of Care, Skill and Negligence At the end of this topic.

CHAPTER 11
DUTIES OF DIRECTORS AND OTHER OFFICERS
PART 1 – Duty of Care, Skill and Negligence
At the end of this topic you should know:
• the duties imposed on directors by the general law and by
the Corporations Act;
• the remedial consequences which result when directors
breach these duties;
• the conduct expected of directors under the duty of care,
skill and diligence;
• the conduct expected of directors under the duty to prevent
insolvent trading; and
• the overlap between the last two duties.
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Introduction
Reasons for Directors’ Duties
The duties fall into three broad categories:
• the duties of care, skill, and diligence;
• the duties of good faith and proper purpose; and
• the duties to avoid conflicts of interest and to
provide proper disclosure.
Directors’ duties reduce the temptation and/or risk of
fraud or mismanagement. They also create tension
between commercial and legal expectations of
directors.
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Balancing Directors’ Duties
Policy Considerations
Directors’
functions
Commercial
Legal
Improve
performance
of company
Comply
with legal
duties
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Debate
During the 1990s some commentators argued that the
balance was weighted too much in favour of legal
compliance, at the expense of company performance.
The debate about the extent of legal regulation of
companies reflects a concern that people who are
most well-informed about their legal responsibilities
may become reluctant to take on the role of a director
for fear of personal liability.
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Why Directors Owe Duties
Directors owe duties of good faith and loyalty
because they are in a “fiduciary relationship” with
their company: Elders Trustees and Executor Co Ltd
v E G Reeves Pty Ltd (1987).
A fiduciary relationship exists:
• where a person is appointed to or assumes to act;
• for the benefit of another person; or
• in circumstances where the appointment gives the
appointed person powers which could be
exercised to the detriment of the other person.
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Outline of Duties of Loyalty and Good Faith
The duties of good faith and loyalty can be broken
down into four overlapping sub-duties:
• the duty to act in good faith;
• the duty to exercise one’s powers for proper
purposes;
• the duty not to fetter one’s discretion; and
• the duty to avoid actual or potential conflicts.
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Outline of Duties of Care, Skill and Diligence
The second group of duties owed by directors
comprises the duties of care, skill, and diligence.
There are two sub-duties:
• the duty to exercise reasonable care, skill, and
diligence; and
• the duty to prevent insolvent trading.
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Who Must Perform the Duties? Sources of
Duties – Directors and Officers
The duties of good faith and loyalty, and care, skill
and diligence arise under:
• the general law; and
• Pt 2D.1 of the Corporations Act.
These duties apply to directors but may also apply to
other officers of a corporation.
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To Whom are the Duties Owed?
Legal Consequences
The duties are owed to the company as a whole: Mills
v Mills (1938), but in special circumstances, may be
extended to members, creditors and beneficiaries of
trusts.
It is quite common for a director to be sued under the
Corporations Act and alternatively under the general
law for breaches of directors’ and fiduciary duties.
A director who breaches their duties may be sued by:
the company; a liquidator; a creditor; a shareholder;
and ASIC.
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Legal Consequences
Both the general law and the Corporations Act provide for
the court to make orders against a director committing a
breach of a director’s duty. These orders are of two broad
kinds:
• remedies (general law, and statutory); and
• penalties (civil and criminal).
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Duty of Care, Skill and Diligence
The director’s duty of care arises under:
• the director’s contract of employment (if any); and
• the general law; and
• s 180(1) of the Corporations Act.
Under the Corporations Act, the standard of care is
assessed by reference to: the company’s
circumstances; the position and responsibilities of the
director or officer; and the experience of the director
or officer.
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Duty of Care, Skill and Diligence
While the duties of care owed by directors under general
law and s 180(1) are substantially similar in meaning and
effect, there are some differences between them.
To determine whether a director has complied with or
breached their duty of care, it is necessary to compare the
director’s actual conduct against the standard of conduct
expected of the director by the director’s duty of care.
Reasonable care suggests an objective standard, but it
may vary depending on size and type of business, as well
as the experience, knowledge and skill of the director:
AWA Ltd v Daniels (1992).
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Duty of Care, Skill and Diligence
Directors are expected to possess certain basic skills
in relation to financial statements and financial affairs
of their companies: Cth Bank v Friedrich (1991).
The element of “diligence” requires directors to take
reasonable steps to place themselves in a position to
monitor and guide the management of the company:
Daniels v Anderson (1995).
Diligence by a director includes: attendance at all
board meetings, basic understanding of the business,
and obligation to keep financially and generally
informed of the business.
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Duty of Care, Skill and Diligence
Four currently contentious issues which impact on the
way in which directors discharge their duty of care
are:
• difference in the functions of the boards;
• differing responsibilities of executive and nonexecutive directors;
• delegation of functions and reliance by directors on
other officers: ss 198D, 190, and 189; and
• differences between entrepreneurial risk taking
and failing to act with care.
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The Business Judgement Rule
A judgement is taken to meet the statutory and general
law duties of care, skill and diligence if the director or
officer:
• made it in good faith and for a proper purpose;
• did not have a material personal interest;
• informed themselves about the subject matter to the
extent they reasonably believed it to be appropriate;
and
• rationally believed that it was in the best interests of
the corporation.
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Duty to Prevent Insolvent Trading
A person engages in insolvent trading in breach of
s 588G if:
• the person is a director of a company when the company
incurs a debt; and
• the company is insolvent at the time of incurring the
debt; and
• there are reasonable grounds for suspecting that the
company was insolvent, or would become insolvent at
the time the debt was incurred: and
• the person is aware of such grounds, or a reasonable
person in like position and same circumstances would be
aware; and
• the person fails to prevent the company from incurring
the debt.
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Duty to Prevent Insolvent Trading
A director may rely upon any one or more of four
possible statutory defences in s 588H if:
• the director could and did reasonably expect that
the company was solvent at the time and would
remain solvent, even if it incurred the debt; or
• the director expected that the company was
solvent, on the basis of information supplied to her
or him by a subordinate the director believed on
reasonable grounds to be competent, reliable and
responsible for providing adequate information
about the solvency of the company; or
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Duty to Prevent Insolvent Trading
• the director, because of illness etc, did not take part
in the management of the company at the relevant
time; or
• the director took all reasonable steps to prevent the
company from incurring the debt: s 588H.
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