Transcript CHAPTER 12 DUTIES OF DIRECTORS AND OTHER OFFICERS PART 2 Good faith and proper purpose At the end of this topic you should.

CHAPTER 12
DUTIES OF DIRECTORS AND OTHER OFFICERS
PART 2 Good faith and proper purpose
At the end of this topic you should know:
• the conduct expected of directors under their duties of
good faith and loyalty;
• the overlap between the general law and statutory
formulations of the duties of good faith and loyalty;
• the requirements under the general law and the
Corporations Act for the duty of good faith and proper
purpose; and
• the statutory formulation of the duty to retain discretions.
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Outline of Duties of Loyalty and Good Faith
Directors owe duties of loyalty and good faith
because they are in a fiduciary relationship with the
companies on whose behalf they act. These duties
can be divided into various categories:
• to act in good faith in the interests of the company;
• to use powers for their proper purpose;
• to retain discretionary powers; and
• to avoid actual and potential conflicts of interest
and duty.
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To Whom are the Duties Owed?
The duties are owed to the company (Percival v
Wright [1902]), but has been extended to:
• individual members;
• creditors;
• beneficiaries of trust; and
• employees.
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Duty to Act in Good Faith –
Description and Source
The duty to act in good faith in the interests of the
company requires directors to act “bona fide [good
faith] in what they consider – not what the court may
consider – is in the interests of the company”: Re
Smith & Fawcett Ltd [1942].
The duty arises under:
• the general law – in particular, from principles of
equity collectively known as “fiduciary law”; and
• ss181 (statutory duty) and 184 (can be criminal) of
the Corporations Act.
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Examples of Breach of Duty
• Controlling members and controlling company
assets.
• Providing personal benefits.
• Favourable directors’ transactions.
• Forgiving debts owed to the company.
• Transferring company assets to others.
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Scope of Duty
Directors are required to act in good faith in what they
consider to be the interests of the company as a whole
— Re Smith & Fawcett.
Directors should consider the interests of the company
as a commercial entity and the members of the
company: Darvall v North Sydney Brick & Tile Co Ltd
(1988).
In companies with two or more classes of shares, the
courts have focussed on whether the decision was fair
as between the different classes of members: Mills v
Mills (1936).
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Scope of Duty
If the company is insolvent or nearing insolvency then
“interests of the company” includes the interests of
creditors: Spies v R (2000).
In relation to dealings between companies in a corporate
group, directors of wholly owned subsidiaries may make
decisions which are in the best interests of the holding
company, but not necessarily the best interests of the
subsidiaries: s 187.
In relation to directors of partly owned subsidiaries, there
are two lines of authority: one that favours directors having
regard to the interests of the group (Charterbridge Corp
Ltd v Lloyds Bank Ltd [1970]), and the other that favours
the interest of the company in which they are a director
(Walker v Wimborne (1976)).
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Scope of Duty
In relation to nominee directors, directors of wholly owned
subsidiary companies, who were nominated by the
holding companies, may have dual loyalties: s 187.
In relation to current employees and the community,
directors may consider their interests, if they can affect the
interests of the company (eg in industrial matters, or
sponsorship that provides good public relations): Parke v
Daily News Ltd [1962].
The company’s constitution may also permit directors to
take account of a particular stakeholder’s interest ahead
of others: Berlei-Hesta (NZ) Ltd v Fernyhough [1980].
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Duty to Exercise Power for Proper Purposes
The duty concerns how directors, in managing a
company, exercise the powers given to them by their
employment contract, the company’s internal rules
and the Corporations Act: ss 198A-198C.
The duty arises under fiduciary law (General law),
and ss 181 and 184 of the Corporations Act.
The onus of establishing that the directors have acted
improperly rests on the person(s) making allegations:
Australian Metropolitan Life Assurance Co Ltd v Ure
(1923).
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Determining Whether Breach of Duty
To determine whether there has been a breach, courts
apply a two-step test:
1. ascertain the nature and purposes for which power
is conferred — the legal purpose by reviewing the
internal rules, or the type of company, its structure
and activities; and then
2. compare with the actual purpose or reason for
which power was exercised by determining what
the directors subjectively believed at the time they
exercised the power.
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Determining Whether Breach of Duty
In relation to multiple purposes, look at the
substantive or dominant purposes (Whitehorse v
Carlton Hotel Pty Ltd).
If the actual purpose for the exercise of the power is
within the range of legal purpose(s), the directors
have acted properly and discharged their duty.
If the actual purpose is outside the legal purpose(s), a
breach of duty will have taken place.
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Examples of Improper Purposes
• Allotment of shares to defeat takeover: Howard
Smith v Ampol Petroleum [1974].
• Allotment of shares to transfer control of a major
company asset: Bailey v Mandala Private Hospital
(1988).
• Dominant purpose of allotment of shares to preserve
the position of majority members: Whitehorse v
Carlton Hotel Pty Ltd (1987).
• Allotment of shares used to dilute/devalue existing
members: Kotokovich Constructions Pty Ltd v
Wallington (1995).
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Section 181 – Good Faith and Proper Purpose
The statutory duty in good faith has been interpreted
as being broadly equivalent to the general law duties
to act in good faith, in the interests of the company
and for proper purposes.
The standard is to be determined objectively: ASIC v
Adler (2002).
Section 184 imposes criminal penalties for breach of
the duty to act in good faith and for proper purpose
when a director is “reckless” or “intentionally
dishonest.”
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Duty to Retain Discretions
The general law imposes two duties on members of a
board in respect of their discretions:
•
duty to exercise an active discretion; and
•
duty to retain directors’ discretion.
Directors can fetter their discretion but this can
breach their duty to retain discretion (MIA Group Ltd).
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Duty to Retain Discretions
The scope of the duty may be limited by:
• a company’s internal rules (see for example
delegation to others ss 189-190);
• delegation to a managing director (s 198C
replaceable rule);
• delegation to a committee (s 198D replaceable
rule); and
• their right to act in the interests of the person or
company who nominated or appointed them.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.