Director's Duties (Australian)

DIRECTORS’ DUTIES

§  Directors’ duties describes the obligations imposed by law upon directors, other officers and employees of a company

§  Definition of director : Section 9 – person who is either validly appointed to the office of director or one who acts in that position

§  Directors must act in the company’s best interest rather than their personal interest

§  S179(1) – directors’ duties are imposed by the Corporation Act and other laws including general (i.e. common) law

§  The main duties are:

o   Care and diligence

o   Good faith

o   Use of position

o   Use of information; and

o   Avoidance of insolvent trading

§  Duty to Exercise reasonable degree of care and diligence

o   Common Law

§  Exercise reasonable care, skill and diligence in decision making on behalf of the company as a whole, members and others who deal with the company

§  Care – responsibility in performance of the duty

§  Skill – talents, training and knowledge

§  Diligence – reliable, punctual and conscientious

o   Statutory

§  S180(1) – exercise care and diligence when making business judgments

§  Acting with degree of care and diligence means director will exercise skill in decision making – Daniels v Anderson

§  Standard: The degree of care and diligence that would be exercised by a reasonable person in the director’s position and circumstances

§  Business Judgment Rule

·         S180(2) – provides a defence for S180(1)

·         business judgment" means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

·         For the defence to apply the director must show:

o   Made the judgment being analysed in good faith for a proper purpose -180(2)(a); and

o   Did not have material personal interest in the subject matter of the judgment – S180(2)(b); and

o   Informed themselves about the subject matter of the judgment to the extent they reasonably believed to be appropriate s180(2) ©; and

o   Rationally believed that the judgment was in the best interests of the company –S180(2)(d)

·         Duty to Act in Good Faith

o   Common Law

§  Fiduciary Duty to act in good faith

·         Act in good faith and best interest of company

·         To exercise the powers with utmost honesty, fairness and loyalty

·         Good faith is to act for the company as a whole and not for the majority of its members – Mills v Mills

·         to consider the various stakeholders : members, employees, creditors, clients

§  Exercising powers for a proper purpose

·         When powers are used for the purpose intended they are being used properly

·         Person who alleges that director has exercised power for an improper purpose has the burden of proof

·         If actual purpose is within the scope of the legal purpose for which the power may be exercised the directors have acted properly and vice-versa

o   Statutory

§  S181(1)  - good faith… best interest .. and proper purpose

§  Objective test

§  Genuine mistakes do not exclude directors from liability.

§  Duty not to use the position of director improperly

o   Common Law

§  Avoid conflicts of interest by placing the companies interest first

§  Any behavior contrary to the proper discharge of a director’s duties, obligations or responsibilities constitutes improper use of position

o   Statutory

§  S182 – avoid making use of position for own or third party advantage

§  Duty not to misuse information obtained as a director

o   Common Law

§  Not use personal knowledge and contacts gained from position for own benefit

§  Trading with inside knowledge

§  Green & Clara Pty Ltd  V Bestobell Industries Pty Ltd

o   Statutory

§  S183  - prohibit usage of information obtained by virtue of the office improperly – for personal or third party advantage

§  Duty to Prevent Insolvent Trading

o   Common Law

§  Company is solvent only if it can pay all its debts as and when it becomes due and payable

§  Prolonged difficulty in making payment may be indication of insolvency

o   Statutory

§  S588G – duty to prevent insolvent trading

§  By failing to prevent the incurring of debt the director is liable if he knows or has grounds for suspecting or a reasonable person in his position would be aware