Topic 9 Duties of Directors and OfficersCRICOS Provid.docx

Topic 9: Duties of Directors and Officers
CRICOS Provider Code 00301J
Company Law 266
COMMONWEALTH OF AUSTRALIA
Copyright Regulation 1969
WARNING
This material has been copied and communicated to you by or
on behalf of Curtin University of Technology pursuant to Part
VB of the Copyright Act 1968 (the Act)
The material in this communication may be subject to copyright
under the Act. Any further copying or communication of this
material by you may be the subject of copyright protection
under the Act.
Do not remove this notice
Life-Cycle of a Company
Incorporation (Starting Up)
Classification of companies
Registration
Business Names
Effect of incorporation

Closing the Company
Insolvency
External administration
Running the Company
Corporate liability
Internal governance
Fundraising
Directors’ duties
Members’ rights and remedies
Financial reporting
Company Law 266
Learning Outcomes
Define key concepts.
Explain when a conflict of interest might arise.
Outline remedies available for transactions entered into under
conflicts of interest.
Discuss and apply the general law and statutory duty of care.
Explain ‘reliance on others’ (s 189) as a statutory defence to a
breach of duty of care.
Company Law 266
Learning Outcomes
Discuss the significance and operation of the business judgment
rule.
Discuss the remedies available for a breach of duty of care.
Apply the law to a set of facts.
Note: Sections in slides refer to the Corporations Act 2001

(Cth) and cases refer to case notes in the textbook
Company Law 266
Topic 9 - Outline
Duty to avoid a conflict of interest
Duty to act with care and diligence
Duty to prevent insolvent trading
Company Law 266
Duties of Directors and Officers
Duties arise from three sources:
General law (Common law and Equity)
Statutory law – Corporations Act
Company constitution and replaceable rules
Company Law 266
Duty to Avoid Conflict of Interest
Directors owe a fiduciary duty to the company.
They must not place themselves in a position of conflict of
interest with the company.
Avoiding a conflict of interest means that directors must not use
their position to:
Divert business opportunity from the company

Use company’s property for their private use (unless they have
permission)
Make a secret profit
Company Law 266
Discussion: Case Examples
Refer to the following case examples and identity the conflict of
interest:
Green v Bestobell Industries (1982) – page 500
Breach of fiduciary duty – conflict of interest
Diversion of a business opportunity
Cook v Deeks [1916] – page 505
Breach of fiduciary duty – conflict of interest
Diversion of a business opportunity
Regal (Hastings) v Gulliver [1967] – page 508
Breach of fiduciary duty – making a secret profit
Company Law 266
Statutory Duty: s 182 and s 183.
Directors must not improperly use their position to gain a
benefit for themselves and/or someone else: s 182.
Directors must not improperly use information acquired because
of their position to gain a benefit for themselves and/or
someone else:
s 183.

Company Law 266
Examples of Conflict of Interest
Taking contracts away from the company.
Accepting bribes or secret commissions.
Misusing company funds.
Taking opportunities that belong to the company.
Misusing confidential information.
Competing with the company.
(Ciro & Syms , 2009:271-273)
Company Law 266
Discussion: Case Example
ASIC v Vizard (1005) FCS 1037
Read the facts of the case – refer to pages 37 and 498 of the
textbook (The case is also on Blackboard under Topic 9)
What duties were breached by Mr Vizard?
Breached section 183
What where the consequences of the breach?
Pecuniary penalty of $400,000 and disqualified
Company Law 266
Disclosure of material personal interest – s 191
A director must disclose any material personal interest to the
Board (s 191) unless exempted (s 191(2).
If a director of a proprietary company discloses a material

interest, the director will be able to vote on matters relating to
that interest: s 194.
A director of a public company who has a material personal
interest cannot be present or vote on matters relating to the
interest: s 195. Note there are some exceptions.
Company Law 266
DISCLOSURE/VOTING PROCEDURE FOR PTY/PUBLIC CO
PTY CO
S191: material personal interest, disclose at meeting of
directors
RR194: Interested director may vote + retain benefits
If constitution silent, also declare to GM: common law
PUBLIC Co
S191: same as pty co.
S195(1): cannot vote or be present in room.
S195(2): Board may allow director to vote
S195(4),(5): BOD quorum of 2 required, else GM required to
deal.
Also declare to GM: common law
Company Law 266
14
3

Related Party Transactions
Chapter 2E only applies to public company’s.
S 207: Purpose is to prevent director’s giving away company’s
assets
S 208: A related party transaction can only proceed with
members approval, unless it falls within Division 2 exception
S 228 – a related party.
S 229 – a financial benefit.
Company Law 266
15
4
Related Party Transactions
S 210 – transactions at arm’s length.
S 211 - remuneration or reimbursement for officers and
employees.
S 212 – indemnities, exemptions, insurance premium and legal
cost.
S 213 – small scale benefits, under $5,000.
S 214 – benefits provided to or by closely-held subsidiaries.
S 215 – ‘fair’ benefits to related parties as members.
S 216 – court ordered financial benefits.
Company Law 266

16
4
Duty of Care and Diligence
Directors have a duty under common law and statutory law to
perform their duties with due care and diligence.
Common law duty of skill, care and diligence
Directors expected to act a as reasonable person to take
reasonable care and respond appropriately to foreseeable risks
of harm
Company Law 266
Statutory Duty of Care
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: s
180(1)
Were a director or officer of a corporation in the corporation’s
circumstances; and
Occupied the office held by, and had the same responsibilities
within the corporation as, the officer or director.
Company Law 266
Duty of Care: Executive Directors/Officers

Should take reasonable steps to place themselves in a position
to guide and monitor the management of a company:
Daniels v Anderson (1995) 37 NSWLR 438.
Should inquire and obtain information:
Vines v ASIC (2007) 73 NSWLR 451.
Note page 531
Company Law 266
Duty of Care: Non-Executive Directors
Daniels v Anderson (1995) 37 NSWLR 438
Outlines minimum standards – all directors must:
Be familiar with the company’s business
Monitor management
Inquire and obtain information
Not shut their eyes to corporate misconduct
Be familiar with the company’s financial position
Where a director has particular skills, the director is expected to
use them:
ASIC v Rich (2003) 44 ACSR 341
Company Law 266
Discussion: Case Study
Read the James Hardy case on page 537. (Also refer to page
196)
What action was brought against the executive and non-
executive directors?
What duties were breached?
What was the decision of the Appeal Court?
What was the recent decision of the High Court?

Company Law 266
Read the Centro case study on page 557.
Why did ASIC take action against Centro?
What was the outcome of the case?
Could the defendants rely on s 189?
What lessons can be learned from the Centro case for boards of
directors?
Company Law 266
Statutory Defences
The business judgment rule is a defence against claims for a
breach of duty of care: s 180(2).
Business judgment: means any decision to take or not take
action in respect of a matter relevant to the business operations
of the corporation: s 180(3).
Company Law 266
Statutory Defences
Directors or other officers can rely on the business judgment
rule if:
The judgment is made in good faith and for a proper purpose;
and
They do not have a material personal interest in the subject

matter; and
They have informed themselves about the subject matter; and
They rationally believe the judgment is in the company’s best
interests: s 180(2)
Company Law 266
Statutory Defences
Reliance on information or advice: sec 189.
Reliance on information is taken to be reasonable if:
A director relies on information and advice given and prepared
by the categories of people stated in s 189(a); and
The reliance is in good faith and after making an independent
assessment of the information and advice provided (s 189(b);
and
It is reasonable in the circumstances (s 189(c)).
Company Law 266
Statutory Defences
Delegation of responsibilities to others is a defence under s 190.
The Board has the power to delegate to others: s 198C and s
198D.
A director, however, may not be responsible for a delegate’s
conduct:
If after making proper inquiries, the director had reasonable
grounds to believe the delegate was reliable and competent: s
190(2).
Company Law 266

Consequences for a Contravention
Remedies under common law and equity:
Damages or compensation;
Account of profits;
Rescission of contract;
Return of property.
Company Law 266
Consequences for a Contravention
The company’s remedies:
Duty of care is owed to the company – if there is a breach that
causes a loss then the company can sue a director or officer for
damages.
Shareholders’ may bring proceedings in the name of the
company under s 236 and s 237 if they have obtained leave
(permission) from the court.
Company Law 266
Duty to Avoid Insolvent Trading
Companies are prohibited from trading while insolvent.
Directors have a duty to prevent insolvent trading: s 588G(1).
A director is in breach of this duty if all the elements under s
588G(1) are present.
Company Law 266

Duty to Prevent Insolvent Trading
The following elements must be present: s588G
The person was a director of the company when the debt was
incurred.
A debt was incurred.
The company was insolvent when the debt was incurred or the
company became insolvent because of the debt.
The director reasonably knew the company was insolvent.
The director/s did not stop the company from becoming
insolvent.
Company Law 266
Duty to Prevent Insolvent Trading
Reasonable grounds for suspecting insolvency include:
Continuing loses
Overdue taxes
Inability to raise further capital
Warrants issued against the company
Special arrangements with creditors
Inability to produce timely financial reports
ASIC v Plymin (2003) – Harris et al, 2013:585
Company Law 266
Defences
Defences under s 588H apply to the duty to prevent insolvent
trading.
Directors had reasonable grounds to expect that the company
was solvent at that time and would remain solvent even if the
company incurred that debt: s 588H(2).
A defence of reliance on information from other persons: s
588H(3).

Company Law 266
Defences
A director did not take part in the management of the company
at the time the debt was incurred: s 588H(4).
The person took all reasonable steps to prevent the company
from becoming insolvent: s 588H(5).
Company Law 266
Read the case of ASIC v Plymin (Water Wheel case) [2003]
VSC 123 on page 570 of the textbook
What are the facts of the case?
What is the key legal issue?
What was the outcome of the case?
Were there any defences available to the defendants?
What penalties were imposed?
What are the key lessons learned from this case for directors?
Company Law 266
Summary
There is a fiduciary duty between directors and the company.
Directors have a fiduciary and statutory duty to act in good faith
and in the best interest of the company.
This generally means that they must act in the best interest of

the general body of shareholders.
Directors have a fiduciary and statutory duty to avoid a conflict
of interest.
They must not use their positions improperly to gain an
advantage for themselves or someone else.
Company Law 266
Summary
The duty to avoid a conflict of interest is breached when
directors fail to disclose material personal interests in
transactions with the company.
Directors have a common law and statutory law duty to act with
due care and diligence.
Directors are expected to make enquiries and be properly
informed so that they can properly manage the company.
A breach of duty of care gives rise to civil liability.
There are various defences against claims for a breach of duty
of care, including the business judgment rule and reliance on
others.
Company Law 266
Summary
A company must not trade while it is insolvent.
Directors have a duty to avoid insolvent trading.
In other words, directors must prevent the company from
incurring debts when there are reasonable grounds to believe the

company is insolvent.
If directors allow the company to trade while insolvent the
courts may ‘lift the corporate veil’ and hold directors personally
liable for insolvent trading.
Directors must take creditors’ interests into account if the
company is insolvent.
Company Law 266
Next Topic
Topic 10: Members’ Rights and Remedies
Work through the Study Guidance Notes
Read the relevant sections in Chapters 12 and 19
Complete learning activities
Company Law 266
8/07/2013
1
Topic 8: Duties of Directors and Officers
COMMONWEALTH OF AUSTRALIA
Copyright Regulation 1969

WARNING
This material has been copied and communicated to you by or
on
behalf of Curtin University of Technology pursuant to Part VB
of the
Copyright Act 1968 (the Act)
The material in this communication may be subject to copyright
under
the Act. Any further copying or communication of this material
by you
may be the subject of copyright protection under the Act.
Do not remove this notice
Company Law 266
Life‐Cycle of a Company
Incorporation
(Starting Up)
• Classification of
companies
• Registration
• Business Names
• Effect of
incorporation
Closing the
Company

• Insolvency
• External
administration
Running the
Company
• Internal
governance
• Corporate liability
• Fundraising
• Directors’ duties
• Members’ rights
and remedies
• Financial reporting
8/07/2013
2
Company Law 266
Topic 8 ‐ Outline
of directors
of directors and officers
and removal of directors

to act in good faith
to act for a proper purpose
Company Law 266
Learning Outcomes
key concepts.
between company officers and
directors.
different types of directors.
how a director may be appointed and
removed.
Company Law 266
Learning Outcomes
the meaning of fiduciary.
the scope of the fiduciary duties of
good faith and proper purpose at general law
and under the Corporations Act.
the law to a set of facts.
• Note: Sections in slides refer to the Corporations

Act 2001 (Cth) and cases refer to case notes in the
textbook
8/07/2013
3
Company Law 266
Board of Directors
Company Law 266
Role of Board
Board of Directors is responsible for the
management of the company, but powers may
be limited: s 198A; s 198A(2).
Board has the right to exercise all the
decision making powers of the company.
Board may delegate powers to officers of
the company, e.g. to a managing director;
financial officer: 198D. (The delegation must be
recorded in the company's minute book s 251A).
Company Law 266

Role of Board
directors are responsible for the day
to day management, but restriction on powers
may apply: s 198C.
directors attend and vote at
meetings.
8/07/2013
4
Company Law 266
Definitions
– s 9, Corporations Acts
• A person appointed to the position of director or
alternative director.
• A person not appointed but acting as a de facto
director.
• A person who is not appointed but who is in
control of the board as a shadow director.
Company Law 266

Definitions
the definition (s 9, CA) includes
• A director or secretary of the corporation
• A person
o who makes or participates in making decisions that
affect the whole or part of the business or
o has the capacity to significantly affect the financial
standing of the business
• A receiver of the property of the corporation
• An administrator of the corporation
• A liquidator of the corporation…
Company Law 266
Management Positions
Principle, 8th Edition. Ciro & Symes.
Management
positions in
companies (may
overlap)
Director
s 9

Secretary
(no statutory
definition)
Officer
s 9
Formally
appointed
Not
appointed
De facto
Shadow
Includes director,
secretary and other
persons in management
8/07/2013
5
Company Law 266
Types of Directors
of the board
• Selects matters to be brought to the board of directors

attention, chairs the meetings and signs minutes of the
meeting
director
• A director who is both on the board of directors and a
fulltime employee of the company
director
• A part‐time director of the company who is not an
employee of the company
Company Law 266
Types of Directors
director
• Executive director to whom the board delegates its
functions
director
• A person appointed on the understanding that he or she
will represent the interests of a particular person or group
Company Law 266
Appointment of Directors
of directors: s 201A
• 1 for a proprietary company;
• 3 for a public company.

directors must consent in writing: s 117.
directors appointed by General
Meeting: s 201G (RR).
can fill casual vacancy, but General
Meeting must confirm appointment: s 201H
(RR).
8/07/2013
6
Company Law 266
Qualifications of Directors
person must be at least 18 years of age: s
201B(1).
person must not be disqualified from
being a director: s 201B(2).
person must agree to the appointment: s
201D.
Company Law 266

Company Law 266
Removal of Directors
Public Company
• Directors of a public
company may be removed
in accordance with s 203D.
• This is not a replaceable
rule.
• Directors cannot be
removed by other directors.
• Directors can be removed
by ordinary resolution at a
members meeting.
Proprietary Company
• Directors may be removed
in terms of s 203C, which is
a replaceable rule for Pty
companies.
by other directors if the
company's constitution
allows this.
by ordinary resolution at a
members meeting.

8/07/2013
7
Company Law 266
Removal of Directors
Thomson Legal & Regulatory Ltd. Corporations Law:
In Principle, 8th Edition. Ciro & Symes.
How directors
can be removed
By general
meeting
By operation
of law s 206B
By ASIC
s 206F
By court order
ss 206E, 206D, 1317E
Public company:
s 203D
Private company:
check internal
rules - eg

s 203C
If insolvent
If subject of
management
banning order
Several failed
corporations
Company Law 266
Duties arise from three sources:
• General law (Common law and Equity)
• Statutory law – Corporations Act
• Company constitution and replaceable rules
Company Law 266
whom are directors’ duties owed?
• ‘To the company as a whole’ = to the collective
body of shareholders
are generally not owed to

• Individual shareholders
• Creditors
• Employees
o But note some exceptions, for example, when the
company is insolvent
8/07/2013
8
Company Law 266
Summary ‐Duties of Directors and Officers
to act in good faith
• Fiduciary duty – an obligation to act honestly
o ASIC v Adler (2002)
• Act in good faith: s 181(1)(a)
to act for a proper purpose
• Fiduciary duty
o Mills v Mills (1938)
• Act for proper purpose: s 181(1)(b)
See Fig 15.4, page

480, textbook
Company Law 266
Fiduciary Duty ‐ Good Faith
duty to act in good faith and in the
best interests of the company:
• ASIC v Adler (2002)
• Bell Group Ltd (in liq) v Westpac Banking Corp
[2008]
interests of company’ refers to the body
of shareholders.
Company Law 266
Examples of Breach of Duty
personal benefits to directors or
particular members.
in transactions on favourable terms
for directors or particular members.
debts owed to the company by
directors or members.
company assets to others in order
to avoid recovery by creditors.

Ciro & Symes, 2009:257
8/07/2013
9
Company Law 266
Company Law 266
Fiduciary Duty ‐ Proper Purpose
duty to exercise power for proper
purposes:
• Mills v Mills (1938)
determine whether there has been a
breach courts apply a two step test:
• Determine the purpose for which power is
conferred– legal purpose.
• Compare with actual purpose or reason for which
power exercised.
Company Law 266

Mixed Purpose
may be issued for both proper and
improper purposes.
• ‘but for’ test: Would the directors still have
exercised the power if the improper purpose did
not exist? (i.e. Would the directors still act in the
same way even if they had not received the
benefit? If no, then the directors appear to be
motivated by an improper purpose).
o Whitehouse v Carlton Hotel Pty Ltd (1987)
8/07/2013
10
Company Law 266
Share Issue
purpose of power – Raise capital:
s198A (RR)
issued to maintain control is improper
purpose:
• Ngurli Ltd v McCann (1953) 90 CLR 425
issued to create, destroy or manipulate

majority voting power is improper:
• Howard Smith Ltd v Ampol Petroleum Ltd [1974]
AC 821
• Mills v Mills (1938) 60 CLR 150
Company Law 266
Statutory Duty
181(1): A director or other officer of a
corporation must exercise their powers and
discharge their duties:
(a) in good faith in the best interests of the
corporation; and
(b) for a proper purpose.
Company Law 266
Remedies
remedies for breach of fiduciary duty –
general law
• Equitable compensation
• Rescission of contract
• Account for profits

• Injunction
8/07/2013
11
Company Law 266
Remedies
of s 181 is a civil penalty provision.
penalties
• Pecuniary penalty
• Compensation
• Disqualification
sanction may also be relevant for a
breach of s 181 where conduct is reckless or
intentionally dishonest (s 184).
Company Law 266
Summary
owe a fiduciary duty to the company.

have a fiduciary and statutory duty to act in
good faith and in the best interest of the company.
means that they must act in the best interest of
the general body of shareholders.
have a fiduciary and statutory duty to
exercise their powers for a proper purpose.
may not use their powers to confer an
advantage on themselves or someone else.
Company Law 266
Next Topic
9: Directors’ Duties – Part B
• Avoiding a conflict of interest
• Due care and diligence
• Avoiding insolvent trading
• Chapters 16, 17 and 18
Company Law 266
Assignment 2: Option 3
© Curtin Business School 1/2
1/2

Company Law 266
Assignment Two
Option 3: Directors Duties
Trimester 3A 2013
Due Date: 13th January, 5:00 PM WST
Assignment Criteria
This assessment aims to address the following unit learning outc
omes:
1.
Explain, analyse and apply basic legal concepts and principles r
elating to company law.
2. Apply appropriate research techniques to select, evaluate
and use information from
primary and secondary sources to make informed judgments abo
ut legal issues.
3.
Write well‐structured documents relevant to company law using
appropriate language
and styles.
The following are the assessment criteria for this assignment:
1.
Relevant legal concepts and principles of company law are ident
ified, clearly explained
and correctly applied.

2.
Appropriate and relevant primary and secondary sources are use
d.
3.
Answers are logical and coherent using appropriate and accurate
language.
4. Answers are fully and accurately referenced.
Assignment Task
Question
Alpine Wines Ltd operates various wine retail shops in Victoria.
It has four directors and no
constitution. The four directors are Emily, Andrew, Mary and C
harles. One of the directors
Charles is aware that the company needs to lease a new retail sh
op and has offered Alpine
Wines Ltd a building owned by Olivia Sweet, his mother. At the
next directors' meeting the
board is to consider the renting of Olivia Sweet’s
warehouse. Emily will be in France
attending the cheese festival and will miss the directors’
meeting. Emily is hoping to
promote Alpine Wines to go with the cheeses at the festival.
Describe in detail how the Corporations Act 2001 (Cth) and cas
e law requires Charles and
the other directors of Alpine Wines Ltd to deal with the leasing
of the new retail shop at the
board meeting or at any subsequent meeting.
[30 marks: 2,500 words]

Company Law 266
Assignment 2: Option 3
© Curtin Business School 2/2
2/2
Guidance Notes on Completing and Submitting the Assignment
Please read the information below very carefully.
Answering the Questions
the 4 step method to answer the question.
The answers must not exceed the number of words that are indic
ated for the question.
You will not be penalised for exceeding the word limit
but excess words will not
necessarily be marked.
The word limit is generous and is stated for a reason. The word
limit indicates the scope
and extent of the answer. There is no need to write more than is
required. The skill is to
write clear, concise and direct answers. This may require writin
g several drafts before
the final assignment
is submitted. Answers that exceed the word limit usually
include
information that is not relevant to the question. When you use c
ase law you do not need
to give details on the facts of the case ‐ rather identify,

explain and apply the legal
issue/s and general principle of law from the case.
The maximum number of words includes the in‐text references.
Referencing
The assignment must be fully and accurately referenced. You ne
ed to reference your
assignment to avoid plagiarism (http://academicintegrity.curtin.
edu.au/students/). If
the assignment or parts of the assignment are not referenced it
will not be marked.
When you refer to legislation you must refer to relevant section
s and provide the full
reference. For example: A company is a separate legal entity (s
119, Corporations Act
2001 (Cth)).
You must provide a full bibliography (reference list) at the end
of the assignment.
You may not use Wikipedia or similar websites or the lecture sli
des as a reference.
Please refer to the Curtin library website for information on refe
rencing. There is also an
excellent iTutorial that you can watch that gives examples of ho

w to reference:
http://libguides.library.curtin.edu.au/content.php?pid=141214&s
id=1335432
Electronic Submission
The instructions for submitting the assignment electronically vi
a Blackboard are posted on
Blackboard under the link on Assessments. Please note
that no late assignments will be
accepted. It
is the student’s responsibility to ensure that the assignment
is submitted on
time. Please note that the Blackboard system operates on Wester
n Standard Time so it is
the student’s responsibility to ensure that the different
time zones are taken into
consideration.
Please read the Unit Outline on assessments for this unit and not
e that there is no extension
for this assignment.

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