The constitution of most companies provides for the management of the company to be the responsibility of the directors. Normally the exercise by the directors of their managerial powers is not subject to review by the members of the company in general meeting. The price of that freedom from review is that the directors are required by the general law to discharge their powers and duties as directors to a high standard.
Directors of a company are fiduciaries in relation to the company on whose board they sit. What this means is their position in relation to company analogous to that of agents and trustees.
To a large extent the general law duties of directors have been picked up and codified in Chapter 2D of the Corporations Act 2001 (the “Act”).
The fundamental tenet is that directors are required broadly to exercise their managerial powers in good faith, for the general benefit of the company as a whole. The directors are not required to get every decision right but rather to direct their minds to what they believe will most benefit the company as a whole. Section 180(2) of the Act contains a statutory formulation of the so-called “business judgment” rule.
It has long been settled that this duty of directors is generally owed to the company and not to individual shareholders in the company. There can however be circumstances, including family circumstances, where the reliance upon directors by shareholders is heightened to the point that a Court may make an exception to this general rule.
As an extension of their duty to act in good faith, it is the obligation of directors to act and exercise their powers for a proper purpose. That duty in turn begs the question of what is a proper purpose? The cases are not particularly helpful but the guiding principle would seem to be a consideration and determination of the purpose for which the particular power was given. It may often be easier to consider the question in the past tense, that is to consider what has been done by directors in purported exercise of a power and in terms of the practical outcome of that act, than to determine why and whether the underlying power was exercised for a proper purpose.
This seems to commonly have been the approach taken by the Courts where directors have for example used their powers to issue shares or have failed to register transfers of shares so as to prevent or occasion a change in the control of a company.
Just as is the case in administrative law, where the directors are given a discretion that they may exercise, it will be a breach of their duties as directors to limit or otherwise fetter the future exercise of that discretion.
The most common example of this is where directors agree as a matter of policy to vote on a particular matter in a predetermined way, without on each occasion, considering what their vote would be if they were to take into account all relevant considerations and act in the best interests of the company as a whole.
Directors, in common with all other classes of fiduciaries, must ensure that they do not allow their personal interests to conflict with those for whose benefit they must act, that is the company as a whole. This is sometimes called the “conflict of interest” rule.
The Act recognises that directors may have wide ranging personal interests that may intersect with the activities of the company. In that case, the Act obliges directors to disclose those interests, in so far as they are relevant, to the company’s board. Public company directors must absent themselves from discussions and are usually prevented from voting on any resolution in which they may have a potential or actual conflict of interest. No such provisions apply in the case of the directors of proprietary companies.
It is important to note, that so long as a director of a proprietary company makes disclosure of their interest under Section 191 of the Act, the director may vote on the related resolution and he or she may retain for themselves the benefit of any contract they may have in relation to such interest.
Traditionally there was no minimum standard of competence for directors, reflecting the historic fact that most boards were comprised of people of some public stature, drawn from the community and acting in an honorary capacity. That has long since ceased to be the typical case and the law has progressively moved away from that traditional position to the point that it now imposes a general duty on directors to exercise due care and diligence in the exercise of their powers and function.
In two particular cases, Permanent Building Society (in liq) v Wheeler [1994] 11 WAR 187 and Daniels (formerly practicing as Deloitte Haskens & Sells) v Anderson [1995] 37 NSWLR 438 (the AWA foreign exchange case) directors were held to owe the company a common law duty of due care and skill. The cases do suggest that this duty may not be borne equally by all directors, with executive directors, as opposed to non executive directors, having a greater obligation in this regard.
As previously mentioned the common law duties of directors have in large part been picked up and codified in Chapter 2D of the Act. To the extent to that those provisions go beyond the established common law duties, it raises the spectre of directors having additional statutory duties to the company.
Sections 180 to 190 of the Act impose duties on “officers” of the company. While directors are clearly officers, the definition of officers in the Act is very broad and as a general statement extends those duties to all who are involved in the management of the company.
There are at least two more aspects of the statutory duties of directors that need to be mentioned.
As well as extending the class of persons charged with those statutory duties, the Act also extends the class of person to whom those duties are owed. Principally this is a reference to the creditors of a company. Directors are obliged to consider the interests of creditors (both existing and future) of the company in the exercise of their managerial powers. In particular, directors must ensure that company does not trade if it has become insolvent. The test for solvency is the usual one – the ability of the company to pay its debts as and when they fall due.
This is a duty, the precise limits of which remain to be fully explored as it seems in concept to contradict one of the central reasons underpinning the development of company law itself, namely the limitation of personal liability.
The last extension of the statutory duties beyond the common law duties to presently note is that a breach of a statutory duty by a director may have additional criminal sanctions under the Act that would not apply under common law.
For example, in ASIC v MacDonald & Ors (No.11) [2009] 71 ASCR 368 the directors of James Hardie Industries Limited were successfully prosecuted for having breached their duty of care by sanctioning or at least not preventing the dissemination of a press release that incorrectly asserted that a pool of assets segregated as part of its corporate restructure was sufficient to meet all liabilities for asbestos related claims that may be made against the company.
Disclaimer: – Please note the comments made in this document do not represent general legal advice and no person should rely upon it/them without seeking advice particular to their own facts and circumstances.
