You are on page 1of 25


Corporation Law
Lecture 06
Directors Duties 3 & 4
Copyright Regulations 1969

This material has been reproduced and communicated to you by or

on behalf of Kaplan Business School 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 reproduction or communication of this
material by you may be the subject of copyright protection under
the Act.
This lecture material contains content owned by Kaplan Business
School and CCH Australia Ltd
Do not remove this notice.
Lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Lipton and Herzberg, Understanding
Company Law 15th edition Thomson Lawbook Co; Woodward, Bird and
Sievers, Corporations Law in Principle 7th edition Thomson Lawbook Co;
Gibson and Fraser, Business Law 4e 2009 Pearsons Education Australia
Course Objectives
• Duty to act in good faith in the best interest of the co.
• Duty to act for a proper purpose
• General law rule against conflict of interest or duty
• Modifying the rule in the company’s constitution
• Statutory regulation of situations of conflict
• Consequences of breach

“Best Interest” duty
• D must act in good faith in the best
interests of the company
• Statutory duty contained in s.181
• Also a general law duty
• 2 issues:
– What is good faith?
– What are the company’s interests?

What does the duty require?
• Director must act in good faith, ie honestly
• Must do what they believe is best for the
company, not themselves or a particular
stakeholder group (eg majority of members)
• Directors need to understand what is meant
by the “interests of the company”

Interest of the company
• Company’s have many stakeholders. From whose
interests are those of the company concerned with?
• Is it the:
– members
– company as a commercial entity separate from its
– creditors
– other company’s within a corporate group
– employees, customers, suppliers & the community?

Generally, look to the interests of
the members overall…
• Generally, the interests of a solvent company are
those of its members
• Directors must look to the company “as a whole”,
& balance competing interests
• Must act fairly as between members of different

Separate Commercial entity
• Are Directors entitled (or required) to look to the long
term viability of the company as a commercial entity,
not just at the short term benefit to current
• Issue not resolved, although sometimes creeps into
takeovers cases
Creditors’ interests
• When a company is insolvent or “nearing insolvency”,
the creditors’ interests become those of the company
Kinsella; Walker
• Note this is not a duty to creditors – it is a duty to the
• For example, no removing assets 8
Corporate groups
• Do Directors have to consider the interests of each
subsidiary separately, or can they do what is best for
the group overall?
• For some wholly-owned subsidiaries, Directors are
allowed to act in interests of holding company if the
requirements of s.187 are met

Effect of s.187
• Directors are taken to meet the requirements if:
– constitution expressly authorises
– act in good faith in best interests of holding company
– company not insolvent or made insolvent
Other group companies
• Where s.187 does not apply, each company’s separate
interests prevail
• Test: whether a person in the position of the Director
could have reasonably believed the decision would
benefit the company: Charterbridge
• Equiticorp: can be an indirect benefit

Interest of other stakeholders

• Can Directors take into account the interests of
employees, customers, suppliers and the community?
• Technically, cannot receive priority over interest of
members: Parke v Daily News
• Corporate governance standards may be
changing 10
Duty to act for a proper purpose
• S.181 – also a general law duty
• Even if Director’s actions are in company’s best
interests, may still be a breach of duty if a power is
not exercised for a proper purpose

Two step test

• See Howard Smith case:
- Q of law - for what purpose was the power conferred?
- Q of fact - for what purpose was the power exercised?
• Mixed purpose: if more than one, use the “but for” test
– Kokotovich, Whitehouse 11
Example – share issue power
• Normally a power of the board of Directors
• Proper purposes include:
– to raise capital
– for an employee share scheme
– as consideration for purchase of an asset
• Improper purposes include to:
– entrench the existing board of Directors
– fight off a hostile takeover bidder
– make a majority member a minority member

Other Examples
• Advance Bank – used company money to fund re-
election campaign
• Permanent Building Society – improperly used
power to enter into contract to acquire land from
Tower. Purpose was to put Tower in funds to
purchase business from JCLD (which benefited

Consequences of breach
• S.181 is a civil penalty provision
• Declaration of contravention & orders
• Note the criminal (offence) provision in
s.184 – reckless or intentionally dishonest
• General law duties – company’s right to equitable
compensation for breach of duty

DD: 4 General law conflict rule
• Director must not place himself/herself in a position
where there is an actual or substantial possibility of
conflict between a personal interest & the Director’s
duty to act in the interests of the company
• Unless the permission of the company is obtained or
the constitution allows it
• A very strict duty – designed to protect shareholders.
Can arise, eg where Director:
– contracts with the company
– makes personal profit as a result of his/her position
as a Director
– misuses confidential co information
– works for a competitor 15
Transaction with the company
• Very common situation triggering the general law
conflict rule
• Director’s interest in the transaction may be:
– direct
– indirect, eg through another co or a partnership
(Aberdeen Railway)

Taking corporate property,
information or opportunity
• Examples: Furs Ltd; Cook v Deeks; Peso Silver
• Director will be in breach even if the company
cannot itself take up the opportunity,
• unless the company agrees: Regal (Hastings)
• When can a Director resign to take up an
opportunity? Canadian Aero Service

Conflict of duties
• Director may not place herself/himself in a position where
there is an actual or substantial possibility of a
conflict between the D’s duty to the co & the D’s duty to
someone else (eg another company)
• See South Australia v Marcus Clark
Other conflicting interests
Other Conflicting interests
Competing companies:
– Non-executive Director can be on boards of
competing companies if no breach of duty (ie no
actual conflict of duties) & no disclosure of confidential
• Nominee Directors: duty to the company prevails over
duty to nominator
But will not be a contravention if..
• Company consents:
– full disclosure made to members in general
meeting and members “ratify” by passing an
ordinary resolution approving, or
– constitution permits it with full disclosure to
board, and full disclosure is made (eg RR s194)
• The constitution modifies the duty

Effect of constitution
• Constitution may include provisions allowing conflict
with full disclosure to, and consent of, the board
– For proprietary companies, see RR s.194
• Modification of nominee Director’s duty eg Levin v

Statutory regulatory
• Disclosure of interests by Directors
• Restrictions on voting by Directors of public companies
• Prohibition on improper use of position or information
• Financial benefits given by public companies to related
parties, including Directors 20
Disclosure of interest
• See ss.191-194
• Directors must disclose material personal interest
to the board, unless exempt
• Matter must relate to affairs of the company, &
potential for conflict must be real & substantial
• Does not apply to single Director proprietary

Voting restriction – public co
• S.195: A director with a material personal interest
in a matter being considered by the board must
not be present or vote at the meeting unless the
other Directors (or ASIC in limited circumstances)
allows it
• Remember, other Directors’ decision to allow
must be in best interests of company

Improper use of position or
• Directors are not allowed to use:
– their position (s182), or
– information obtained in that position (s183) to
gain advantage for themselves or someone else,
or to cause detriment to co

Related party transaction
• Chapter 2E restricts ability of public company, or
entity controlled by public company, to give a
financial benefit to (among others) the public
company’s Directors, their family or entities
controlled by them
• Unless the benefit is exempt or approved by
ordinary resolution of general meeting
• Exempt benefits include:
– benefits within wholly-owned groups
– reasonable remuneration for officers or employees
– benefits given on arm’s length terms
– benefits to members that do not discriminate
unfairly between them 24
Consequences of breach
• General law duty – company may have civil
remedy eg claim for damages, account of profits
• Statutory provisions:
– s.191: fine $1,700 and/or 3 months prison
– s.195: fine $850
– s.182: civil penalty provisions (also note offence
provision in s.184)
– Chapter 2E: civil penalty provision