Corp Law Lecture Week 11 Tuesday

Exam

 3 hours
 4 short answers
 1 problem question

We are finishing off director duties – looking at ‘escape hatches’

We last looked at ratification by shareholders and ratification by board (Queensland Mines outlier
case, each SH had representative on board, which was unusual situation. thus, ratification of board
was regarded as akin to ratification by shareholders, so rare case)

Liability ‘escape hatches’ for directors:

 Ratification by shareholders
 Ratification by the board?
 Relief granted by the court
 Internal liability mitigation measures:
o Constitutional attenuation
o Indemnification from the company
o Insurance paid for by the company

Relief granted by the court

 Section 1318, corps act

 Section 1317S

These 2 sections represent court’s ability to cure more substantive breaches of the corps act

Threshold concepts/preconditions – what situation can court grant relief – s1318

 You need civil proceeding

o so not relevant where D is facing criminal prosecution
 ‘against person whom section applies’ – defined in ss 4
o Officer – see s 9 definition, directors, shadow directors, etc.
o Employees
 Proceeding for negligence, default, breach of trust or breach of duty
o So this s doesn’t cover absolutely every breach of corporations law, though it is still
broad enough to cover most breaches under statute or general law
o Rogers in AWA Daniels: might be cases where there can be claim for breach of
contract where this section can be relied on by director to escape breach. He said
you might have a claim in negligence where director raises contributory negligence
to reduce their liability, s 1318 offers same outcome as contributory negligence
outcome (because s 1318 reduces the director’s liability so the D does not have to
pass off the liability)

Court can consider 3 things to see whether D should be granted relief

1. Director must have acted honestly

a. positive proof that they were actually honest
b. Mere absence of dishonesty is not enough
 c. ASIC v Healey (centro decision): ‘without intent to gain improper benefit or
advantage and without careless or no imprudence at a level that negates the
performance of the duty in question’
 D must be showing this as first thing if they want relief
2. Person ought fairly be excused – ASIC v Healy
a. This involves following considerations
i. Degree to which d’s conduct fell short of statutory standard of
care/diligence
ii. Seriousness of contravention –importance of breached provision, its
consequence
iii. Presence or absence of contrition
b. court is reluctant to use this section to excuse D of their duty of care – court does
not want to undermine minimum standard of care, diligence and skill
3. Whether applicant should be relieved wholly or in part
a. Court will consider need for general deterrence here

When can director use s1318?

 Ss 1 means director can go to court if action has been brought

 Ss 2 allows director to go to court pre-emptively before action is brought and get off the
hook for anything that may come their way

s 1317S

why introduced? Concern that ‘civil proceeding’ gateway concept in s 1318 would cause problems
given civil penalty regime (i.e. it would make make proceedings under civil penalty regime NOT civil
in nature).

may faith liability to company itself or SH in class action

Both sections can be pleaded at the same time from director – s 1318 and s 1317S

Threshold concept in s 1317S

 Eligible proceedings
o basically  proceedings for a contravention of a civil penalty provisio
 Brought against person
 Appears to court that person may have contravened a civil penalty provision

Once threshold concepts met, court essentially goes over same inquiry as those above for s 1318,
e.g. whether D acted honestly, whether relief in whole or in part, etc.

to illustrate how they work, contrast Mclelland case with Centro case

Mclelland

 Court excuised Director under the 2 sections

o judged happy to exercise court discretion becaues he had acted honestly and had
done all he reasonably could (sought advice from accountant, acted on advice,
reasonable for him to rely on advice, and tried finding other sources of money). In
other words, carroll did not stand still and do nothing, he was always trying to
improve cash flow position
 o He was met with some bad luck but ultimately was positively doing things
o contrast this to Centro case where none of the D’s got let off

In contrast Carroll case to Centro:

 None of the directors were let off here

 showed liabilities as being paid off in the long term when in fact they were due in 12 months
 Facts concerned financial statements did not include info regarding company’s full liabilities
(their maturities, contingent liabilities, etc.). Accounts did not fully disclose risk profile of
company.
 Evidence was the D’s did not even turn their mind to the accounts
o Board had not even formed an opinion on the accounts – which is a fundamental
requirement for D’s
o court did not excuse any of the D’s
 company had own accounting function plus had engaged PWC – so D’s were properly
advised. so how was this different to Carol in McLelland who had brought on brighton?
o difference probably lies in the fact Carol was doing everything he could – problem
with centro was that directors basically admitted they didn’t turn their mind to the
accounts – carol was at least positively doing his best
o other difference is carol was private business whereas centro was public

‘Internal’ liability mitigation measures’

o Constitutional attenuation
o Indemnification from the company
o Insurance paid for by the company

At some time in history, directors realised there were ways to mitigate their liability by crafting the
company’s rules

See case name on recording/other notes

 Provision in memorandum of articles which excused them for liability for everything ‘except
for a wilful breach’

There were broad exoneration provisions – inquiry said directors should not be allowed to do this.
Current law seeks to deal with it in the following way (‘internal’ liability mitigation measures’):

 Exemption from liability not permitted: s 199A(1)

o so cannot be exoneration
 However, constitutional attenuation possible: e.g. Whitehouse v Carlton Hotel
o recall whtiehoues case – there was unique share structure – class of B shares which
had all voting rights – argument in this case was: set up of company inevitably linked
to control of company (so problems in Hogg v Cramphorn had no application in this
company because it was determined by makeup that these class shares determined
control). court disagreed with this however agreed with idea that internal rules of
company can attenuate or modify the content of the duty
o has to be a point where attenuation goes so far that it is almost exoneration
o in theory, attenuation is possible: Whitehouse is authority for this
  Indemnity: permissible but scope circumscribed by subsections 199A(2) and (3)
o Indemnity for liability (other than legal costs): s 199A(2)
o Indemnity for legal costs: s 199A(3)
 Payment of insurance premia: permissible but scope circumstanced by s 199B

In theory, attenuation is possible (Whitehouse) but we don’t need to know details as to how far this
can go

Indemnities

This is where company indemnifies D for any liability or loss they incur acting as a D for the company

this is where cocmpny indemnifies dicretor from any liability or loss they might suffer or incur acting
as a director for the company

the way the act does it

 think of all the things that oculd be indemnified – the act proscribes what can’t be
indeminified and everything else is up for negotiation b/w the company and its directors
 what can’t be indemnified
o S 199A(2)
o a) if D breaches duty – company sues D for X – company gets damages of $100 – if
there was indeminity of D for $100, the net effect of indeminificaiton in this case
would be the D getting off the hook (basically exonerated) – so a) says company
cannot indemnify D for liability the D owes to company
o b) represents how D should bear consequences of their actions – the company
should not have to pay for D if D needs to give compensation
o c)

Given the carve out in s 199A(2), what is left for a company to meaningfully indemnify a D?

 Generally against actions brought by people outside the company

 E.g. with IPO, new sharehodlers buying shares might bring class action saying D did not give
full disclosure and they wouldn’t have bought had full disclosure been given – this is an
example of claim by someone outside of company against the Director.
 As long as D can show they acted in good faith they will get an indemnity from company

S 199A(3) deals with question of legal costs – what legal costs can be indemnified work out by what
is not included in this section

 Says what sort of legal costs cannot be indemnified, by implication we can work out what
can be indemnified
 cannot indeminify director against legal costs incurred in defending an action for liability
incurred if the costs are incurred: then  sets out 4 instances (a)-(d)
o look at words in a)-d)
 w.r.t a), it shows exclusion on indemnifying legal costs only applies where
there has been a final decision.
 Note 2 to section says company can give legal costs to D as the legal
proeedings are going on – this is contingent legal costs, so the D can
pay as they go thorugh. if D is successful and not found to have any
 liabilities, D can keep money and doesn’t have to pay company back.
if D is unsuccessful, loses action and found to have legal liability, D
must pay back comapny
 What is left?
 Note 2 says company can make contingent payment to D of their legal costs
o If D is unsuccessful, D must pay company back

Insurance cover to protect to protect D against claims brought against them in their capacity as D –
common for company to yake out insurance for their D’s. however, there are limits (company can’t
pay for insurance providing cover for wilful breach of duty or for contraventions of s 182 (misue of
position) and s 183 (misuse of information). so a line is drawn for egregious istuations regarding
what the company can and cant take out insurance for. otherwise though, there is a lot of scope left
for these

Access to docs so they can defend themselves

Commits company to giving indemnity under admissible terms

Imposes obligation on company to take out/maintain insurance

True/False questions

1. True
2. False
 narrow interpretation
 slightly tricky statement
3. False
4. True
 but for test where you have multiple purpsoe
5. False
 This duty is expressed in a compound way as duty to act bona fide for best intersts
for company as a whole and for proper purposes
i. first part ‘best interests’ imports subjective test unless no objective D would
have thought so
ii. in takeover contexts, court will apply more objective test which is ‘has the
power been exercised for proper purpose’
 so this statement conflates the two limbs of the duty
6. False
 S 181 – have regard to circumstances of company and D’s responsibilities
7. True
 Note at end of section
 statutory DOC and general law duties of care
8. True
 183 is duty not to misuse corporate information (182 regarding misues of position)
 180 – duty of care and s 181 (good faith) ONLY APPLY TO OFICERS, not employees
(whereas s 182 and 183 does apply to employees)
9. False
 10. False
 queensland mines is an outlier
11. True
 S 187 allows this
12. True
 Asic has ability to apply for pecuniary penalty
 s 206C and s 1317
 companies can only apply for…(see above)
13. true
14. true
 s588V
15. false
 defence of non-partiicpation
 Taxation v Clark is authority saying mere passivitiy is not defence
16. True
17. False
18. True
19. True
 S 1318 and s 1317S, McLellan is example of this happening
20. False
 Deputy commission v Clark

Problem question (good example of what to expect in final)

Give yourself 2 hours of writing for the problem question in the exam

Manderlay = Man

Man registered in 1989 – so has memorandum of association and articles – has not made a
constitution – recall s 135(1) says for such a company so registered, replaceable rules apply to them
if they had repealed constitution - so company is governed by replaceable rules

Man is a public company – affects some of the provisions in the act

Structure for your answer: Tackle this question on a duty by duty basis and then determine whether
director has complied with those duties

Duties – this will be our structure. keep in mind corresponding statutory duties that exist in addition
to general law

1. Duty of care
2. Duty to act bona fide best interests of company as a whole and for proper purposes
3. Conflicts
a. Conflict
b. Secret profit

People in case – identify people and their respective roles: assume 2-5 are non-executive directors.
If it turns out they are executive directors, analysis from them follows same analysis as for Max

1. Max – Chairman and CEO

 2. Danny
3. Jack
4. Harley
5. Caroline

what type of executive a D is (executive or non-executive) is very relevant to duty of care. sometimes
in problem question it is not crystal clear what they are. if not much, just assume they are non-
executive. then asy, if it turns out they are executive, just say in answer ‘if so found, my analysis will
be analogous to Max’

Start with DUTY OF CARE FIRST

Start with Max

 CEO - Executive director

 either term in K or implied term from labour law
 DOC implied in contract if no express term: Lister v Romford Ice and Cold Storage
o Standard of care standard will be the standard of skill, care and diligence expected
of a reasonable CEO (the lister case just says employee, whether CEO, CFO, etc, will
have employment K where term is implied if not express)
o BUT he is ALSO subject to concurrent duty of care arising in equity, tort and under
statute (s 180): Daniels and Anderson
 Don’t go through and give four answers for each source. You do this:
 He is an employee. He has implied or express duty under K to exercise care,
skill and diligence of reasonable CEO. He has concurrent duty in equity, tort
and under statute, the case law has indicated all duties from sources have
same content (Daniels) and I will use s 180(1) as the focal point for this
analysis
 What can we say about the standard of care expected under equity, tort, and required by
Max?
o it is grounded in context
 He is chairman and executive officer
 ASIC v Rich – said chair is generally subject to higher standard of
care
 ASIC v Vines – suggested executive (MD) is subject to higher
standard of care
 standard: he will be expected to exercise care, diligence and skill of
reasonable MD
 Once you have described what standard he has to meet, ask: how does his conduct measure
up against this standard?
o Fallen short clearly because
 Not apparent he has obtained financial information of properties in Surry
hills
 rushed job
 No methodology around their valuation
 Alternative transaction raised by Jack which he brushes aside – no careful
consideration whether this is better alternative to the paddinton property
 hasn’t involved any external professional assistance
 o This transaction requires shareholder approval (under listing rules) – this signals to
us that this is a big deal
 look for something on facts which may suggest SH approval is needed, and
mention ASX listing rules (if public company)
o so most likely not complied with standard of duty and care

one made completely different decision and one left the room. So in terms of whether they
exercised their standard of care, it is different question. so we will deal with them separately. but
danny and Harley both voted in favour. Factually in different positions (one left room, other voted
no). Danny and Harley voted in favour.

OTHER d’s w.r.t duty of care. of the other directors, tackle Daniel and Harley first because they vote
yes (assume non-exec d’s). on basis their non-exec d’s, we don’t need to worry about contractual
duty, so we use the equity, tort duty which has the same content. Use 180(1)1 as focal point – for
Danny and Harley

 might briefly say there used to be a debate that non-executive D’s were treated a bit more
leniently than other D’s – this debate has gone away - courts now have minimum standard
of care diligence and skill (CENTRO case) which all d’s must meet, regardless of whether exec
or not. This is the standard
 Now turn to whether: Did Danny and Harley meet this standard?
 This is not question of skill (no specialised skills), this is question of diligence
o As part of diligence, directors are expected to bring critical inquiry to mind
 They listen to his speech (full of assertions) and then vote for it – they have not brought
critical approach to this issue
 Lack of inquiry is compounded by fact Caroline raised issue but together, both did nothing
about it and did not further due diligence
 Danny’s excuse of being in fashion will not excuse him, still subject to min standard

Max vaguely discloses interest – not clear whether in best interests of company

An issue that arises with non-exec d’s: to what extent can non-execs say they rely on management
to do things properly (and rely on information from management)?

 you need to go through how the law tackles this

 S 190 deals with when D can say they delegated it to someone and thus shouldn’t be
responsible – reasonably strict
 Non-executive D must believe on reasonable grounds at all times that delegate would
exercise power deleged conforiming with duties…see section
 Does Danny and Harley have reasonable grounds here?
o No
o Caroline has suggested problem with valuation – they have been put on notice
about his lack of reliability. they both relied on content of his presentation – they
were series of assertions – danny and Harley both accept this at face value – they
have not brought independent assessment required by s 189
o so danny and Harley will struggle to rely on s 189 and s 190

there may be some sitautions that the board just cannot delegate?

 centro involves decision which corps act required to be accounted – not the case here.
  asic v mcdonald – situation where whilst not mandated to go to board by legislation, issue is
nonetheless of such importance that the board should not pass it off to management
o james hardie was comapny in asic v mcdonald case – asbsestos liabilities – highly
sensitive isuse – range of stakeholders – court said they need to formulate opinion
themselves
 here, we have a significant transaction
 both dan and Harley couldn’t just delegate away

let’s now deal with jack and caroline – jack voted no an caroline walked out of the room

 jack
o advocated alternative transaction
o did he display requisite skill, standard of care? NO
o he still has to make inquiries and still did not question Max’s assertions
o not clear on facts why he voted no
 if he voted no because he had done his homework, he might be OK
 but if he hasn’t thought about it, and is chasing other deal for the sake of it,
thus not doing any analysis, he is no different to Max above and won’t be OK
 caroline
o she gives some attempt at warning but there is question whether she has done
enough
o her situation is analogous to Permanent building society – recall D who excused
himself from board meeting because he had a conflict. he basically left the matter to
them.
 in that case, court said as CEO, with important role, this D could not have
walked out on fellow D’s knowing CEO had the skillset to make decision
 compared to here, Caroline is NOT ceo
 she has tried to say something
o she would needed to have raised her voice and said ‘no one has checked anything,
we haven’t engaged anyone, etc
o you would say caroline potentially triggers application of Permannt building society
but her situation is not identical – she gives some temporal warning, btu there is still
a question as to whether she has done enough.

2 last points – do BJR (which is like a defene) then mention remedies

Business judgment rule s 180(2)

 This is a defence to a claim you breached DOC

 Let’s see whether directors here have satisfied this
 You need a business judgment
o Here, there is BJ made by Max, Harley, Danny, Jack – BJ relates to transaction (to
grow size of business)
o Caroline may struggle with the gateaway of the BJ
 For 4 D’s, go over provisions in s 180
o element 1: judgment in good faith for a proper purpose
 say ‘i will come to this in the next part’
o element 2: no material personal interest
  max will struggle here because his family company has 30% of shares in
monty – so big stake in seller – this likely amounts to material personal
intetest
 so max may struggle to satisfy this element
o element 3: Inform themselves about subject matter to the extent they reasonably
believe to be appropriate
 this concerns whether htye have informed themselves
 max doesn’t appear to have had any methodology
 Decision must be in good faith and proper purpose
o Say ‘ill note this in the next part’
 Cannot have material personal interests in subject matter
o Owns 30% of seller

Remedies

 recission is not available for breach of duty of care

 company could have damages claim for D’s who have breached (in tort or equity or K, if
calim under K)
 company can apply for compensation order under civil penalty regime

NOW, the above are remedies available to the company – but we are adivisng Rebecca, the SH. In
the exam, we would go into shareholder remedy/standing. We would need to go over things like
what are the chances of company bringing action? pretty slim if max and stuff are still on the board –
they would not sue themselves.

Whilst not directly a remedy, civil penalty regime may apply – ASIC can bring claim (don’t say more
than this, asked to advise Rebecca)

This concludes DOC

Let’s look now at duty to act in good faith/best interests

duty to act in good faith

its fairly easy for D to point to sujective best interest which they were pursuing by the
transaction/decision