Lecture 7

• Directors Statutory
Duties
• Corporate Governance
• Financial and reporting
obligations
• Audit

6 April 2021
 Section 191

s191
 Requires that a director of a company who has a material personal
interest in a matter that relates to the affairs of the company must give
the other directors notice of the interest unless s191(2) says
otherwise.

 “Material personal interest” involves a real possibility of conflict

 s191(2) – examples when disclosure not needed:

 DIRECTOR’S REMUNERATION
 INTERESTS WHERE THE DIRECTOR IS A GUARANTOR OF A LOAN
TO THE COMPANY
 WHERE (IN PTY COMPANY) THE DIRECTORS ARE ALREADY AWARE
OF SUCH INTERESTS

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 Directors Statutory Duties

• The Act sets out that general law re directors’

fiduciary duties is still relevant (s185)

• Statutory duties apply not only to directors but

also apply to other company officers (s9 &
s179) and in some cases employees (s 182
and s 183).

• The statutory duties are enforced by ASIC –

specific penalties apply depending on the
section breached
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 Directors’ Statutory Duties

• The provisions in the Corporations Act dealing with

directors’ duties can be divided into 4 main groups:

 Director’s position – good faith, proper purpose & avoid conflict

interest (s181,182 & 183)

 Dishonest or reckless conduct ( for example s184)

 Management standards – care and diligence (s180 & s588G)

 Disclosure obligations (s191 & s192)

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 Directors Statutory Duties – s181,
s182, s183
s181

Mirrors the general law duty to act in good faith, in the best interests of the
company and for a proper purpose.

S182

Duty to not misuse position to gain advantage

S183

 DUTY TO NOT MISUSE INFORMATION TO GAIN ADVANTAGE

• Sections 181, 182 & 183 are civil penalty provisions and breach
may result in the imposition of civil penalties
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 Civil Penalties

• Section 1317G – the greater of (a) 5000 penalty units

(presently $1.05M) and, (b) if the court can determine
the benefit derived and the detriment avoided because
of the contravention, then that amount multiplied by 3.

• Section 1317GAB – a relinquishment order to pay the

Commonwealth Government an amount equal to the
benefit derived and detriment avoided

• Section 1317GA – a refund order where fees for

service were received after fee arrangement terminated

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 Civil Penalties

• Section 1317H – this section applies where there

is a breach of the civil penalty provisions and
enables the court to order a person to
compensate the company for damage resulting
from the contravention

• Section 206C provides for disqualification where

a civil penalty provision is breached

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 Criminal Penalties
s184
 Where a director fails to act in good faith or for a proper purpose (as in
181), or misuses their position (182) or information (183) for gain and where
the conduct is reckless or dishonest then this will be in breach of s184.

 The criminal penalty provisions apply to a breach of s184

 There are several sections of the Corporations Act that result in

criminal penalties – a list of these sections and the specific penalties
can be found in Sch 3 and include: imprisonment and fines
(monetary penalties)

 Where Sch 3 does not set out a specific monetary penalty s1311B
will be relevant to the calculation of any monetary penalty payable

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 The Duty of Care and Diligence

Arises under:

 General law
UNDER GENERAL LAW WHETHER A DIRECTOR HAD BREACHED THE
DUTY OF CARE AND DILIGENCE DEPENDED ON A LARGELY SUBJECTIVE
ASSESSMENT OF THE DIRECTOR’S OWN SKILLS AND KNOWLEDGE

THIS GENERAL LAW STANDARD (AS APPLIED IN RE CITY EQUITABLE) IS

NO LONGER RELEVANT – ASSESSING CARE AND DILIGENCE IS AN
OBJECTIVE EXERCISE TODAY

 Statute Law
S180
s180 (1) - act with reasonable care and diligence
s180 (2) - business judgment rule (BJR)

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 Care and Diligence

• Accountability and objectivity have altered the application of the

general law standard in regards to a director’s duty of care

• In Daniels v Anderson the Court of Appeal found the executive directors of

AWA Ltd had been negligent and that directors must understand the nature of the
duty they are required to perform and be familiar with the business of the company

• Directors must be pro-active in their approach to management.

Keeping themselves informed about company matters

Regular attendance at meetings
Making their own inquiries and not merely relying on the information of others
Participating in the decision making processes
Directors cannot simply rely of the fact that systems are in place and have
an objective duty to be able to read and understand the company’s
financial statements (ASIC v Healey)
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 s180

• s180 (1) requires an objective ‘reasonable person’

test to be applied and clearly sets out the standard of
the duty of care and diligence which must be
observed by the directors and officers of the
company

• Consideration of whether a director has acted

reasonably will include a consideration of the
company’s circumstances and the responsibilities of
the director

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 Business Judgment Rule

• s180(2) – Business Judgment Rule (BJR)

a) The director makes the business judgment in good faith for

a proper purpose
b) Has no material interest in the subject matter of the decision
(avoid conflicts of interest)
c) Informed themselves as to the subject matter
d) Rationally believe the business judgment is in the best
interests of the company.

• s180(3) – defines a business judgment to mean any

decision to take or not take action in respect of a matter
relevant to the business operations of the company

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 Business Judgment Rule

• The BJR was used as a defence in ASIC v Adler

however this was not successful as the court held
that Mr Adler clearly had a material personal interest
in relation to the relevant transaction and thereby the
BJR did not apply
• The BJR does not protect a director where the
breach involves a failure to monitor the company’s
affairs
• The director bears the onus of proving that the BJR
applies

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 ASIC V ADLER

Pacific Eagle Equity Pty Ltd (PEE)

Adler controls
HIH Insurance Buys HIH shares
Limited (HIH) - trustee of AEUT -
Adler – non exec
director
Australian Equities Unit Trusts (AEUT)
Bought shares owned by Adler Corp
- Made unsecured loans -

Williams (CEO) HIH Casualty and

and Fodera (CFO) General Insurance
organised $10M advance
Limited (HIHC) Adler Corporation
by HIHC on Adler’s behalf
Other directors unaware [Wholly owned subsidiary Adler and wife only shareholders
of HIH]
Advanced $10M to PEE

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 s 588G – Insolvent Trading

• Pursuant to s 588G, a director has a statutory duty to prevent the

company from trading whilst insolvent.

• The director has an obligation to ensure that the company is not

insolvent at the time a debt is incurred or they will run the risk of
personal liability for debts incurred. The test applied per s 588G
is whether a reasonable director would have suspected
insolvency.

• In a similar way to s 180 the standard imposed upon a director

under s 588G will be that of a reasonable person in the
circumstances

• Thus, the directors are required to keep themselves informed as

to the financial position of the company
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 Financial and Reporting Obligations

• Fundamental reporting obligations upon a company:

TO KEEP FINANCIAL RECORDS (S 286) – ALL COMPANIES

TO PREPARE FINANCIAL AND DIRECTORS’ REPORT FOR EACH

FINANCIAL YEAR (S 292) – LARGE PTY AND PUBLIC COMPANIES

AUDITED FINANCIAL REPORTS AND OBTAIN AUDITOR’S REPORT (S 301) – LARGE PTY AND PUBLIC
COMPANIES

• Pursuant to s 302, a disclosing entity (definition s 111AC - for example a listed company)
must prepare an audited financial report and directors reports half-yearly.

• Small proprietary companies are not required to prepare annual financial reports unless
directed to do so

BY THE MEMBERS (HOLDING 5% OR MORE OF THE VOTING SHARES) - S 293.

BY ASIC – S 294

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Financial and Reporting Obligations

• The financial reports must:

 Comply with accounting standards (s 296); and

 give a “true and fair view” of the financial performance of the company (s 297)

• Directors Reports in listed companies must include details of remuneration

matters and directors interests in shares, options, debentures or contracts
with the company (s 298 to 300B)

• Financial records must be kept for 7 years after the transactions covered by
the records are completed. (s 286 (2))

• Records kept in electronic form must be convertible into hard copy (s 288)

• A written notice to ASIC is required to notify the whereabouts of financial

records kept outside Australia (s 289)

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 Continuous Disclosure
• Disclosing entities are required to disclose material
information in relation to the company’s operations or
financial position on a continuous basis (s 674)
• The requirements of continuous disclosure vary
depending on whether the disclosing entity is listed or
unlisted. For listed companies the ASX Listing Rules
apply
• The continuous disclosure provisions are
investor/market focussed
• Non-disclosure, misleading disclosure, and selective
disclosure are all targeted
• Section 674 is a civil penalty provision
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 Auditor Independence
There is a general requirement that auditors remain independent of
the audited body in the sense that they avoid conflicts of interest - s
324CA

The Corporations Act sets out examples of relevant relationships

that may amount to a conflict – s 324CH

There is a 2 year waiting period before an auditor can become an

officer (take a management role) in a client company – s 324CI; s
324CJ

A significant role auditor must be rotated after a maximum of 5

successive years of servicing a particular audit client – s 324DA

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 Auditors Duties

• General Law

 Duties to the company to use reasonable care and skill

A CONTRACTUAL DUTY TO THE COMPANY ENGAGING
THEM
TORT – RELATIONSHIP OF AUDITOR AND CLIENT GIVE
RISE TO A DUTY OF CARE TOWARDS THE CLIENT

 Duties to Outsider
THE CRUCIAL ISSUE IS “PROXIMITY”
CASE: ESANDA FINANCE V PEAT MARWICK

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 Auditors

• Corporations Act Duties (s 307 to s 313)

 Forming an opinion whether the financial report

 COMPLIES WITH AASB (S 296 OR S 304)

 PRESENTS A TRUE AND FAIR VIEW (S 297 OR S 303)

 Reporting to members (ss 295 to 297 and s 303)

 For listed company, attending the AGM and providing answer to written questions (ss
250RA and 250PA)

 Complying with Auditing standards (s 307A)

 Must report to ASIC if there are reasonable grounds to suspect a contravention of the
Act (s 311)

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