DIRECTORS DUTIES AND CORPORATE GOVERNANCE

I.                   Directors

1)      Who is a director?

S9 defines a director of a co. as a person who is appointed to the position of director or alternate director regardless of the name given to their position.

S9 also regarded certain persons to be directors even though they are not validly appointed if:

·         They act in the position of director – “de facto director” (is the driving force behind the co. business/ continues to participate in the management of co. after the expiration of the appointment as a director/ have power like real directors)

·         The directors are accustomed to act in accordance with person’s instructions or wishes – “shadow director” (hiding in shadow, has power on real directors, tell them what to do)

2)      Types of directors (formally appointed):

·         Managing directors: CEO – has given the power of broad of directors to be in charge of managing co.’s daily business.

·         Chair of directors: exercise procedural control over the meeting – declaring solutions to be carried or defeated, asking for general business, and closing the meeting, etc.

·         Executive directors: work full-time for the co. The main role is to take part in the daily management of the co.’s business.

·         Non-executive directors: not directly involved in the daily management of the co.’s business. They have part-time involvement in the co. (normally not get paid) and participate in board meetings. => Play important role in monitoring the activities of the management team headed by CEO, and where conflicts of interest arise => independent/ objective view & judgment

·         Alternative directors: substitute directors

Proprietary co.	Public co.
·         Minimum of 1 director resident in Australia s201A(1)	·         Minimum of 3 directors, 2 must reside in Australia s201A(2) ·         Director must be appointed and removed by resolutions of members s203Dnot by other directors s203E
Appointment of directors: min. age is 18 to be appointed as a director s201B(1)

3)      Broad procedure:

a)      Directors’ meetings: directors exercise their powers by making decisions and passing resolutions at broad meetings.

·         The rules governing directors’ meetings are set out in the RR or the Constitution or determined by board itself.

b)     Resolutions: The RR in s248 provides that a director’s resolution must be passed by the majority of the votes cast by directors entitled to vote on the resolution.

c)      Notice of board meetings: The RR in s248C reasonable notice given for directors’ meetings – give all directors time so they can be available at the meeting.

d)     Quorum: minimum no. of directors required for valid meeting. The RR in s248Fprovides that the quorum is 2 directors

e)      Minutes: s251A (1) (b), proceedings and resolutions of directors’ meetings must be recorded in the co.’s minute book.

f)       Committees of the board: delegate power from the Board to committee of directors => officially give power to sub group of directors => they will meet separately to deal with important co. matters.

·         The main reason is to ensure that important matters are given full attention, the workload of the board is effectively distributed and non-executive directors make effective contributions in areas requiring independent judgement.

E.g. remuneration/ audit/ nomination committee

II.                Corporate governance: methods by which companies are controlled and managed.

·         The aim of corporate governance regulation is to achieve “best practice” with the intended goals being economic efficiency and investor protection.

·         Also addresses roles, functions and structures of the board and its relationship to management and the Board’s Accountability

·         How objectives and policies are set and achieved, how risk is monitored, and assessed, how performance is optimised.

·         Corporate governance is regulated by mix of

Legal regulation:

ü  Corporations Act 2001, Common Law duties

ü  ASX listing rules, accounting standards, auditing standards

Self-regulation:

ü  Voluntary codes, such as:

§  ASX Principle of Good Corporate Governance

§  Best Practice recommendation, OECD (Organisation for Economic Co-operation and Development) principles

III.             Directors’ duties:

I: The legal issue here is whether “…” – director of co. by “the action …” breached his duties

·         Under s181 (1) (a), duty to act in good faith in best interest of co.

·         Under s181 (1) (b), duty to exercise power for proper purpose

·         Under s182 (1), duty to not misuse position

·         Under s183 (1), duty not to misuse information

·         Under s180 (1), duty to exercise due care, and diligence

·         Under statutory, duty not to prejudice creditor’s interest

And the equivalent fiduciary duties

·         Under s190, duty to not fetter discretion

·         Under s191 (1), duty to disclose conflicts of interest

·         Under s588G, duty to prevent insolvent trading

And whether the co. can claim for remedies under both statutory and common law.

	Common law ·         Contractual duties: express, implied terms in the contract between directors and company ·         Tortious duties: law of negligence (applied to everyone including directors) ·         Equitable duties: ü  General duties: to exercise reasonable care, skill and diligence ü  Onerous fiduciary duties							Statutory law ·         S181 (1):duty to act in co.’s interest & for proper purpose ·         S182 (1):duty to not misuse position ·         S183 (1): duty not to misuse information ·         S180 (1):duty to exercise due care and diligence ·         S191 (1):duty to disclose conflicts of interest ·         Ch2E: giving financial benefits required shareholder approval. ·         S190:Responsibility for actions of delegates ·         Duty not to prejudice creditor’s interests ·         S588G:Duty to prevent insolvent trading
A.    Fiduciary duties: are supplemented by various statutory duties contained in Ch 2D – ss180 – 183. ·         The Ch2D duties have effect in addition to fiduciary duties owed to a Corporation s185
Duties of directors – 1	I.       R: The general rule is (Directors (or other officers) of corporation must exercise power and discharge their duties to act in good faith in the best interest of the company.)
	·         Under fiduciary duties ·         Only apply for directors ü  S9defines a director of a co. as a person who is appointed to the position of director or alternate director regardless of the name given to their position. ü  S9 also regarded certain persons to be directors even though they are not validly appointed if: §  They act in the position of director – “de facto director” §  The directors are accustomed to act in accordance with person’s instructions or wishes – “shadow director”							·         The equivalent statutory duty is contained in s181(1)(a) ·         Apply for directors or other officers ü  S9defines the term “officer of a corporation”. It includes: (1)   Person who hold certain specified positions – directors or secretary (2)   Persons involved in managing the co. in an insolvency context, such as receiver, administrator, liquidator (3)   Company executives who hold senior positions below board level. The executives must be a person: §  Who makes/ participates in making decisions that affects the whole or substantial part of co.’s business §  Or who has capacity to affect significantly the co.’s financial standing §  Or in accordance with those instructions or wishes the directors are accustomed to act  - “shadow” officers
	1)      R: (Good faith: requires directors to genuinely believe that they are acting in the best interests of co. – push someone else interest before their own.) ·         However, the directors will not comply with duty merely because they have an honest belief that their actions are in the best interests of the company. ·         The court imposes an objective test – an intelligent and honest man, which is “whether an intelligent and honest man in the position of the director could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the co.?”Charterbridge Corp v Lloyd Bank 2)      R: (For the benefits/ in the interest of company: a)      Member’s interest ·         When the company is solvent, the interests of the co. correspond with the interests of its shareholders as a collective group Parke v Daily News 1962 English case without preferring the interests of particular shareholders over the interests of other members Percival v Wright [1902] ·         Interests of both present and future shareholders Darvall v North Sydney Brick & Tile Co Ltd [1988]) b)     Employee’s interest HOWEVER, there is no established principle that this includes the co. as “going commercial concern” or that it includes the interests of the co.’s employees (to the extent that it is not required to avoid industrial unrest – angry, violent behaviour of people who’re protesting against the co.), its customers or the community at large. ·         Parke v Daily News 1962 English case: co. is sold and paid out compensation to lay off workers out of co. assets. Here, employees are not legally entitled to the compensation and the director use $ of shareholders to pay but not for benefits of shareholders (to foster better employer/ee relationship). Also, majority of shareholders are not entitled to ratify, thus, director breached his duty as he disregarded the shareholders’ interest to confer the benefits of employees => Injunction granted. ·         Patrick Amendments (2000): after Patrick Stevedores’ dispute (1997), new Pt 5.8A requires that directors to consider the interests of employees in certain situations.  Introduced to protect employees by preventing directors of employer companies stripping the companies’ assets and making the companies insolvent so to prevent employees enforcing their entitlements. c)      Corporate group interest: consistent with separate legal entity, Directors of a member co. in a corporate group must consider the interests of their company rather than the interests of the group as a whole Walker v Wimborne [1976]UNLESS ü  The group’s fate is so entwined with the co.’s fate that to ignore the group’s fate would also damage the co. future prospects Equitycorp Finance Ltd v Bank of NZ [1993] NSW ü  AND exceptions under s187applies: Director of a wholly-owned subsidiary (holding co. own 100% shares of subsidiaries => doesn’t hurt any other shareholders)will be taken to act in good faith in the best interest IF: §  Constitution allows the director to act in the best interest of the holding co §  Director did act in the best interest of the holding co §  Subsidiary must be solvent – able to pay debts when they become due and payable. Rationale – each co. has its own creditors who may look to that co. for payment. ·         Walker v Wimborne [1976]: E lent A $ on security. At the same time, A lent $ to AS, which is in A’s corporate group but no cross-shareholding with no mortgage or security. This transaction is not in the interest of A because each co. is separate & independent legal entity. ·         Equitycorp Finance Ltd v Bank of NZ [1993] NSW: A big corp. group, with 3 subsidiaries of an ultimate holding co (EHL), U, EFL and EFSA. U got a loan from Bank; Bank got EFL and EFSA to repay.  EFL and EFSA became insolvent =>No breach of duties because the welfare of the group was intimately tied up with the welfare of individual companies, if holding co. ant’s pay, whole group would’ve collapsed. Transaction benefits U directly, but has derivative benefits for EFL and EFSA as well. Therefore, the decision was made to avoid the collapse even though group collapsed anyway.
Duties of directors – 2	II.                R: (Directors (or other officers) must exercise their power for proper purposes – benefits for the co. not for themselves  (similar to duty to act for the benefit of the co., except the cases breaching these duties usually acting in the interest of directors themselves, rather than employees, creditors, etc.))
	·         Under fiduciary duties ·         Only apply for directors						·         The equivalent statutory duty is contained in s181(1)(b) ·         Apply for directors or other officers
	R: (in deciding if the duty is breach, 2 questions will be asked. ð  Objective purpose for which a power was granted ð  Purpose actually motivated the exercise of power. ) ð  Common situation for breach is POWER TO ISSUE SHARES 1)      Power to issue shares: a)      A: (Objective purpose of this power– considered by court as “proper”- raising capital;  issue shares as consideration for purchasing property b)     Improper purpose of this power: (1)   Maintain control of the existing directors in power: the power must not be used under the cloak for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders (2)   To defeat a takeover bid: Offeror offer to buy enough shares to get control. The stimulus for a takeover is generally that the offeror thinks they can manage the company's assets more profitably than the current managers.  Accordingly, the directors of the target company will be likely to lose their positions if the takeover is successful =>Directors in order to protect themselves (retain management)might issue shares to someone else, thus making it more difficult to offeror to gain control of the co. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 ·         Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821:A& B controlled 55% of issued capital& made a joint takeover bid for all other shares. Howard Smith (HS), which was friendly to the board, also made a takeover bid offering a higher price. A&B announced they would not sell to HS so the Board decided to issue extra shares to Howard Smith, to reduce A& B’s shareholding into a minority shareholding =>The directors were motivated primarily to reduce A & B’s shareholding so HS can succeed in the takeover bid. => The court held that this was improper & directors had breached their duties => share issue to HS was invalidated. (3)   Creating or destroy/manipulating a majority of voting powers Whitehouse v Carlton [1987] Whitehouse v Carlton [1987] HC Aust:Company’ shareholders are family of husband, wife and son. Husband held all powers of board in him alone as governing director position in Constitution. After divorce of husband and wife, he issued new shares to his sons to ensure wife didn’t have voting control => Directors breached duty to act for proper purposes. The court ordered issue of share was invalid.) (4)   R: (Mixed purposes and the “but for” test: Directors may be motivated by a no. of purposes, some proper, some improper to issue shares. In Whitehouse v Carlton [1987] HC Aust, the “but for” test should be applied to work out whether the directors breached their duty and issued the shares for an improper purpose. ·         The “but for” test asks “but for the director’s alleged improper purpose of …, would the share issue have been made?” – What are the real things that cause directors to issue share => If it is improper =>Violate s181 (1) (b) & fiduciary duties in common law.) 2)      Other powers: The duty to exercise powers for proper purposes applies to all exercises of directors’ duties, not just share issues. ·         Misappropriation: directors misuse assets of company 3)      A: Remedies: ·         Injunction: to rescind (stop) share issue ·         A shareholder may apply for court leave under s236 to sue directors in the name of the co. if it is unwilling to take such actions against its directors. ·         Issuing shares for improper purpose may also constitute oppressive or unfair conduct and  enable shareholders to obtain remedy under s232
Duties of directors – 3	III.             Directors have fiduciary duties to avoid  conflict of interest situations, meaning: 1)      “The conflict rule”: directors must avoid putting themselves situations where they will be tempted to prefer their own interests, or someone else’s interests, over those of co. ·         A director can be in breach even if she or he acts honestly and does not stand to make a profit. ·         Test - whether there is a “real sensible possibility of conflict” ü  Undisclosed interest can be direct: director contracts personally with the co. ü  Undisclosed interest can be indirect: Directors holds multiple directorships of competing companies & conflict is more likely if those companies are engaging in business together. ü  The extent of interest held by director: a director of a co. which is borrowing money from alarge publicly listed bank would be unlikely to have a conflict if the director happened to have very small shareholding in the bank. The situation would be different if the director owned 50% 2)      The “profit rule”:If a director profits from using company information or his or her position, the director is accountable to the company for those profits (same as s182 & s183) 3)      Examples of breach of “Conflict rule” ·         Misuse of co. funds: conflict of interest arises when directors obtain funds from co. for personal use. Paul A Davies Pty Ltd v Davies [1983] ·         Taking up a corporate opportunity: ü  Diversion of contract  ü  Involving in business that competes with the co. Mordecai v Mordecai [1988]			Under s182 (1), directors or officers or other employees have statutory duties not to misuse position to: ·         Gain advantages for themselves or any other person ·         To cause detriment to the corporation. ð  The equivalent fiduciary duty stated that directors are under duty not to make undisclosed personal profits (bribes & secret commission & undisclosed benefits to obtain particular course of action by the co. or to influence the director in a particular way) arising from their position Boston Deep Sea Fishing & Ice co v Ansell [1888], but s182 is wider in the application to employees as well as officers. ·         Boston Deep Sea Fishing & Ice co v Ansell [1888]: Ansell’s personal interests conflicted with his fiduciary duty to Boston in respect of both the commission received from shipbuilders as well as bonuses received from the ice-supplying & fish-caring co. of which he is shareholder.
				Under s183 (1), directors or officers or other employees have statutory duties not to misuse information to: ·         To make gain for themselves or any other person. ·         To cause detriment to corporation ð  S183supplements the fiduciary duty regarding the misuse of confidential information (trade secrets, lists of customers and suppliers, pricing information) without appropriate disclosure or approval. Thomas Marshall Ltd v Guinle [1978] ·         Thomas Marshall Ltd v Guinle [1978]: Guinle is managing director breached his fiduciary duties by dealing with co.’s customers and supplier & using co.’s  confidential information& trade secrets to started beginning to trade on his own account in competition with company.
	A: Defences for fiduciary duties: disclosure of interest (1)   At common law: director’s fiduciary obligations require them to make full disclosure of their potential conflicts of interest to co.’s shareholders at a general meeting and obtain their consent – ratification. (2)   Under Constitution: may relax obligation to disclose conflicts of interest to shareholders and allow disclosure to be made to the board (approved by the co.’s directors) instead of GM. ð  A: Director respects the co.’s ideas & decisions, and they only do that when they are permitted/ authorised to act in the power of a director.			1)      R: (Statutory duty to disclose conflicts of interest ·         S191 (1) provides a director of a co. who has a material personal interest in a matter that relates to the affairs of the co. must give the other directors notice of the interest UNLESS subsection (2) [12.240] says otherwise. ) ð  Apply to all companies other than proprietary companies with 1 director. 2)      Entitlement of interested director to vote: ·         Public co – s 195(1):A director who has a ‘material personal interest’ in a matter being considered at a meeting of directors must not vote on that matter or be present at the meeting while it is being considered UNLESS other directors allow it or ASIC makes an order allowing it ·         Private co – s. 194 – no prohibition; depends on constitution.
			Additional rues: financial benefits to directors of public companiesCh 2E ·         Designed to protect shareholders of a public co. by requiring prior shareholder approvalb4 public co. gives financial benefits to directors and other related parties s207 ·         CANNOT be overridden by the Constitution. 1)      Shareholder approval needed for financial benefits: s208 ·         S208(1) (a) (i)Public co. may give financial benefits to a related party if it obtains approval of its shareholders ·         Applies to public co. & entities controlled by public co. ·         S208 (1) (a) (ii): shareholder approval must be obtained no more than 15 months b4 the pub. Co. gives the financial benefits 2)      What is financial benefits: provided in s229 ·         Giving or providing finance or property ·         Buying or selling an asset ·         Leasing an asset ·         Supplying or receiving services ·         Issuing securities, etc. 3)      Who is related parties: defined in s228can be an individual as well as an “entity” ·         Individual: directors of public co. and of an entity that controls the public co & their spouses, de facto spouses, parents and children.  ·         Entities: entity controls the public co. 4)      When member approval not required: one of exceptions in ss210 – 216 applies: ·         Reasonable remuneration to company officers s211(1) ·         Amounts of money given to a director or spouse of less than $5,000 s213 5)      Consequences of breach: ·         Breach of s 208 does not invalidate the transaction: s 103 ·         Civil penalty provision s1317E ·         A person commits a criminal offence if their involvement in the contravention of s208 is dishonest s209 (3) ·         A proposed benefits to a related party that contravenes s208 may be stopped by the court where an application for an injunction is brought under s1324
Remedies	A: Breach of fiduciary duties: ·         Equitable remedy of compensation: Directors will be liable for all damages or loss caused by them				A: Contravention of s181(1), s182(1), s183(1): ·         Civil penalties may be imposed for breach of directors duties under s1317E: ü  The court may order to pay a pecuniary penalty up to $200,000 s1317G ü  Compensation to the corporation for damage suffered by it s1317H ü  Disqualified from management s206C ·         Contravention of the civil penalty provisions contained in s181 – s183 may constitute criminal offence if a director/ officer was reckless/ intentionally dishonest s184
Duty of directors – 4	IV.             Duty to exercise due care, skill and diligence:S180 (1) & common law for tort of negligence & fiduciary duty of care Older Cases ·         OLD CASES imposes a very low burden on directors, very lenient (less severely/seriously). ·         OLD CASES say:  No breach of the duty, if directors are inactive and do not participate in management.  The director is not bound to come to meetings at all.  In this case, he had no notice/knowledge of fraud. (Marquis of Bute’s case 1892- only came to one meeting in 38 years) ·         Director need not exhibit in the performance of duties a greater degree of skill that may reasonably be expected from a person of his knowledge and experience. (Re City Equitable Fire Insurance Co Ltd [1925])  ·         So less experience, lower standard. R: (S180 provides that a director (or other officers) of the corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (1)   Were director or officer of a corporation in the corporation’s circumstances; and) (2)   Occupied the office held by (have the same position), and had the same responsibilities within the corporation as the director or officer ð  This is equivalent with common law except for “discharge duties with degree of care, skill, and diligence” 1)      Subjective elements: a)      R: (“Corporation’s circumstances”: urgency and magnitude of problem faced by the co, financial affairs (financial position), size, type and nature of business, provisions of Constitution, composition of board, the distribution of work between board and other officers(Explanatory Memorandum)– situation of co. =>affect the level of responsibility of directors. ) b)     “Responsibilities”: ·         Take account of special background, qualification, management responsibility of officer.  (ASIC v Rich, ASIC v MacDonald)  ·         To some extent, the subjective skills/ability/background comes into consideration.  E.g. if director was appointed BECAUSE of his special skills and expertise. (Gamble v Hoffman) A: Directors of the co. did “…” because they believe that “…”. Therefore, directors in this circumstance acts honestly and for the proper purpose. (Their subjective purposes are to “…”, thus, they are acting for the interests of shareholders/ creditors as a whole.) However, directors of the co. was managing child day care centres, therefore, they do not have appropriate knowledge and expertise regarding the real estate. As a consequence, a reasonable directors in the same situation would have seek for advices from experts who are professional about real estate matters or hire professional real estate broker to help them for selling the land at market price. However, directors of the company fail to do so, thus, they breached duty of care expected from them, which leads to “…” 2)      R: (Objective elements (reasonable person): executive & non-executive directors have different levels of standard of care expected. a)      Standard of Care of Executive directors: should take reasonable steps to place themselves in a position to guide and monitor the management of co.(Daniels v Anderson [1995])) ·         Directors need not have equal knowledge and experience of every aspect of co.’s activities, they are under a continuing obligation to make inquiries (ask questions) and keep informed about all aspects of co. Francis v United Jersey Bank [1981] ·         Directors must also be familiar with their company’s financial position by regularly reviewing its financial statements and inquire into matters in those statements which call for inquiry Friedrich ·         Directors cannot shut their eyes to corporate misconduct and then claims that they did not see the misconduct and did not have duty to look. ·         (Executive directors should subject to higher standard of care, by reason of their contractual employee status.) b)     R: (Standard of care of non-executive directors: ·         not as high as executive directors ·         Non-executive directors are only expected to decide on matters of policy, not directly involved in daily management of the co., & not liable for corporate management failures because they are not paid, only attend a meeting every month or so. ) ð  A: (Non-executive directors of large companies must rely on management, led by the co.’s managing director or CEO, for information & makes inquiries to properly carry out their roles as directors.) ·         James Hardiecase: there was insufficient evidence of communication to non-executive director, thus non-executive directors were found not to be in breach of s 180(1) while executive directors were found to be in breach. ·         Daniels v Anderson [1995]: AWA allowed middle level manager K to handle AWA’s trading on the foreign exchange.K hid losses of $50 million from directors, K carried out unauthorized borrowings. Auditor gave warning to directors but did not say it was that bad or that urgent. The court held that auditor negligent, AWA’s executive directors also negligent but AWA’s non-executive directors were NOT negligent.
	I: The legal issue here is whether directors of the co. might apply for “…” defence for breach of statutory and fiduciary duty of care under s180 (2) A: Defences: Directors ( or officers) who would contravene s180 (1) or the equivalent fiduciary dutycan avoid liability under: (1)   s180 (2) - “The business judgment rule”:a “business judgment” is defined as “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation – planning, budgeting & forecasting”s180(3) =>The decisions to “…” are related to business, thus, they are business judgement A director of corporation who makes a business judgement is not liable if they: ·         Make judgement in good faith & for proper purpose – acted in good intentions for the supreme benefits for the co. not for themselves which is absolutely a proper purpose(a) ·         Do not have material personal interest in the subject matter of the judgment (b)– no violation of s182 & s183=>Directors do not have conflict of interest in those transactions. ·         Inform themselves about the subject matter of judgement to the extent they reasonably believe to be appropriate (c) - =>get enough information/ appropriate advices & make enough consideration ·         Rationally believe that the judgment is in the best interest of the corporation (d)-belief that a reasonable person in their position would hold. =>It is rationally believed that in order to make investment, they co. is under the need to raise capital. As the co. Pty. Ltd. cannot raise fund from public, they can only borrow from bank with required interest payment. Therefore, directors might want to avoid such fee from selling unnecessary assets to finance the investment.  (2)   S189–Reliance:it is provided under s189 (a) that a director may rely upon information or advice provided by: ·         Reliable and competent (capable) employee (i) ·         A professional adviser or expert in relation to matters within their competence (ii) ·         Another director or officer in relation to matters within their authority – expert in subject (iii) ·         A committee of directors in relation to matters within their authority (iv) C: The directors can/cannot rely on “business judgement/ reliance rule” to avoid liability under s180 (1) because they fail element …/ satisfy all elements, hence, the directors must be liable/ can defend successfully for transactions “…” ð  Discuss remedies if liable
Remedies	Breach of common law duty: ·         Company can sue director for damages occurred due to the breach ·         A shareholder may apply for court leave under s236 to sue directors in the name of the co. if it is unwilling to take such actions against its directors.					Contravention of s180 (1)duty of care and diligence: Civil penalties may be imposed for breach of directors duties under s1317E ·         The court may order to pay a pecuniary penalty up to $200,000s1317G ·         Compensation to the corporation for damage suffered by it s1317H ·         Disqualified from management s206C ·         Deliberately excluded from s184, which provides for criminal offences where the directors’ duties are breached dishonestly. Negligence & failure to exercise sufficient care & diligence do not involve dishonesty.
Duty of directors - 5		V.                Duty To Not Fetter Discretions 1)      Responsibility for actions of delegates:s190 ·         S190 (1) states the general rule that if directors delegate (give responsibility to someone else) a power under s198D or Constitution, they are responsible for the exercise of power by the delegate as if the power had been exercised by the directors themselves. ·         S198Dallows directors to delegate any of their powers to: (1)   A Committee of directors – smaller group of directors (2)   A director (3)   An employee of the company. (4)   Any other person UNLESS the Constitution states otherwise. 2)      Defences: under s190 (2)¸directors avoids responsibility if the director believed: ·         On a reasonable grounds that the delegate would exercise the power in conformity (acceptable behaviour)with the duties imposed on directors of the co. by this Act and co.’s constitution ·         On reasonable grounds, in good faith, after making proper inquiry if the circumstances indicated the need for inquiry, that the delegate was reliable and competent in relation to the power delegated.
Duty of director – 6	VI.             Duty not to prejudice creditor’s interests: Directors of companies in financial difficulties are subject to a fiduciary duty to act in good faith and in the best interest of co., meaning the directors must not to engage in activities that prejudice creditor’s interests. ·         Directors who prejudice creditors’ interests may also breach statutory in: ü  Ss181– (a)best interest of co. &(b)for proper purpose ü  Ss182– improper use of position ü  Ss183– improper use of information ·         Examples of breach: ü  Permit the co. to give away its property or otherwise dispose of its assets at less than commercial value. ü  Loans made with no prospect (chances of success) of repayment Walker v Wimborne [1976] ü  Co. lending money at less than market interest rate Ring v Sutton [1979] ð  Shareholders CANNOT ratify director’s breach of duty that involves prejudicing the interests of creditors.
Duty of director – 7	VII.          Duty to prevent insolvent trading: s588G a director is under duty to prevent company incurring debts if there are reasonable grounds for suspecting that it is insolvent. 1)      S588G: a)      Who is liable: the person is a director of the company when it incurs a debt => the duty is imposed only on directors because they control overall management of the co. & have the ultimate power to prevent debts being incurred. b)     When is a debt incurred: the company is insolvent at that time, or becomes insolvent by incurring that debt or debts including that debts ·         Usually at the time the contract is entered into, but it may depend on the terms of agreement between the parties ·         Co. contracted to buy raw materials from one of suppliers provided that co. could place orders & payment was to be made 30 days after the delivery => debt incurred when co. made order ·         A contract with another supplier related to sale of wheat which was to be stored by supplier and delivered to the co. as required. => debt incurred when contract was made ·         Contract for supply of electricity =>debt incurred when electricity was used c)      Insolvency: ·         s 95A(2) - A person who is not solvent is insolvent ·         s 95A(1) - A person is solvent if, and only if, the person is able to pay all the person’s debts as and when they become due and payable d)     Reasonable grounds for suspecting: there are reasonable grounds for suspecting (requires lower level of knowledge or awareness) the company is insolvent or would so become insolvent ·         Co. traded unprofitably, and accumulated losses continuously ·         Co.’s overdraft was frequently exceeded ·         Co.’s bank sent monthly bank statements to indicate that the co. was exceeding its overdraft limit ·         Cheques were dishonoured ·         Bank advised directors that no further increase to overdraft facility would be approved e)      Failure to prevent incurring of debts: the director fails to prevent the company from incurring the debt – inactivity or failure to attempt 2)      Defences:s588Hsets out 4 alternative defences available to directors who otherwise contravene s588G ·         s 588H (2) : the director had reasonable grounds to expect and did expect the company was solvent and would remain solvent; or ·         s 588H (3)the director reasonably believed (delegation) ü  a competent and reliable person was keeping him/her adequately informed about the company’s solvency, and ü  on the basis of that information expected that the company was solvent and would remain so ·         s.588H(4) the director did not take part in management of the company when the debt was incurred because of illness or other good reason ·         s.588H(5) the director took all reasonable steps to prevent the company incurring the debt 3)      Consequences of contravention: ·         The court will lift the corporate veil and make the director personally liable for co.’s contractual obligations. ·         Civil penalty : disqualification, pecuniary penalty order ·         A director may be liable to compensate the company / liquidator ·         The liquidator may take action to recover as a debt to the company loss or damage suffered by the unsecured creditors at general law. ·         in limited circumstances individual creditors can sue the director ·         If the contravention is dishonest, the director face criminal penalties
Who can sue?	·         Only company can sue under general law (shareholders can sue under the name of co. from derivative action) ·         Creditors cannot sue				·         ASIC and co. can sue under statutory law ·         The only case creditor can sue is when the co. is insolvent & directors breached duty to prevent insolvent trading.
Example of breach of  s180, s181, s182, s183	ASIC v Adler &Ors [2002] NSWSC 171  (confirmed on appeal ASIC v Adler [2003] NSWCA 131) Adler was one of the directors of HIH Co. An HIH subsidiary paid $10m to a company of which Adler was a sole director. Besides that, by use of a trust mechanism, around $4m was used to acquire HIH shares to increase share prices, venture capital unlisted investment were purchased from another Adler company; and loans were made to entities which were associated with Adler. These transactions occurred with no board or member approval and without disclosure; the loans were given without proper document or security being sought and the payment was made so that it would not come to the attention of other HIH directors. Adler was found to have contravened ·         in good faith and for a proper purpose (s 181), ·         duty not to improperly use position (s 182), ·         duty not to improperly use information (s 183), ·         And the duty to act with due care and diligence(s 180). ð  Adler banned for 20 years from acting as a director and fined $450,000

C: In conclusion, the co. has legal right against the director under …. Because …, and sue for damages under both common law and statutory law.