Lecture 5-Company directors' and officers' duties Flashcards Preview

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Flashcards in Lecture 5-Company directors' and officers' duties Deck (53)
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1
Q

What are the two types of duties?

A

-duties under general law and statutory duties

2
Q

What are the general law duties?

A
  • the case law duty -divided into loyalty and good faith bit and care and diligence bit -under care and diligence you have the duty to care act with reasonable care and diligence -under loyalty and good faith there are 4 duties
    1. duty to retain discretions
    2. duty to avoid conflicts of interest
    3. duty to act in good faith in the interests of the company
    4. duty to use powers for a proper purpose
3
Q

Who owes the general law duties?

A

-directors and senior executive officers

4
Q

What is meant by an officer under general law?

A

-people the law considers could hurt the company in some way

5
Q

What is the fiduciary relationship officers and directors have with the company?

A

-have to be the best version of yourself -based on the power they exercise and the vulnerability of the company to their wrongful actions

6
Q

What are the statutory duties?

A

-governed by the corps act -sections in the Corps Act specifying what the duty of directors and officers is

7
Q

What are the two statutory duties under the general law duty to act with reasonable care and diligence?

A

1.duty to act with reasonable care and diligence s180 2.Duty to prevent insolvent trading s588G

8
Q

Who owes the statutory duties?

A

-directors as defined in the Corps Act (includes de facto and shadow) -most statutory duties apply to officers as defined in s9 (except s191 and 588G) -two statutory duties imposed on employees (s182, s183)

9
Q

What are the two sections that don’t apply to officers in the statutory duties?

A

s 191 or s 588G -s191= members of the board to tell the other board members they have conflict of interest -588G= insolvent trading

10
Q

What does s191 do?

A

-members of the board to tell the other board members they have conflict of interest

11
Q

What are the two statutory duties imposed on employees?

A

-s182= not make improper use of your position -s183=improper use of information

12
Q

To whom are the duties owed?

A

-the company -both the general law duties and statutory duties apply (only in exceptional circumstances will the duty be to a shareholder ie Brunninghausen v Glavanics)

13
Q

What are the facts of the case Brunninghausen v Glavanics?

A

-they do not owe the duty to shareholders! it is owed to the company -in exceotional: Brunninghausen v Glavanics= here director owes the duty to shareholder -Mr B. owned 5/6 of the sgares, G, owned 1/6, bith directris, G didn’t take part -B wants to buy G’s shares, B didn’t tell that third party offered to buy all the shares at higher price -G then angry and sues -court decides that B owed duty to G

14
Q

Who enforces the statutory duties?

A

ASIC

15
Q

Who enforces the general law duties?

A

the company (or liquidator if the company is being would up)

16
Q

What is the breach of a statutory duty called?

A
  • “civil penalty provisions” under Pt 9.4B of the Act
17
Q

How must civil penalty provisions be proved?

A

-on the balance of probabilities, more likely than not then guilty (unlike criminal where it has to be beyond reasonable doubt -easier to prove -not criminal so do not send to jail

18
Q

What are the punishments if court decides you breached statutory duty?

A
  • pecuniary penalty up to $200,000: s 1317G ! -disqualification (banning) order: s 206C - compensation to company: s 1317H
19
Q

Can breach of duty have criminal consequences?

A

-yes -not for breach of duty of care (laziness) - Yes for breaches of some other duties where done with intentional dishonesty or recklessness: s 184 -if misusing position etc.

20
Q

What is the punishment if it is a criminal offence?

A

-fine or jail time ( it is only called fine is criminal!)

21
Q

What are the sources of duty of care,skill and diligence?

A

-general law negligence cases -s 180(1) -contract of employment - for executive directors and other executive officers

22
Q

What does s180 (1) do?

A

-A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: – (a) were a director or officer of a corporation in the corporation’s circumstances; and – (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

23
Q

What does negligent mean?

A

-if any of the three breached (general law negligence cases-s 180(1) -contract of employment)

24
Q

What did it used to be like the duty of care?

A

-Originally, under the common law, the courts used a largely subjective test : -Took into account the background, skills and experience of the director concerned -A director with little knowledge of his/her company’s business, and little skill, was judged against the standard of someone with the same (poor) knowledge and skill

25
Q

What is the interpretation of s180 (1)?

A

reasonable= it depends on the facts -that is where we use the case law -the closer you are to collapse the more you have to do -the case law adds the meat to the statute bone -the cases are what gives the meaning to the statute -cases= interpret the statute and to tell the dierction of action -also related to what office you hold, non executive director= less duty than CEO -role you play affects the duty, and the cases tell us how

26
Q

What is the modern standard of care?

A

-There is no single standard for all directors and officers - The standard required of director X is the care that a reasonable person doing X’s job in X’s company would exercise (a largely “objective” test)

27
Q

What are the minimum requirements (of duty of care) under the modern standard?

A

Every director must : 1.btain a basic understanding of their company’s business 2.keep informed about and monitor the company’s activities and regularly attend board meetings 3.monitor the company’s financial position -see Daniels v AWA Ltd (that is what it’s based on)

28
Q

Do some director have higher requirements in their duty of care?

A

-Directors with special skills are held to the standard of a person professing to have those skills: ASIC v Vines -Executive directors’ greater involvement in the business of the company leads to an expectation of greater knowledge, focus and awareness -the unqualified ones have the minimum standard -CEO expected to do the most of the directors -chair of the board also expected to know more

29
Q

What are the facts of ASIC v Vines?

A

-Vines was a director but also the financial officer= held to a higher standard, expected to perform at a higher standard

30
Q

Under which section can directors delegate their powers?

A

-s198D -may delegate any of their powers to any person, unless constitution restricts delegation

31
Q

Is the director liable if the delegator is negligent?

A

-delegate is negligent, director will be liable unless requirements of s 190 satisfied (eg, director believed on reasonable grounds that delegate was reliable and competent)

32
Q

What does s190 do?

A

-directors are liable for delegators’ actions unless s190(2) is satisfied =he director believed: (i) on reasonable grounds; and (ii) in good faith; and (iii) 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.

33
Q

What is the reliance?

A

-When a director’s reliance on information provided by employees, professional advisers, other directors or officers, and board committees, is reasonable -Set out in s 189 – good faith and independent assessment

34
Q

What does s189 do?

A

-reliance of directors on information on others, in good faith and independent assesment

35
Q

What was the major theme in ASIC

A

-Major example of breach of duty of care ! Payment by HIHC to PEE

36
Q

What is the intention of the business judgment rule?

A

-borrowed from the US -doesn’t fit the law very well -if directors have done everything carefully and properly and without any conflict of interest then forgiven for breaching s180 (General principle that courts do not substitute their business judgment for that of directors ! Statutory business judgment rule: s 180 (2) ! Says when a director is taken to have met the requirements of s 180(1))

37
Q

What is the business judgement rule?

A

-Director is taken to meet the statutory and general law duties of care in connection with a business judgment if: ! good faith and for a proper purpose ! no material personal interest in subject matter of judgment ! inform themselves ! rationally believe the judgment is in the best interests of the company -s180 (2) (it is the business judgement) -under s180 (1) have to be as careful and as dilligent as a reasonable person would -in ASIC v Rich -if you breach 180 (1) then 180 (2) is not usually available to you, you cannot fit yourself in there -cannot be used as defence much

38
Q

What does s588G do?

A

-Directors have a duty to prevent their company incurring debts when the company is insolvent or would become insolvent –means if directors realise the company cannot pay its debt they cannot trade out (borrow more) -law says no -if you cannot pay your currents debts, you cannot get more debts= that is the insolvent trading -have a duty to prevent the company incurring debts -duty to prevent incurring the debt, even by other directors

39
Q

Who is the 588G duty owed by?

A

-Duty is owed by “directors” - includes de facto and shadow directors

40
Q

What does s 588V do?

A

-when holding a holding company liable for a subsidiary insovency -if breach this then taken not liable

41
Q

When does 588G apply?

A

-Person was a director when a company incurred a debt -Company was “insolvent” at that time or became insolvent by incurring that debt -At the time the debt was incurred, there were reasonable grounds for suspecting insolvency

42
Q

What is the meaning of expect and suspect?

A

-expect= firm grounds -suspect= do not have to have that form grounds, a little feeling -making the director liable even in the absence of proof of insolvency

43
Q

What does incurring a debt mean?

A

-For certain actions, see the operative table in s 588G(1A) eg declaring a dividend; uncommercial transaction -For other debts, the debt: a) must be for a specific amount b) must be incurred voluntarily by company

44
Q

What is insolvency?

A

Section 95A : insolvency worked out using cash flow test (not balance sheet test) -not being able to pay your debt when it is due -if company asset rich but cash poor can be insolvent -but can mortgage the assets (Question is: Is company able to pay all its debts, as and when they become due and payable? So: What cash does company have? What access to finance does company have?)

45
Q

What does s95A?

A
  • (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. - (2) A person who is not solvent is insolvent.
46
Q

When is liability for insolvency imposed?

A

-s588G (2) -the director was aware that there were reasonable grounds for suspecting insolvency (subjective test), or - a reasonable person doing that director’s job in that company would have been aware that there were reasonable grounds for suspecting insolvency (objective test)

47
Q

What are the three tests in 588G (1)?

A

-person director -company incur debt -reasonable grounds for insolvency

48
Q

What are the two tests in 588G (2)?

A

-two tests in 588G 2, or= can use either one –the director was aware that there were reasonable grounds for suspecting insolvency (subjective test), or - a reasonable person doing that director’s job in that company would have been aware that there were reasonable grounds for suspecting insolvency (objective test)

49
Q

What is the possible defence against liability of insolvency? 588H

A

-Director had reasonable grounds to expect, and did expect, that company was solvent and would remain solvent ! harder to “expect” than to “suspect” - Metropolitan Fire Systems v Miller ! ignorance of company’s finances no excuse

50
Q

What is the defence in 588H (3)?

A

-Delegation and reliance on competent and reliable person

51
Q

What is the defence in 588H (4)

A

-Absence from management, due to illness or other good reason: (good reason must be really good!)

52
Q

What is the defense in 588H (5) and (6)?

A

-Director took all reasonable steps to prevent the company incurring the debt - 588H(5)+(6) -appointment of an administrator under voluntary administration (VA) provisions

53
Q

What are the consequences for breaching the duty of care?

A

-Civil penalty provision ! Pecuniary penalty, disqualification, compensation -Also, liquidator can seek compensation: s 588M - Also, an unsecured creditor can seek - Criminal liability: s 588G(3)