BLAW20001

Corporate Law 2022

Lecture 5
Summary of the Duties
Directors’ and Other Officers’ Duties – Part 1

Julian Panetta
E: julian.panetta@unimelb.edu.au T: 03 8344 6842
Rm – GM02, Mezzanine, Melbourne Law School
WELCOME BACK

• Introduction to major topic

• Directors’ and other Officers’ Duties

• Individual written assignment

• Some tips…

• Lecture consultation
• Tuesdays 10:30am – 12noon
• On campus – GM02, Mezzanine, MLS
• Zoom

• Mid-semester feedback

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WEEKS 1- 4

• Lecture 1
• Foundation principles including key concepts e.g.) limited
liability, separate legal entity, Salomon’s Case, types of shares,
debt/equity finance.
• Lecture 2
• Choice of form of business, types of companies, internal
governance, s140 statutory contract.
• Lecture 3
• Decision making in companies, directors, director meetings,
director decisions, variation of class rights.
• Lecture 4
• Members’ meetings, procedures and decision making.
3 • Irregularities and Gambotto.
WEEKS 5 - 8

• Major topic of the semester.

• Lecture 5
• Summary of the duties
• Duty of Care, Skill and Diligence

• Lecture 6
• Duty to prevent insolvent trading

• Lecture 7
• Good faith, proper purpose, best interests
• Dividends

• Lecture 8
• Conflicts, disclosure, misuse of position, misuse of information
4 • Related-party transactions
SUMMARY OF THE DUTIES

• Core obligations
• Care and diligence – don’t be lazy
• Loyalty and good faith – don’t be evil

• General law origins

• case law evolution
• gives company right to take action

• Statutory versions as well

• uses cases to explain what the statute requires
• gives company and ASIC right to take action
• ASIC can seek criminal punishment too in some
cases

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WHO OWES THE DUTIES?

• The duties exist under the general law and the statute

• Not always owed by the same people.

General Law Duties

• Directors

• Senior executive officers

• Fiduciaries
• They are in a fiduciary relationship with the company - based on the power they exercise and the
vulnerability of the company to their wrongful actions

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WHO OWES THE DUTIES?

Statutory Duties

• Directors as defined by s9

• Includes de facto and shadow directors.

• Officers

• Sometimes to employees

• How to work out who it applies to? READ THE SECTION.

• E.g.)
• ss180 and 181 – applies to directors or other officers
• Ss182 and 183 – applies to directors, other officers or employees
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TO WHOM ARE THE DUTIES OWED?

• To the company
• The company is the victim
• In the case of general law duties, it is the company that enforces the breach

• To individual members
• Only in very limited circumstances

• Brunninghausen v Glavanics
• Held that Mr B as the director, owed the duty to Mr G, the other shareholder

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WHO ENFORCES THE DUTIES?

• This depends on whether we are dealing with general law duties or statutory duties

Statutory Duties

• Enforced by ASIC – the corporate police.

• The company can also seek compensation if it takes action under the statute

General Law Duties

• Enforced by the company (or liquidator if the company is beyond wound up)
• The company takes action against the director.

Why have both?

• Lots of overlap between general law duties and statutory duties.

• Statute allows ASIC to be involved in enforcement – can get criminal penalties as well.
• Different remedies available under statute and general law.
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CONSEQUENCES OF BREACH OF DUTY

• Consequences depend on whether it is a breach of general law duty or statutory duty.

Statutory Duties

• Statutory duties are “civil penalty provisions” under Pt 9.4B of the Act.
• Following a declaration of contravention, a court may impose:
• pecuniary penalty: s 1317G
• disqualification (banning) order: s 206C
• compensation to company: s 1317H. Company can also seek this.

• Criminal consequences in some cases:

• Not for breach of duty of care
• Yes for breaches of some other duties where done with intentional dishonesty or recklessness: s 184
• Contravention is an offence – criminal penalty of prison and/or a fine.

General Law Duties

• Company is taking action

• Compensation or damages
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THE DUTY OF CARE, SKILL AND DILIGENCE

Sources of the duty

• s180 of the Corporations Act

• Contract
• General Law

S180 – care and diligence – directors and other officers

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

Note: this subsection is a civil penalty provision (see s1317E)

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THE DUTY OF CARE, SKILL AND DILIGENCE

S180 – care and diligence – directors and other officers

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

Note: this subsection is a civil penalty provision (see s1317E)

• A director or other officer breaches this duty if they are “negligent”

• 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)

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THE DUTY OF CARE, SKILL AND DILIGENCE

Contract

• A duty of care can arise from a contract between an executive director (or other officer) and their
company.

• Look at the term of the contract and what is required.

General Law

• Directors owe a duty to their company to exercise reasonable care under the law of negligence.

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DIFFERENCES BETWEEN THE SOURCES OF THE DUTY?

• Lots of overlap between the various sources.

• No significant difference in terms of the standard to be applied.

• Key differences:
• WHO can take action – (ASIC or the company)
• Remedies

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WHAT STANDARDS ARE APPLIED?

Minimum standard applicable to ALL directors

• Daniels v AWA Ltd

• Applies to ALL directors:
• Must acquire a basic understanding of the business of the company and be familiar with the fundamentals of
the company’s business
• Are under a continuing obligation to keep informed about the activities of the company
• Detailed inspection of the day-to-day activities is not required, but what is required is a general monitoring of
the company’s business affairs. Accordingly, a director should attend board meetings regularly.
• While directors are not required to audit the company’s books, they should maintain familiarity with the
financial status of the company by a regular review of financial statements

Higher Standards?

• Directors with special skills are held to the standard of a person professing to have those skills: ASIC v Vines – CFO of
company

• The more you are involved, the more is expected of you

• Executive directors’ greater involvement in the business of the company leads to an expectation of greater knowledge,
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focus and awareness
DEFENCES

• Delegation defences – s190

• Reliance defence – s189

• Business judgment rule – s180(2)

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DELEGATION DEFENCE – SECTION 190

• Directors may delegate any of their powers to any person, unless constitution restricts delegation: s
198D

S190(1) Delegation by director

If the directors delegate a power under s198D, a director is responsible for the exercise of the power by the delegate
as if the power had been exercised by the directors themselves.

S190(2) Director not responsible in certain circumstances

A director is not responsible under subsection (1) if:

(a) The director believed on reasonable grounds at all times that the delegate would exercise the power in conformity
with the duties imposed on directors of the company….; and

(a) The 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
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competent in relation to the power delegated
RELIANCE DEFENCE – SECTION 189

S189 (a)
- This subsection talks about reliance (by a director) on information or expert advice given by various people such as
employees, professional advisors, experts, other directors or a committee of directors.

s189(b)
[if] the reliance [on information or advice] was made:
(i) In good faith; and
(ii) After making an independent assessment of the information or advice, having regard to the director’s knowledge
of the corporation and the complexity of the structure and operations of the corporation; and
(iii) the reasonableness of the director’s reliance on the information or advices arises in proceedings brought to
determine whether a director has performed a duty under this Part or an equivalent general law duty

the director’s reliance on the information or advice is taken to be reasonable unless the contrary is proved.

Example
- ASIC v Healey
- Reliance defence not available – each director did not make an independent assessment of the situation.

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BUSINESS JUDGMENT RULE – SECTION 180(2)

• ONLY serves as a defence to an alleged breach of s180(1)

• VERY VERY difficult to successfully establish

• See ASIC v Rich
• Successfully used by the defendant
• Very complicated facts – no need to do any independent reading here
• ASIC v Marriner

s180(2)
A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of
subsection (1)…if they:-

(a) Make the judgment in good faith for a proper purpose; and
(b) Do not have a material personal interest in the subject matter of the judgment; and
(c) Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be
appropriate
(d) Rationally believe that the judgment is in the best interests of the corporation.
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EXAMPLES OF BREACH OF THE STATUTORY DUTY OF CARE

ASIC v Adler
• See figure 11.2 in CACL 2022
• Major example of breach of duty of care.
• Payment by HIHC to PEE
• Look at roles and actions of Adler, Fedora and Williams
• Material prejudice to company’s interests
• Company had financial problems
• Overlapping duties – same conduct leads to multiple breaches

ASIC v Parker
• DoC breached – failed to ensure loan conditions fixed by the board and delegated for implementation were
satisfied before the loan was made

ASIC v Loiterton
• DoC breached – paying dividends when no profits

ASIC v PFS Business Development Group Pty Ltd

• Multiple DoC breaches. E.g.)
• Failing to ensure employees were paid wages in a timely manner
20 • Failing to ensure the group companies kept proper books and records
PROBLEM SOLVING GUIDANCE
DUTY OF CARE, SKILL AND DILIGENCE

1. Identify the source of the duty

• General Law
• Contract
• Statute

2. WHO owes the duty?

• Depends on source
• GL – directors, senior executive officers, fiduciaries
• Statute – directors (s9) and other officers

3. To WHOM is the duty owed?

• To the company?
• To individual members per Brunninghausen v Glavanics?

4. Has the duty been breached? Apply the standard (minimum and higher (if applicable)) – look at each relevant person
• Subjective and objective test – use the language in section 180
• Daniels v AWA – minimum standard for ALL directors
21 • ASIC v Vines - higher standard for more senior directors and those with specialist skills
• Use the facts in the question to provide evidence of the breach – what did the director do that was careless?
PROBLEM SOLVING GUIDANCE
DUTY OF CARE, SKILL AND DILIGENCE

4. Raise any defences that may be applicable

• Delegation – s190
• Reliance – s189
• Business Judgment Rule –s180(2)
• TIP: use the legislation carefully here. Note that most of the defence elements use the word “and” instead of “or”. All
elements need to be satisfied to successfully make out the defence. Sometimes it is easier to identify one element that
doesn’t apply and state why it doesn’t apply thereby defeating the defence.
• e.g.)
• s180(2)(b) – the defence will fail if you establish that the director DOES have a material personal interest
(state what that is) and the defence will not succeed; OR
• s189(b)(i) – if you believe the reliance [on information or advice] was not made in good faith (state why), the
defence will not succeed.

5. What are the consequences for breach of duty?

• This depends on a few things and the nature of the question asked, e.g.)
• Whether a defence is successfully established. If yes – no consequences.
• The source of the duty – General Law, Statute etc
• Consequences for breach of duty
22 • Statutory breach – Civil Penalty Provisions Pt 9.4B (more on this later)
• General Law – compensation or damages (more on this later)
EXAMPLE QUESTION

Bob is a non-executive director on the board of Merchant Bank Ltd (“Merchant”).

Savings NOW Partners is financial consulting firm which had dealings with Merchant. Michael is a partner of
Savings NOW and is also a non-executive director of Merchant.

Savings NOW has proposed a permanent consulting role with Merchant which would generate huge fees for Savings NOW.
Michael is a vocal advocate for the proposal and lobbies his fellow directors to accept the deal. While the other directors
know that Michael is a partner of Savings NOW, they are not told that Michael will be paid extra commission if the
consulting deal is approved.

Bob’s role on the board of Merchant has been fairly insignificant as he is not overly friendly with the other directors. He is
suspicious of Michael but believes that whatever he says will be ignored by the other directors and his vote will not change
the decision. Bob does not turn up for the board meeting at which the decision is made and, not surprisingly, the other
directors vote in favour of approving the consultancy.

Advise ASIC if the above conduct by Bob amounts to a breach of s180 of the Corporations Act 2001. Your response should
consider any and all defences (where relevant).
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BRIEF POINTS OF ANSWER

NOTE

• We are asked to advise on Bob’s behaviour only. This is one way in which we may limit the scope of the question for
your analysis. Do not advise on Michael’s behaviour even if you are tempted to do so.
• The question specifically asks you consider if there has been a breach of s180 of the Act. Again, this is limiting you to
the statutory duty. DO NOT discuss the general law equivalent of the duty of care, skill and diligence

APPLYING THE PROBLEM SOLVING STEPS

- Note – this is a very brief outline of things you may like to discuss. This is not a complete answer and much more detail
would be required if this was an assessment question.

- You do not need to use the headings provided. This is just to illustrate the problem solving steps discussed before.

- Your answer should consider all of the steps as you apply the law to the facts when you build your response.

- Responding in bullet points is not appropriate. It is done here to give you an idea of the issues and law you need to
24 discuss and how to apply the law to the facts
BRIEF POINTS OF ANSWER

• Source of the duty

• Statutory duty – s180 of the Corporations Act 2001

• WHO owes the duty?

• The statutory duty is owed by directors and other officers.
• The statutory duty applies to Bob in his capacity as a non-executive director of Merchant

• To WHOM is the duty owed?

• Bob owes the duty of care under s180 to the company, Merchant.
• Nothing in the facts to indicate a Brunninghaus v Glavanics in favour of owing the duty to a member.

• Has the duty been breached? (Spend most of your time here)
• A non-executive director holds no other position within the company and merely attends board meetings to make
decisions and provide general oversight of the company’s management and strategic direction.
• All directors are subject to the same duties and the obligations imposed on non-executive directors are not of a
lesser standard than those imposed on executives: Daniels v Anderson
• No suggestion in the facts to suggest that Bob has executive management responsibilities.. Rather, he is serving
on the board in an advisory capacity.
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BRIEF POINTS OF ANSWER

• Has the duty been breached? (Continued)

• As a director, Bob is subject to the minimum standard of care as per Daniels v AWA.
• Bob has a fundamental duty to monitor the company’s performance and to properly read and consider matters brought before the
board for consideration. This minimum standard imposes an obligation on Bob to attend board meetings and establish internal
monitoring systems that allows him to remain informed about the company’s ongoing financial viability: Daniles v AWA.
• It would appear that Bob has failed to act with due care and diligence by failing to participate in the board discussion concerning
the consulting contract. Furthermore, it could be argued that reasonable person acting in Bob’s circumstances (as NED) at the
relevant time (the time for consideration) would have attended the meeting – subjective and objective elements of s180
• For these reasons, failure to attend the board meeting would likely breach s180 of the Act.

• Defences?
• S180(2) – BJR – would not succeed per s180(2)(c) – Bob did not take reasonable steps to inform himself about the subject
matter for consideration. Further, arguably not a business judgment anyway.
• s189 – reliance defence – would not succeed. Bob did not exercise independent judgment about the information provided b y
others (he did not attend) and therefore could not rely on the defence.
• s190 – delegation defence – not relevant on the facts

• Consequences? (more on this later in the course)

• S180 is a civil penalty provision – Part 9.4B – perhaps disqualification or a penalty
26 • No criminal liability here.
TO SUMMARISE

• Understand and appreciate how and why we have directors’ duties (in a broad context).

• Understand the source of the duties (general law or statute) guides us with respect to
WHO can enforce the duty and WHAT remedies are available.

• Know WHO the DoC applies to, to whom it is owed and who can enforce for a breach.

• Understand how the case law is used to give meaning to the statute and to help us
establish a ‘breach’

• Recognise the operation and application of s180 including the minimum standard of
care, the defences for breach (“reliance”, “delegation”, “business judgment rule” and
the consequences for breach of duty under the statute and the general law

• Be comfortable with the suggested problem solving steps used to solve a DoC
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hypothetical problem.
Next week….

Lecture 6
Directors’ and other officers’ duty – Part 2
Duty to prevent insolvent trading

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- Hotpot lovers – Panda Hotpot and Dragon Hotpot
- Lovers of Italian food – 400 Gradi or DOC