Law of Directors' Duties
The Law of Directors Duties
The law of Directors Duties stems from the systems of corporate governance in order to ensure that the persons occupying higher positions within the company will take good care of the company, as well as not act in a way that will create deficiency. There are 3 sources to the legal duties: the common law; the principles of equitable fiduciary duties; and the statutory duties stated under the Corporation Act section 180-183(Harris,J., 2008). The penalties of breach could be civil or criminal, or even both without being considered double jeopardy . Duties imposed by law are basically the idea that directors must:
- (1) act in good faith, in the interest of the company s 181(1)(a)
- (2) act for a proper purpose s 181(1)(b)
- (3) avoid conflict of interests, and (4)not make secret profits. Ss 182, 183
However, there are defenses to liability that could be used, for instance:
Delegation of responsibility to others, reliance on others, and the business judgment rule may be defenses to the breach of duty under s 180(1); or making full and frank disclosure, obtaining member’s genuine consent may be a defense to conflict of interest and secret profits. In addition to these, the Act provides power to grant relief to the court under s 1317S and 1318, which require the directors to prove their honesty, but the sections are not commonly used and rarely successful. There are many cases the court has emphasized these rules to assist in the interpretation of the statute and enforcement of the law as a whole. The important cases to be considered are:
AWA v Daniels (1992) 9 ACSR 383
ASIC v Adler [2002] NSWLR 483; [2002] NSWSC 171
ASIC v Rich [2003] NSWSC 85
ASIC v MacDonald (No 11) [2009] NSWSC 287 These cases had large impacts by setting milestones on the development and clarifications of the law of directors’ duties. The implementation of the Corporation Act and the Law of Directors Duties amongst these cases had
The law of Directors Duties stems from the systems of corporate governance in order to ensure that the persons occupying higher positions within the company will take good care of the company, as well as not act in a way that will create deficiency. There are 3 sources to the legal duties: the common law; the principles of equitable fiduciary duties; and the statutory duties stated under the Corporation Act section 180-183(Harris,J., 2008). The penalties of breach could be civil or criminal, or even both without being considered double jeopardy . Duties imposed by law are basically the idea that directors must:
- (1) act in good faith, in the interest of the company s 181(1)(a)
- (2) act for a proper purpose s 181(1)(b)
- (3) avoid conflict of interests, and (4)not make secret profits. Ss 182, 183
However, there are defenses to liability that could be used, for instance:
Delegation of responsibility to others, reliance on others, and the business judgment rule may be defenses to the breach of duty under s 180(1); or making full and frank disclosure, obtaining member’s genuine consent may be a defense to conflict of interest and secret profits. In addition to these, the Act provides power to grant relief to the court under s 1317S and 1318, which require the directors to prove their honesty, but the sections are not commonly used and rarely successful. There are many cases the court has emphasized these rules to assist in the interpretation of the statute and enforcement of the law as a whole. The important cases to be considered are:
AWA v Daniels (1992) 9 ACSR 383
ASIC v Adler [2002] NSWLR 483; [2002] NSWSC 171
ASIC v Rich [2003] NSWSC 85
ASIC v MacDonald (No 11) [2009] NSWSC 287 These cases had large impacts by setting milestones on the development and clarifications of the law of directors’ duties. The implementation of the Corporation Act and the Law of Directors Duties amongst these cases had
References: AWA v Daniels (1992) 9 ACSR 383 ASIC v Adler [2002] NSWLR 483; [2002] NSWSC 171 Daniels v Anderson (1995) 37 NSWLR 438 Harris, Jason, Australian Corporate Law, LexisNexis Butterworths, 2008. Phillip Lipton, The demise of HIH: corporate governance lessons, Keeping Good Companies, HIH Royal Commission, 2003. Peter Costello, Report of the HIH Royal Commission, The treasury press release, 2003. Gloria Peterson, HIH Insurance - APRA 's role revisited, Media release, Australian Prudential Regulation Authority, April 2001. APRA Annual Report 2002, Australian Prudential Regulation Authority, 2002. Stuart Wilson, ASIC 'S James Hardie Test Case to Define the Corporate Roles, Australian Shareholders Association, 2007. James Hardie: a cautionary tale, Australasian Risk Management newsletter, 2009.