LECTURE 5 – DIRECTOR’S DUTIES
Overview of duties
All directors and officers of a corporation are bound by a number of general law and statutory duties. All directors owe the company equitable duties of loyalty and good faith Act in good faith in the interests of the company
Act for a proper purpose
Avoid conflicts of interest
s185 – provides that the duties imposed by the Corporations Act are additional to the duties imposed at the common law and in equity, rather than exclusive of them. Thus a director could be sued for all three types of actions rather than just the Corporations Act.
s180(1) – the duty of care by imposing the same objective standard; is determined by what a reasonable person would do or would have believed. s181 – duties to act in good faith and for a proper purpose ss 182 and 183 – the duty to avoid conflicts of interest by prohibiting directors from making improper use of their office and information.
Problem: the enforcement of these duties and the remedies that flow from the different sources of law. Addressed by Part 2F.1.A – allowing shareholders to litigate on the company’s behalf in certain circumstances via a statutory derivative action. ASIC generally enforce the statutory duties arising under the Corporations Act. Part 2D.1 – duties of company officers reflecting general law principles.
To whom are directors duties owed?
The duty is owed to the company as a whole (company is a separate legal entity) – meaning not the company as an entity outside and apart from its shareholders, but rather the general body of shareholders. Who can sue? Greenhalgh v Ardene Cinemas Ltd  Ch 286
The principle that only the company could enforce a breach of directors duties leads to the obvious practical problem that the company only acts on the initiative of the directors. The decision that prevented individual shareholders from taking actions against the board of directors for breach of their duties, because duties were owed not to particular shareholders, but for the company as a whole. Foss v Harbottle  2 Hare 461; 67 ER 189
Proper plaintiff principle – only the company can sue for the breach of duty to the company. Problem: Who decides whether or not the company sues (Replaceable rule; s198A ie. Who runs the company? The director).ie. ‘Directors would not like to sue themselves’.
Duty to avoid insolvent trading
When is a company solvent?
Dictionary – s9
s95A(1) – “A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable. Insolvent: When persons cannot meet persons debts and cannot pay. “Cash flow test”
When a company becomes insolvent, the duties of directors change from being owed to the company (shareholders) to being owed to the creditors.
s588G(1)- requirements for the statutory offence of insolvent trading A person is a director at a time when the company incurs a debt – applies to directors only. The company is insolvent or becomes insolvent by incurring that debt – contigent debts. A reasonable person would have grounds to suspect that the company was insolvent or would become insolvent by incurring that debt. There are reasonable grounds for suspecting the company is insolvent, or would become so by incurring that debt. ASIC v Plymin  VSC 123
‘Reasonable’ – imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his duties as imposed by law and capable of reaching a reasonable informed opinion as to a company’s financial capacity. List of factors in helping to find reasonable grounds to suspect insolvency Continuing losses and overdue taxes
Liquidity ratios below 1
Poor relationship with bank
No access to alternative financing
Inability to rather further equity capital
Suppliers placing company on cash on delivery (COD) or...
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