Law of Directors' Duties

Topics: Board of directors, Corporate governance, Corporation Pages: 9 (2960 words) Published: March 29, 2011
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 companys 181(1)(a) -(2) act for a proper purposes 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 narrowed the scope of interpretation and set standards for law enforcements, as well as have inspired many industrial, professional bodies, or even governmental organizations in initiating better performance guidelines for directors to generate a better business market field in Australia for domestic and international players.

The Importance and Impact of the Cases
CasesSummary of caseSignificance and Impact on Law of Directors Duties AWA v Daniels
AWA Ltd. sued its auditor, Daniels and his firm for negligence in failing to report the company’s inefficient internal control over its foreign exchange currency trading to the board of directors resulting in the company’s loss. Daniels countered-sued AWA’s directors for contributory negligence that the directors had failed in maintaining the reasonable degree of their duties of care and diligence. The court found the auditors guilty, however, the damage was reduced by contribution of AWA’s executive and non-executive directors liability in contributory negligence resulting from failure of exercising their director’s duties.- The case is considered the rise of “The modern duty of care and diligence” where the directors need to monitor management independently, and shall be tested by the use of objective test of “What a reasonable person would have known, done or believed” rather than the subjective of “What the director says they knew, did, or believed” (Harris, J, 2008) - The court suggested a distinction between executive and non-executive directors, which owe lesser standard of care to the company. However, was changed by Daniels v Anderson by setting a landmark on director’s duty of care, skill and diligence under s 180(1) that all directors owe the same basic duties to the company, and the idea was confirmed by ASIC v Rich . - In reliance to the defense of delegating responsibility under s190 and 198D, the court applied the interpretation of Re City Equitable Fire Insurance Co. that the directors are...

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.
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