Australia: The responsibilities of becoming a director

The Corporations Act 2001

The obligations of directors are based on the fact that they hold a position of fiduciary responsibility to the company or organisation of which they are a director.

The primary obligations are:

  • Section 180(1) Corporations Act 2001 (the CA) imposes the obligation of acting with care and diligence1.
  • Subsection 180(2) deems an officer to have satisfied the requirements of S180(1), as well as the corresponding general law duty, where an officer has chosen to take or not take action based on an exercise of their judgment in:
    1. good faith and for a proper purpose2, and
    2. not for a material personal interest3, Though only in circumstances where:
    3. the officer informs themselves about the subject matter of the judgment to the extent he or she reasonably believes to be appropriate, and
    4. the officer rationally believes that the judgment is in the best interests of the corporation.
  • Section 181(1) requires officers to exercise powers in good faith for what they believe to be the interests of the Company, and for a proper purpose.
  • Section 182(1)(a) prohibits officers from acting in their position for the purpose of obtaining personal advantage for themselves or for another person4.
  • Section 183 requires directors to refrain from using information obtained in the course of their duties for the advantage of themselves or for another person5.
  • 1.1 Case Law

The care and diligence criteria found in Section 180(1) of the Corporations Act 2001 was discussed in ASIC v Vines where it was held that "each person appointed to a designated executive office is subject to objective statutory duties of care, skill and diligence measured by the degree of care, skill and diligence that a reasonable person in an equivalent executive position in the corporation would exercise in the corporation's circumstances6. It will be noted from this statement that the applicable standard is that of a reasonable person who is in the position of the director in the particular circumstances of the organisation. Thus, the standard of care required of a director will vary, though it is to be determined objectively.

It has been said that the standard of care required by the statutory duty is "no higher" than that required by the analogous general law duty7. Indeed, it has been said that the statutory duty is "essentially the same"8 as the general law duty.

Section 180(2) has been described as the "business judgement rule", which prevents a Court from enquiring as to the merits of a business judgement9. The components of Section 180(2) can be understood by reference to their general law meaning. For example, in Chew v R10, it was stated that the duty of good faith requires company directors to:

  • act honestly (and not misappropriate the company's assets);
  • exercise their powers in the interests of the company (and avoid misusing their powers); and avoid conflicts of interests11

The requirement of Section 182 to act other than for material self interest reflects fundamental fiduciary obligation. It was said of the precursor to that section that the impropriety that is prohibited by it "consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case"12 At its base, the Section confirms the long standing rule that directors cannot use the power conferred upon them to obtain some private advantage13.

1.2 Fiduciary duties and accountability
  1. Basis of a director's fiduciary duties and classes to which they may apply

As a broad statement of principle, it has been said that a precondition for a person to be a fiduciary is that they 'must first and foremost have bound themselves in some way to protect and or to advance the interests of another'.14 This description is appropriate to describe the responsibilities of directors, namely to protect and advance the interests of the Company or organisation of which they are a director. For a director to seek personal advantage to the disadvantage of the Company or organisation of which they are a director is necessarily contrary to that objective.

There are two fundamental duties that exist for all fiduciaries including company directors. In the context of corporations law;

  1. Directors may not profit from their position unless they have the Board's express informed consent.
  2. Directors have a duty to avoid any conflicts of interest between themselves and the Company of which they are a director.
  3. 1.3 Concept of material personal interest

Central to these obligations is the concept of "material personal interest". Section 191 of the Corporations Act requires a Director of a company who has a "material personal interest in a matter that relates to the affairs of the company" to give the other directors notice of that interest.

The expression is not defined in the Corporations Act nor is any of the component expressions such as "material" and "interest". Nonetheless, the expression was considered in Grand Enterprises Pty Ltd v Aurium Resources Ltd15. In determining that the relevant interests of the Director in that case did not have to be disclosed because they were "insubstantial and/or remote", Barker J, relied on an analysis of the expression undertaken by Murray J in McGellin v Mount King Mining NL16. In the McGellin case Murray J observed:

"Material in this context, I think, means that the interest involves a relationship of some real substance to the matter under consideration or the contract or arrangement which is proposed. In that way, the nature of the interest should be seen to have a capacity to influence the vote of the particular Director upon the decision to be made, bearing in mind that both the article and the section are concerned with that aspect of a Director's fiduciary duties which relates to the resolution of conflict of interest which must, of itself, be of a real or substantial kind. .... It is the substance of the interest, its nature and capacity to have an impact upon the ability of the Director to discharge his or her fiduciary duty which will be important" (emphasis added).
1.4 To whom are fiduciary duties owed/who can ratify a breach?17
  1. The defence of fully informed consent

The law provides a defence to an allegation of breach of fiduciary duty where the alleged breach was perpetrated with the "fully informed consent" of the Company. In Maguire v Makaronis it was said that:

"What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given.18
In the case of an organisation it is clear that the fiduciary must fully inform the organisation of "all the relevant facts"19. The defence will not be available where even one such fact has not been communicated20. Further, the relevant facts must be communicated such that individual members of the relevant [Board] such that they "fully understand" what they are concurring in21.

The question of whether information is "relevant" or "material" is, "in part, an objective one as to whether or not the information not available to the beneficiary is of relevance and of sufficient significance to the decision to grant consent, that that decision cannot be said to have been fully informed."22

Moreover the onus of establishing fully informed consent is on the director who owes the fiduciary duty. That is, the requirement of disclosure is not dependent upon the director's subjective assessment of the "materiality of the information" (or the need to make disclosure). Rather, it is to be adjudged objectively from the standpoint of other members of the Board of Directors. In short it is the director who owes the fiduciary duty who bears the onus of proving that there was "full and frank disclosure of all material facts".23

  1. Factors determining fully informed consent

Sophistication of those to whom the duty is owed

Despite the imprecision of the formula, certain factors are relevant in determining the fact of whether fully informed consent has been given. In Farah Constructions Pty Ltd v Say Dee Pty Ltd the High Court of Australia considered whether the "the sufficiency of disclosure can depend on the sophistication and intelligence of the persons to whom disclosure must be made." That is the obligation may be less strict where he Board of Directors is sophisticated but more strict where other members of the Board are less knowledgeable.24

Refraining from voting may not be sufficient

Further factors are relevant in determining the extent of the disclosure required, which will vary from case to case25. In Fitzsimons v R, a case in which the applicant was the director of a number of companies to which he owed fiduciary duties, Owen J considered the factors relevant in determining the extent of disclosure required. His Honour considered that "the minimum requirement will be disclosure of the interest" and continued:

"What action, above and beyond mere disclosure, the director must take will vary from case to case depending on the subject matter, the state of knowledge of the adverse information, the degree to which the director has been involved in the transaction, whether the director has been promoting the cause, the gravity of the possible outcome, the exigencies and commercial reality of the situation and so on. It may not be enough for the director simply to refrain from voting or even to absent him or herself from the meeting during discussion of the impugned business. The circumstances may require the director to take some positive action to identify clearly the perceived conflict and to suggest a course of action to limit the possible damage."26

Special obligation on a Director who conducts the day to day operations of an Organisation

A director may be permitted to merely disclose a conflict of interest or abstain from the relevant exercise of power, thereby remaining in their conflicted position as if at arm's length. In other circumstances, though, a director may be subject to more onerous requirements. It has been held, in the context of company law, that where "...the director conducts the day to day operations of the company or is otherwise possessed of knowledge relevant to the decision, which his co-directors do not possess, he may not be free to act in that way but may be obligated to act in a way which protects the interests of the company"."27

Director with special knowledge or appreciation of the relevant facts

Similarly, where a director has a better appreciation than their co-fiduciaries of the facts material to the wisdom of a particular transaction, a positive duty to protect the interests of the Company is occasioned28. In these circumstances, the discharge of duty requires that the conflicted director to "at least" takes steps to "ensure that the other directors appreciated the potential harm inherent in the transaction."29 It is insufficient in such circumstances to merely declare the existence of a personal interest or special knowledge30.

Wilful blindness no protection

In Permanent Building Society (in liquidation) v McGee31, it was a director who knew of the financial state of another entity (owing to his substantial shareholding therein) to which the company loaned money was under a positive duty to disclose that knowledge. A fiduciary will not escape this more onerous obligation if they are not "possessed of knowledge" merely because of wilful blindness as to the relevant facts32. A director cannot "avoid that duty by, metaphorically speaking, burying his head in the sand while his co-directors discussed" enter into a "potentially detrimental transaction."33

Extent of Power and influence relevant

In Permanent Building Society (in liq) v McGee it was further suggested that the "power and influence" of the director over the board and the capacity of that director to "prevent the transaction" cast upon him a positive duty to prevent the transaction34. Thus, the relative influence and power of a director will further determine the extent of disclosure required, and indeed may impose a duty upon a fiduciary beyond mere disclosure. The fiduciary may, for example, be required to ""point out steps that could be taken to reduce the possibility of that harm"35 or even, as indicated, take positive steps to prevent the exercise of the power in a particular way36.

Timing of disclosure

The timing of purported disclosure may also be of relevance. If by failing to disclose the relevant facts at a particular time a director "sets the course" for the transaction or exercise of power that is said to be in breach of fiduciary duty, they are unlikely to escape liability by making that disclosure at a later time37. Finally, "the gravity of the possible outcome" of the exercise of the power alleged to occasion the breach of fiduciary duty will affect the extent of the disclosure required to ground a defence of fully informed consent38.

  1. Ratification of breach of fiduciary duties of Directors

A breach of fiduciary duty may be ratified or approved either retrospectively or even prospectively (in the case of a planned breach) provided certain conditions are met.

Where there has been a breach of fiduciary duty, or where a breach of fiduciary duty is proposed, provided that there has been full and frank disclosure, it is possible to be ratified by the Board or by a general meeting of shareholders, depending upon the person who is involved in the breach.

In Queensland Mines Ltd v Hudson, the Privy Council confirmed that it is possible for the board to ratify the decisions of a single director, provided that there has been full disclosure. It may not however be possible to notify a breach of duty committed by an entire Board (Regal (Hastings) Ltd v Gulliver).

There are limits upon the extent to which the general meeting can ratify breaches of duties of directors, especially when a corporation is in serious financial difficulty. Justice Santow in Miller v Miller summarised the circumstances in which ratifications would not be available:39

  1. Where it constitutes fraud on the minority40
  2. Misappropriation of company resources41
  3. Entered into by an insolvent company to the prejudice of creditors42
  4. Defeated a member's personal right43
  5. Where the majority in the general meeting acted for the same improper purpose as the directors44

Footnotes

1Section 180(1) of the Corporations Act 2001: ASIC v Vines (2003) 48 ACSR 322; Company, Corporate & Securities Law, Australian Corporations Commentary, OFFICERS AND EMPLOYEES , DIRECTORS' AND OFFICERS' DUTIES , Other duties , [¶42-710] Duty of care and diligence.
2 Sections 180(2) and section 181(1) of the Corporations Act: Chew v R (1991) 5 ACSR 473.Also see a useful discussion generally in Company, Corporate & Securities Law, above n3 [¶42-220] Equitable duty of good faith and in the interests of the company.
3ss180(2)9b) of the Corporations Act 2001. See also Mills v Mills [1938] HCA 4; (1938) 60 CLR 150 (17 February 1938) and Hindle v John Cotton (1919) 56 Sc.L.R625.
4 s 182(1) (a) of the Corporations Act. Fundamentally it confirms that directors cannot use the power conferred upon them to obtain some private advantage: Mills v Mills above.
5 This obligation reflects s183 of the Corporations Act.
6ASIC v Vines (2003) Supra; Company, Corporate & Securities Law, Australian Corporations Commentary, OFFICERS AND EMPLOYEES , DIRECTORS' AND OFFICERS' DUTIES , Other duties , [¶42-710] Duty of care and diligence
7 Redmond, P. Corporations and Financial Markets Law (6th Ed), Sydney, Thomson Reuters, 2013, p. 432.
8 ASIC v Rich (2009) 75 ACSR 1 per Austin J at [7254].
9See generally Redmond Supra, pp. 457-463.
10 (1991) 5 ACSR 473
11 See useful discussion generally in Company, Corporate & Securities Law, above n3 [¶42-220] Equitable duty of good faith and in the interests of the company
12Byrnes v R (1995) 183 CLR 501 at [514] per Brennan, Deane, Toohey, and Gaudron JJ; See also: Hindle v John Cotton (1919) 56 Sc.L.R.625
13Mills v Mills (1938) 60 CLR 150
14 Finn P, Fiduciary Obligations (Law Book Co, 1977).
15[2009] FCA 513 (28 May 2009)
16(1998) 144 FLR 288
17 This section is based substantially on a lecture presented by my colleague, Selwyn Black to the University of NSW Law School in September 2014.
18 Maguire and Anor v Makaronis and Anor (1997) 144 ALR 729, per Brennan CJ, Gaudron, McHugh and Gummow JJ at 739.
19 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399.
20Fyffes Group Ltd v Templeman [2000] 2 Lloyd's Rep 643 at 668–70
21Re Paulings Settlement Trust [1962] 1 WLR 86 quoted with approval in Maguire (supra).
22Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97 per Spiegelman J at 122.
23 New Zealand Netherlands Society "Oranje" Inc v Kuys [1973] 1 WLR 1126 per Lord Wilberforce at 1131–1132, quoted in Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499; 10 ACLR 197 at 202.
24 Ibid.
25 Phipps v Boardman [1967] 2 AC 46 at 124 per Lord Upjohn; Fitzsimmons v R (1997) ACSR 355, per Owen J in the Court of Appeal of WA at 358.
26 Fitzsimmons supra
27 Centofanti v Eekimitor Pty Ltd (1995) 15 ACSR 629 per King CJ at 632
28 Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260, at 289-90; See also: Australian Breeders Co-operative Society Ltd v Jones & Ors (1998) 16 ACLC 100.
29 Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187: Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260, 289-90:
30 Groeneveld Australia Pty Ltd v Nolten (No 3) (2010) 80 ACSR 562 at 577 per Davies J.
31Permanent Building Society (in liq) v McGee supra.
32 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398.
33 Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 161.
34 Permanent Building Society (in liq) v McGee supra at 289-90; see also ASIC v Adler and ORS [2002] NSWSC 171 at [735] (upheld on appeal to the NSW Court of Appeal).
35Permanent Building Society v Wheeler Supra; see also Fitzsimmons v R (1997) ACSR 355, Owen J in the Court of Appeal of Western Australia stated (at 358)
36ASIC v Adler, supra; Permanent Building Society (in liq) v McGee, supra at 289-90:
37 Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213, at [672] (reversed on appeal to the High Court of Australia).
38 Fitzsimmons supra per Owen J in the Court of Appeal of W A at 358:
39 Miller v Miller (1995) 16 ACSR 73 at 89.
40 Ngurli Ltd v McCann (1953) 90 CLR 425.
41 Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791.
42 Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722.
43 Residues Treatment & Trading Co Ltd v Southern Resources (No 2) (1988) 14 ACLR 396.
44Ibid.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.