This is an extract of our Directors' Duties document, which we sell as part of our Company Law Notes collection written by the top tier of University Of Otago students.
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Company Law Section Three: Directors' Duties Good Faith: s131 duty of good faith, and acting in the best interests of the company (what the director believes it to be)
- Subjective test
- Business judgement role, recognises that all business involves risk, and confers discretion upon directors
- Courts will not review business decisions unless there is evidence that they have been made in bad faith. Hedley:
- Involved some investment plans, which would create a number of companies, who would buy office blocks.
- The income from tenants would pay the dividends of the shareholders.
- Ultimately, the companies failed.
- Shareholders seeking leave for direction that the liquidators sue for breach of s131 Court accepts the statutory test is subjective, but places an objective gloss on it. Imports factors that the directors should have considered: Find all available options, assess the options, compare each option. There was a conflict of interest between directors of original company, and their role as directors of the new companies, which meant they could not make a proper judgement as to what was in the companies' best interests. The court held that even if the directors disclosed the conflict, it would not be enough. Robb v Sojourner: s131 breach of duty of good faith.
- Aeromarine 1 building fibreglass boats, contracts with Hislop and Sojourner.
- Difficulties with completing the contracts: They would lose a considerable amount of money if they were to complete them.
- Sometimes companies find that one part of their business is not profitable - they try to get rid of it to keep the rest of the business up.
- Sold Aeromarine 1 to Aeromarine 2 to avoid liability from Sojourner "no real allowance for goodwill" "if the sale to Aeromarine 2 was for "fair value" then Aeromarine 1 suffered no loss" "Look at the situation which would have resulted if Aeromarine 1 had been acting independantly of Mr and Mrs Robb" s131 has both subjective and objective standards. The standard does not allow a director to discharge the duty, if their belief rests on "wholly inappropriate" appreciations as to the best interests of the company. s301 "discretionary terms" "covers a wide range of possible causes of action". S301 can look beyond corporate form, and look to sue persons beyond the company (directors, managers etc.) Liquidator, creditor, shareholder can apply to the court that the director pay anything taken or lost, contribute money to the company, or order a payment to a creditor. "No immediate cash flow difficulties", thus there was time "for an ordinary sale of the business at arms length".
The directors did "not have a simple liquidation option" If the goodwill of Aeromarine 1 had been paid, its creditors would have been paid in full. The directors had an inherent conflict of interest - self dealing prohibition. S141 regulates transactions with "interested parties" requires full disclosure and "fair value" be given. They should have obtained a valuation of the business. This reinforced the view from Hedley that the court can review the directors decisions, and whether they were in the company's best interests. The Directors based their defence on s138 - advice from an accountant that they relied upon. The court said good faith in s131 is different from good faith in s138 - good faith in acting on the advice/report/information. Court found that the accountant hadn't given any real advice, so s138 didn't apply. Albany Power:
- Directors breached s131 Distinction between fiduciary duties and tortious duties. (Daniels duty of care tortious) Only liable for loss caused to the company. S131 different to s137, in that s131 the director is liable for all gains and losses. Proper Purpose: S133 powers to be exercised for a proper purpose, introduced by law comission. If a trustee is granted power, they can only use that power for the purpose intended.
- If not, it is a fraud on the power
- s133 codifies the common law duty s134 directors to comply with the Companies Act and the Constitution of the company. If we have this section, why do we need any of the other duties?
Duty of Care: S137 directors duty of care.
- Traditionally, shareholderrs in a general meeting chose directors, and if they chose bad ones that was their problem. Re City Equitable:
- Directors required to act honestly
- "Gross negligence" Duty of care reduced even further, as courts were taking a very subjective approach on what directors considered reasonable. Directors weren't turning up to board meetings, or delegating anything to employees. Directors not bound to give continuous attention to the company's business, and can delegate.
- This is no longer the case! It is recognised now that directors have a duty of care. Shell Petroleum: Reinforced the business judgement rule (courts will not interfere). Daniels v Anderson:
- Recognised duty of care, and for some directors a duty of skill.
- AWA suffered significant foreign exchange losses
- Auditors were sued for failing to pick up mistakes, and they cross claimed saying the directors had breached their duty of care.
- Daniels claimed a special skill, had special responsibilities. He was the chairman of directors, responsible for performance of the board. The courts upheld the auditors claim. "Failed to exercise a reasonable degree of care" "the source of a duty of care at common law rests in the relationship of proximity" "duties of a director were owed to the company", "derived from the duties of a trustee" "the directors duty is not to take all possible care, but a degree of care, reasonably expected from a person of the director's knowledge and expertise." "a director is not bound to give continuous attention to the affairs of the company... can pay intermittent attention" "May not shut their eyes to corporate misconduct" "Responsibility of ensuring he or she understands the nature of the duty... vary according to the size of the company, and the experience or skills that the director held himself out to have in support of appointment to the office." The duty depends on the circumstances, and what is required is going to depend on the company itself. Key Aspects of Duty of Care:
1. All directors should acquire a rudimentary understanding of the company's business
2. Should keep informed
3. Should be continually monitoring the company's business affairs
4. Maintain familiarity with the company's finances
5. Can't rely on statements from executives, have to do their own enquiring s130(2) Liability of directors who have delegated. Board is responsible unless: (a) Believed on reasonable grounds at all times before the exercise of power that the delegate would exercise the power in conformity with directors duties; and (b) has monitored, by means of reasonable methods properly used. S138 use of information and advice: Delegated gathering of information to person who provides advice. Director may rely on advice given by specified persons: (a) employees who director believes on reasonable grounds to be reliable and competent (b) professional advisors in relation to which matters the director believes on reasonable grounds to be within the person's professional competence (c) any other director or committee of directors upon which the director did not serve s138(1) only applies if the director: (a) Acts in good faith (b) Makes proper inquiry where the need for inquiries is indicated by the circumstances; and (c) Has no knowledge that such reliance is unwarranted Alexander v De Lacy:
- Securities Act 1978
- Excluded liability unless the person had been negligent s137(b) nature of the decision (bigger decision needs more skill/care)
s137(c) position of the director (executive or non executive) Dovey:
- Duty of care depends on whether the director is executive or non executive Fletcher:
- Rejected non executive director owed duty of care Vines (2003):
- Chief financial officer
- "Reasonable director in like position"
- Executive directors will also be employees, under contract, in contract will be duty of skill.
- Distinguished between executive and non executive directors
- Objective degree of care/dilligence, special skill that has been brought to such an office
- "Identifiable specialised skill" (2005) Added 3 qualifications:
1. In deciding the directors position, focus on exactly what they do, not their title.
2. Look at the whole of the position occupied by the defendant.
3. Recognise that some positions are unique, no standardised office. "Special and unique responsibilities" Judge by what a reasonable person with those speical and unique responsibilities would have done. Wise:
- Directors are not perfect, perfection is not demanded. They are only required to make reasonable business decisions. Re Australasian Venezolana:
- Director started making decisions before fully acquainted with the company. Wright:
- Board appointed a personal loan to one of the directors
- No possible benefit to the company
- Reasonable director would not have made this decision Dorchester Finance:
- Company cheques had to be signed by a couple of directors
- 1 director signed them all blank, the other director turned out to be a rogue Paape v Fahey:
- Securities Act
- Shares in a company to be formed, must specify minimum amount to be sold.
- If not satisfied, statutory duty to return money. Strict liability, unless failure to do so is not due to ones own negligence.
- Promotor agreed to buy, said unconditional. Promoter did not buy. Court held directors negligent, personally liable. Reasonable director would have sought confirmation of payment before confirming subscription. Commissioner of Taxation v Clark:
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