Re city equitable fire insurance co ltd 1925 ch 407

LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TUTORIAL TOPIC 5.1

Directors’ duties Activity 5.1.4 Activity 5.1.5

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Activity 5.1.4

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Activity 5.1.4

• The question raises the general issue of the power of the board versus the power of the general meeting.

•  Does the general meeting have power to tell the directors how to manage?

•  The answer under replaceable rule 198A is NO - the management power is vested in the Board, not the General Meeting.

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Removal of a director. • Only the company in general meeting (not the directors) can remove a director from office under section 203D and section 203E (Cash is a public company)

• A director in Cash Ltd may be removed by resolution section 203D(1) but notice must be given and director must be informed and have opportunity to state their case - see section 203D subsections (2) - (6)

• A director of a public company cannot simply be removed by the other directors – section 203E

• Even if it had been done correctly under section 203D this does not avoid any contractual or industrial liabilities to the director

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Activity 5.1.4

• Despite the fact that normally the general meeting does not have the power to direct the board, they certainly do have the power to dismiss it under section 203D risk faced by directors who ignore the membership.

•  The director cannot be dismissed by fellow directors sections 203D, 203E thus dismissal is invalid.

• Actions such as defamation might be available.

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Activity 5.1.4 •  In dismissing unlawfully are the directors following

their statutory obligations in section 181 or their contractual obligation to follow the constitution under section 140?

• Have they used their fiduciary powers unlawfully?

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Activity 5.1.4 •  Section 232 cannot be used to override an article of

the company vesting power of management in the directors without some evidence that the directors have acted unfairly oppressively etc under s 232.

•  For students wanting more - see the discussion on the link between an earlier version of section 232 and the directors broad power to manage in Wayde’s case.

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Activity 5.1.4 •  Their unlawful dismissal of the director may be some

evidence but it is unlikely the courts will implement a decision of the general meeting which breaches the articles.

•  The courts are likely to take the view that the remedy of dismissal of the board lies in the general meeting.

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Activity 5.1.4 •  There can be oppressive conduct of board

meetings, (such as decisions for the benefit of related companies rather than shareholder in the company)

•  The issue of whether section 232 will apply to cases where there has been an improper use of management powers (as is the case) will focus on the conduct of the directors

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Activity 5.1.4 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 [704] (Young J) relevant test : The inquiry as to whether it can be said, after account has been taken of the nature of the business carried on by the company and the nature of the relations between its participants, that the impugned conduct could be seen to be, objectively in the eyes of a commercial bystander ... so unfair that reasonable directors who consider the matter would not have thought the decision fair. In other words, a plaintiff has to prove conduct that, considered in light of all of the relevant circumstances, is inequitable or unjust; Wayde v NSW Rugby League Ltd [1985] HCA 68; see also Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153 Brereton J

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Activity 5.1.4

Some examples of directors conduct found to constitute oppression have included: the repeated or persistent failure to hold meetings of directors or members which are required to be held or to allow proper discussion at meetings Shum Yip Properties v Chatswood Investment [2002] NSWSC 13 [205] (Austin J).

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Activity 5.1.5

Activity 5.1.5 There is a lot in this question! •  Failure to pay dividends •  Remuneration of directors •  Sale of hotels and change in company’s business • Appears the two directors (Harrison and Whitelaw)

holding profits in company to build up value in company, then to sell their shares.

• Might be seen as oppressive towards other members - likely breach of section 232

• Have the directors breached their fiduciary duties to the company in causing the sale of the shares?

• Were they acting in their own interests or in the best interests of the company?

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Failure to pay dividends • Oppression •  Resolution not to make a declaration of dividends

without anything further is a legitimate management decision; Wayde v NSW Rugby League

• Quality of the management decision-making difficult to defeat under oppression provisions; section 232 (but not impossible).

• Court generally reluctant to substitute its views for a management decision

• Needs to be some form of evidence to get past the management prerogative

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Failure to pay dividends may constitute oppression or unfairness when taking into account: •  history of the company, • extent of its financial needs •  reasonable expectations of its members Roberts v Walter Developments (1997) 15 ACLC 882

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Remuneration of directors Authorisation for directors’ remuneration: •  general meeting, •  Trans National’s CC •  statutory authority. Section 202A (RR) provides for directors' remuneration by resolution of the company.

• Remuneration discovered by private inquiry. ?> no informed consent by way of the general meeting. • CC may allow for directors to determine their own remuneration . •  If no authorising instrument can be found, then the extra remuneration must be repaid to the company

• See also Ch 2E sections 208, 211, 228

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Activity 5.1.5

Check and apply General law directors’ duties • care & diligence •  Esp fiduciary law (good faith & loyalty) Statutory law directors’ duties •  Section 180 care & diligence •  Section 181 good faith & loyalty •  Section 182 good faith & loyalty – use of position •  Section 183 good faith & loyalty – use of

information •  Is there insider trading? (see Part 7.10 Div 3.)

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Overview of directors’ duties; Text p 239.

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Directors’ Duties Directors’ duties are divided into two broad groups 1. the duties of loyalty and good faith; & 2. the duties of care and diligence. Directors’ duties are governed by: •  the general law • Corporations Act - esp sections180-184 & 588G

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1(a) Directors’ Duties of loyalty and good faith; general law Directors owe duties of good faith and loyalty because they are in a “fiduciary relationship” with their company. A fiduciary relationship exists where: • a person (eg, a director) is appointed to or assumes to act;

•  for the benefit of another person (eg, company);

•  in circumstances where the appointment gives the appointed person powers which could be exercised to the detriment of the other person (eg, company).

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Directors are fiduciaries. ‘A fiduciary relationship is the relationship between a person in a position of trust, (the fiduciary), and the person for whose benefit the fiduciary acts (the principal)’ Directors of a company are in a fiduciary relationship with the company Mills v Mills (1938) 60 CLR 150, 185 (Dixon J)

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Classification of fiduciary duties

The general law impose duties – recognised under the equitable principles as: • a duty to act bona fide in the interests of the

company. • a duty to exercise powers for their proper purposes. •  to retain discretionary powers • a duty to avoid conflicts of interest.

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Fiduciary duties

No conflict (a) the conflict of interest rule: (b) the conflict of duties rule: (c) the misappropriation rule: No profit/gain (d) the profit rule: (e) the business opportunity rule: The Bell Group v Westpac [No 9] [2008] WASC 239

[4496] (Owen J) citing Austin, Ford and Ramsay, Company Directors, Principles of Law and Corporate Governance (2005)

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Duty to act in good faith in the interests of the company

• Duty requires directors to act ‘bona fide’ [in good faith] and to act in the best interests of the company.

• Directors also owe a duty to avoid actual or potential conflicts of interest. The duty is a strict one.

• Director may breach the duty even though he or she acts honestly and does not stand to make profit.

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Remedies for a breach of fiduciary duty

•  If director breaches a fiduciary duty and makes a profit - director is accountable for that profit to the company irrespective of whether the company suffered any loss; see Regal (Hastings); Furs Ltd v Tomkies.

•  The company may also be able to seek imposition of a constructive trust on a third party who assists the fiduciary with knowledge of the breach

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1(b) Statutory Duties sections 181-184

Section 181 requires a director or other officer to act in good faith in the best interests of the coy & for a proper purpose in the exercise of their powers and the discharge of their duties The expression ‘improper purpose’ refers to an abuse of power or the doing of an act which the person in question has no authority to do R v Byrnes (1995) 13 ACLC 1488

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Improper Use of Information & Position

•  Sections 182 and 183 supplement the general law fiduciary duty to avoid conflicts of interest

•  Section 182 > director of a company must not make improper use of their position to gain an advantage for themself/someone else or to cause detriment to the corporation

•  Section 183 > director of a company must not make improper use of information to gain an advantage for themself/someone else or to cause detriment to the corporation

•  Sections 182 & 183 exhibits similar terminology by the use of ‘improper use of’ information or position and to ‘gain an advantage for themselves or to cause detriment to the corporation’

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Civil and criminal provision

•  Sections 180 -183 are civil penalty provisions •  Further, a criminal offence is committed re the duties

not to misuse information or position if the misuse is dishonest or reckless section 184

•  See ASIC v Adler (No3) (2002) 20 ACLC 576 - a case on the effectiveness of civil penalties involving serious breaches of directors’ duties

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2(a) Duties of Care & Diligence; general law

•  Treat the requirements of ‘care’, ‘skill’ and ‘diligence’ as overlapping requirements.

•  Re City Equitable Life Insurance Co Ltd [1925] Ch 407 set a standard of care to be expected of directors which was not burdensome (see now Daniels v AWA)

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Summary of duty of care & Skill; Text p 273

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Reasonable Care

• Objective standard of care • Standard of care expected - depends on specific facts of case and varies depending on the size and business of company and knowledge, experience and skill of director

• See text p 321

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Skill set

• Director should have some basic competency skills to undertake their duties

• For example, directors are expected to understand the company’s affairs including the financial statements and financial affairs

• See text p 324

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What is ‘diligence’?

Directors to monitor and guide the management of the company Daniels v Anderson (1995) 37 NSWLR 438, 501 Including: • attendance at board meetings • basic understanding of the business of the company

• keeping informed about company’s financial and general affairs

See text p 333

Duty of care Elements of liability • Care •  Skill • Diligence Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Section180(1) provides the statutory duty of care of a director: ‘degree of care and diligence that a reasonable person would exercise’

Section 180(1) = civil obligation only Breach of other directors’ duties may cause criminal liability; section 184

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Activity 5.1.5

•  Note sections 180-183 are civil penalty provisions •  Breach of civil penalty provisions > section1317E and

via ASIC seek pecuniary penalty order section 1317G • disqualification order re H and W section 206C • court may order compensation order section 1317H • company may apply for compensation order where

director has contravened civil penalty provision section 1317J(2)

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Activity 5.1.5 • General law –common law + equity section 185 •  H and W owe fiduciary duties to the company Percival v Wright [1902] 2 Ch 421.

• H and W (as fiduciaries) cannot retain a profit or benefit that has been obtained following a conflict of interest and/or a breach of fiduciary duty Hospital Products

• Court could impose a constructive trust (Boardman v Phipps) over the benefit/gain and remedy by disgorging the benefit back to the company

• H and W may have to account of profit to the company Cook v Deeks; Regal (Hastings) v Gulliver

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Activity 5.1.5 •  The focus here is on directors' duties and members'

remedies. Foss v Harbottle please be aware that the statutory derivative action provisions now override the general law regarding derivative actions section 236(3)

•  Foss v Harbottle as it relates to the proper plaintiff rule and its exceptions has been abolished by section 236(3)

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Members’ Remedies

Corporations Act — (Standing; Grounds, Orders)

Oppression sections 232-234 Statutory derivative action sections 236-242 Winding up section 461 Injunction section 1324 procedural irregularities section 1322

Activity 5.1.5

•  Does the statutory injunction section 1324 apply? •  Section 1324 confers power on certain persons to

restrain conduct that is in contravention of the Corporations Act by way of an injunction.

• Court also has power to award damages section 1324(10)

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Activity 5.1.5

• Could the company be wound up on the failure of substratum ground? see Tivoli Freeholds and section 461(1)(k)

•  Is this case where the court might allow a representative action under sections 236/237?

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Activity 5.1.5

•  Note also re evidence gathering •  Sam as a member may apply (in good faith and for a proper purpose) to the court to make an order authorising him to inspect the company’s books under section 247A - note also section 247D (RR)

•  Re general meeting re resolution not to make declaration of dividends. Note company must take minutes section 251A

• member (Sam) has access to minutes section 251B and can inspect and request copies sections 251B(1) + (2)

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