Melbourne University Law Students’ Society
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Subject: LLB Corporations
Subject code: LAWS30001
Tutorial number: 6
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Date: 11 May 2011
Duties to act in good faith and for a proper purpose – s 181(1)(a) and (b)
Split into two duties: good faith and proper purpose, though they are sometimes amalgamated (as in Ngurli).
Duty to act in good faith (s 181(1)(a))
Directors must exercise their powers bona fide for the benefit of the company as a whole
Applicable to directors and officers
Usually enforced leniently, unlike proper purpose.
BONA FIDE
Subjective intent
Bad faith isn’t necessarily dishonesty, or every breach of s 181 would also be a breach of s 184
Self-interest always destroys a claim of bona fides (Howard Smith v Ampol)
Remember the judicial reluctance to interfere in management decisions (though s 180(2) (BJR) is
inapplicable here)
BENEFIT OF THE COMPANY – COMPANY’S INTERESTS
Objective
Courts generally defer to director’s opinion unless a 3rd party’s interest has been wrongly considered
The interests of the company are the financial interests of existing members (Greenhalgh; Ngurli)
Where shareholder interests are divided, ask what is fair as between classes (Mills v Mills)
Not future members, but the future interests of existing members may be considered
Not employees, though if being charitable to employees is indirectly in the interests of members, that
is permissible (read Parke v Daily News - charity cannot “sit at boards of directors qua charity”; it can
only do so as charity in the interests of those who practice it)
Creditors where the company is insolvent/nearing insolvency, but this is not a duty owed to creditors
(Sycotex v Baseler)
Group members - we use the strict Walker approach discussed earlier
Section 187 provides that a director of a wholly-owned subsidiary is taken to act in good faith in the
best interests of the subsidiary where the subsidiary’s constitution expressly authorises him to act in
the best interests of the holding company (keep s 588G in mind as well).
Duty to act for a proper purpose (s 181(1)(b))
Directors must act for a proper purpose
Applicable to directors and officers
Usually enforced strictly
TEST
What are the purposes for which the power may be exercised?
For what purposes were the power exercised in the particular case? (from Howard Smith v Ampol)
Purposes for which the power may be exercised – Ford’s at 8.210
Look to the company constitution, the size and nature of the company (a small company with
director-shareholders may have directors with much more power than large, listed companies) and
modern conditions
Consider in particular the valid and invalid purposes for issuing shares – read Ford’s at 8.210.
Actual purpose for which powers were exercised – Ford’s at 8.230
Directors should ensure their action is “tied to some credible and properly prepared financial or business
objective”, preferably supported by expert advice canvassing all options (Howard Smith).
Give credit to the bona fide opinion of a director and respect their judgment (Howard Smith).
Have regard to the circumstances surrounding the decision (Hindle v John Cotton).
Where dealing with a collective, look to the substantial purpose of the majority directors (Harlowe’s
Nominees), though usually there will be a collective reason.
Mixed purposes? Look for the “substantial object the accomplishment of which formed the real
ground of the board’s action” (Mills v Mills).
Consequences of breaching either s 181(1)(a) or (b)
Transaction is voidable, depending on the presence/absence of notice of the third party (Whitehouse)
Section 181 is a civil penalty provision, penalising the directors; s 181(2) imposes civil penalties on
those who are involved.
Reckless/dishonest breaches of s 181(1)(a) and (b) are criminal offences (s 184)
Duty to avoid conflicts of interest – conflicts and profits rules – equity; s 191;
182(1) and 183(1)
A director owes fiduciary duties to the company
Fiduciary duties to shareholders may also arise independently (Coleman v Myers)
WHO OWES THE DUTIES?
Equity applies to
o Executive and non-executive directors
o Senior executives (Canadian Aero Services v O’Malley) but probably not ordinary employees
Statute – refer to each provision
CONFLICT RULE:
In equity – read Ford’s from 9.057
Directors must not have a personal interest/inconsistent engagement with a third party except with the
company’s informed consent
Is there a real sensible possibility of conflict? (Hospital Products; The Bell Group)
Ask – is the conflict duty/interest or duty/duty?
Is the interest such that a reasonable person would think there is a real or substantial possibility of the
director being swayed by it? (The Bell Group)
Current approach is a practical one – focusing on the directors’ actions in conflict situations. Not putting
oneself in them is merely a “counsel of prudence” (Hospital Products)
o Cf old approach – no conflict allowed at all (Bray v Ford)
o What may Ds need to do? (disclosure at a minimum, not voting, resignation)
Look out for attenuation under the constitution (read Ford’s at 9.120)
Under statute – read Ford’s 9.125 - 9.190
Criminal offences
Applicable to directors only
Read s 191 and 195
PROFIT RULE:
In equity – read Ford’s 9.220 – 9.280
Directors must not misuse their position for their own/a third party’s possible advantage (except with
informed Co. consent) & must account to the Co. for any gain made in connection with their office
Diversion of corporate opportunities – Cook v Deeks. Note the issues regarding:
o if the company’s inability to exploit the opportunity matters (inability cf lack of desire to)
o private/fiduciary capacity (see Peso)
o fairness to the company (irrelevant – Regal (Hastings))
o resignation to exploit opportunity (may still be precluded)
Under statute – read Ford’s at 9.280
Civil penalty provisions; criminal if there is dishonesty and intention/recklessness (s 184)
Applicable to directors, secretaries, officers and employees
s 182(1): improperly using position to gain/damage company
s 183(1): improperly using information to gain/damage company
Consequences of breach – read Ford’s at 9.288. For the relationship of ss 182 and 183 to other fiduciary
principles, read Ford’s at 9.290.