Level 7, 520 Collins Street, Melbourne Victoria 3000 | DX: 30855 Melbourne Stock Exchange Phone: (03) 9620 2001 | Facsimile: (03) 9620 2002 | ABN: 16 109 36 218 Web: www.mcpgroup.com.au [Incorporating The Fulfilment Company & Poynters Lawyers] STATUTORY AND COMMON LAW DIRECTORS' DUTIES - A SUMMARY Company "A director or other officer of a corporation must A Company is an association of a number of exercise their powers and discharge their duties: people with a common object. It is owned by (a) in good faith in the best interests of the Shareholders and managed by Directors. Once corporation ; and created it is an entity in its own right and has a (b) for a proper purpose." legal personality to do what a natural person can do. Therefore, a Company can sue and be sued Section 182(1) - Use of Position in its own right. "A director, secretary, or other officer or employee of a corporation must not improperly use their Director position to:- A Director is a person employed as an officer of (a) gain an advantage for themselves or a company and has a duty to perform the duties someone else; or of management of the business of the company. (b) cause a detriment to the corporation." Director's Duties Section 183(1) - Use of Information This summary deals with several main directors' "A person who obtains information because they duties found at Common Law and in the are, or have been, a director or other officer or Corporations Law. Directors’ duties derive from employee of a corporation must not improperly use three potential sources: - the information to:- • Those imposed by Statute, primarily the (a) gain an advantage for themselves or Corporations Law; someone else; or • Those developed by the Courts, particularly (b) cause detriment to the corporation." those duties arising from a director's fiduciary position; and Section 191(1) – Disclosure of Interest • Those that may be expanded upon or shaped “A Director who has a material personal interest in by the particular circumstances of a a matter that relates to the affairs of the company company, primarily by a Company's must give notice of the interest” Constitution or Replaceable Rules and other contracts such as Shareholders' There are various exceptions to this rule. Agreements. Common Law – Fiduciary Duties The Constitution or Replaceable Rules that apply Duty to Act in Good Faith to the Company have effect of a Contract The duty of good faith is owed by each director and between the Company and each member, is owed to the company itself, as a whole. between the Company and each director and Directors are required to act in what they honestly company secretary; and between a member and believe to be the interests of the company. In each other member, under which each person considering what is ‘in the interests of the will observe and perform the Constitution and company’, a director must have regard to the Rules insofar as they apply to that person. interests of the shareholders of the company and the interests of the company as a commercial Statutory Duties entity. The courts have also considered it proper to [Please note: these statutory duties can extend take into consideration the interests of the to beyond those with the official title of 'Director'.] company’s creditors. Section 180(1) - Care and Diligence Duty to Avoid a Conflict of Interest "A director or other officer of a corporation must A director has a duty to avoid conflicting his or her exercise their powers and discharge their duties own interests with the interests of the Company. A with the degree of care and diligence that a director is liable to account to the Company for any reasonable person would exercise if they: profit derived or to indemnify the Company from (a) were a director or officer of a corporation any loss arising from the director’s action. in the corporation's circumstances; and Additionally, the Company can choose to void any (b) occupied the office held by, and had the contract that the director entered into as a result of same responsibilities within the the conflict. corporation as, the director or officer." Duty to Exercise Power for a Proper Purpose Section 181(1) – Duty to Act in Good Faith A director must exercise his or her powers (a) remit the group tax or prescribed payments; conferred on them under the Company’s (b) enter into and comply with a payment Constitution or the Act for a proper purpose. agreement in relation to the company's liability Powers must not be exercised for an ulterior with the ATO (upon default of which, the purpose or for manipulating voting power. current directors are personally liable for the Company's obligations under the agreement); Duty to Retain Discretion (c) appoint an administrator to the Company under Generally, a director cannot contract as to how Part 5.3A of the Corporations Law; or they will vote at a future board meeting. A (d) begin to be wound up under the Corporations director can however, having entered into a Law. contract on behalf of the Company in the bona fide exercise of his or her duties, agree to take Directors of the Company will become personally certain action at a board meeting that is liable even if they were not appointed at the time necessary to carry out the contract. the liability was incurred. Insolvent Trading Defrauding Creditors Directors are now under a positive duty to ensure Directors' criminal liability for corporate actions that the Company does not incur a debt while leading to the defrauding of creditors can be insolvent. broken down into two parts:- • Criminal liability under State Crimes Act; and It will be the liquidator, rather than individual • Criminal liability under the Corporations Law. creditors, who will have the primary right to sue directors for insolvent trading with money Criminal liability under Crimes Act 1958 (Vic):- recovered by the liquidator being available for all • s81 - obtaining property by deception unsecured creditors on a pro rata basis. • s82 - obtaining financial advantage by Directors can also be criminally liable under the deception insolvent trading provisions of the Corporations • s83 - engaging in false accounting Law. Section 588G(3) of the Law provides that a • s84 – Where an offence committed by a person commits an offence if: Company under section 81, 82 or 83 is proved (a) the person is a director of the Company when to have been committed with the consent or it incurs a debt; and connivance of any Company director, manager, (b) the Company is insolvent at that time, or secretary or similar officer, or any person becomes insolvent by incurring that debt, or purporting to act in any such capacity, he as incurring at the time debts including that debt; well as the Company shall be guilty of that and offence and punished accordingly. (c) the person suspected at the time when the • s85 - directors intend to deceive creditors by Company incurred the debt that the false or misleading statements and/or Company was insolvent or would become publication insolvent as a result of incurring that debt or • Penalties may include imprisonment other debts (as paragraph (1)(b)); and (d) the person's failure to prevent the Company Occupational Health and Safety incurring the debt was dishonest. Crimes (Workplace Deaths & Serious Injuries) Bill 2001 creates new offences and penalties for Recovery action by the Australian Tax Office Criminal Manslaughter. (ATO) The ATO has made Director Penalty Notices Corporate Manslaughter can result in substantial (“DPN”), issued pursuant to section 222AOE of fines. Directors and senior officers can be the Income Tax Assessment Act 1936, part of imprisoned and also receive a fine. their enforcement activities. Directors of a Company which fails to pay its tax as it becomes A further offence of negligently causing serious due and payable are liable to pay to the injury is prescribed in the Bill. A Corporation can Commissioner of Taxation a penalty equivalent be fined and directors and senior officers may be to the unremitted amounts. imprisoned and fined $120,000. Prior to recovery of that penalty from the Trade Practices Act 1974 (Cth) ('TPA') directors, the Commissioner of Taxation must The TPA provides for directors to be criminally issue a written notice requiring the directors of liable for the actions of their corporations by virtue the Company to cause the company to do one of of Section 75B which acts as a 'secondary liability the following things within fourteen (14) days, provision'. Essentially this Section provides that a namely:- person, which would include a director, commits an offence under the TPA if they are in any way directly or indirectly knowingly concerned in, or party to, the commission of an offence against the statute. There are two requirements for a person to be 'knowingly concerned' in a contravention. First, they must have the requisite knowledge, and second, they must be concerned in the contravention. Environmental Protection Act 1970 (Vic) (EPA) Under Section 66B of the EPA, a director is liable if their Corporation contravenes, whether by act or omission, any provision of the EPA. Thus, as soon as the Corporation breaches the EPA, the directors are also criminally liable. It is possible, under the legislation, for the director to be prosecuted but not the Corporation. However, the general practice to date has been to charge the Corporation and the director with the proceedings heard together. Given that liability for directors under the EPA is strict, the key to the Victorian legislation is in the defences available to a director for contravention of the EPA. These are contained in Section 66B(1A), namely:- (a) the Corporation's contravention occurred without the director's knowledge; (b) the director was not in a position to influence the Corporation's conduct in relation to the contravention; or (c) the director, being in such a position, used all due diligence to prevent the contravention. Please call Mike Poynter or Shane Frost with any queries or request for further detail. DISCLAIMER This information sheet is a guide only and legal advice should be sought in individual circumstances. While every effort has been made to ensure the accuracy and appropriateness of the above information, neither MCP Group nor any of its officers, employees or agents accept any responsibility or liability for any loss occasioned by a person relying on the above information.