Directorial Duties in Australia
Discuss about the Company and Securities Law.
In a corporate organization, directors are conferred with the responsibility to manage the functions of the company they are expected to act in the best interest of the company with the sole objective to promote success of the organization, thus, ensuring its shareholders earn gain. However, several controversies have arose surrounding the issue that apart from ensuring best interest of the shareholders, whether the directors are obligated to act in the best interest of the stakeholders as well[1]. In Australia, pertaining to this issue, there were debates whether the Corporations Act 2001 (Cth) required to be amended to address the issue. However, it was concluded that the duties of the directors set out under section [181] of the Act were flexible enough and did not require any amendment[2]. On the contrary, in the UK, in order to the issue regarding duty of the directors to ensure best interests of the stakeholders apart from the shareholders, the Companies Act 2006 (UK) (Companies Act) was enacted. It stipulated the directorial duties under section [172] of the Act[3], which made it mandatory for the directors to ensure best interest of the stakeholder along with the shareholders.
This essay will assess whether the Australian review were correct or should the country amend section [181] of the Corporation Act 2001 and adopt the provision of section [172] of the Companies Act[4]. To do so, the essay shall discuss about the directorial duties in the context of shareholder and stakeholder’s interest and explain the phrase ‘best interest of the company’. Through the above discussion, it will be established that directorial duties stipulated under section [181] are adequate and adoption of section [172] of UK legislation will only add unnecessary complication to such duties.
In order to assess whether the present Australian legislation on the statutory duties of the directors under section [181] of the Corporations Act (CA) requires amendment, it is important to comprehend the directorial duties[5]. In majority of cases, the directors of an organization is responsible to carry out the managerial functions of the company and in Australia, this power has been conferred upon the directors by the CA as well as by the Constitution of the company. As per section [198A] of the Corporations Act 2001, which is a replaceable rule, confers upon the directors to manage the company activities and regardless of it being a replaceable rule, similar provisions had been stipulated by several company constitutions where such duty has been assigned to the company directors[6].
Directorial Duties in the UK
The power to carry out the business functions conferred upon the directors is wide and is paramount as was reaffirmed in Howard Smith Ltd v Ampol Petroleum Ltd [1974][7] by the Privy Council where the directors were empowered to make decisions against the wishes of majority shareholders. The power to manage the company functions conferred upon the directors is wide enough to supersede any resolution of the members as was established in Imperial Hydropathic Hotel Company Blackpool v Hampson [1882][8]. However, this does not imply that the decisions made by the directors cannot be challenged because the directors are imposed with certain obligations owing to the immense power conferred upon them. Since the shareholders delegate the managerial powers upon the directors, the directors primarily obligated to ensure best interest of the shareholders. Therefore, the shareholders are empowered to challenge the directors.
Further, Barker (2016) states that the company is also obligated to discharge its common law duties to the company under tort law and contract law. Furthermore, directors also owe fiduciary duties to the company and generally, the directors are required to act for a proper purpose as well as in the best interest of the corporations. Moreover, in the event of breach of directorial duties, several remedies exist for company against such breach even if the company has not suffered any actual loss[9]. The duties of the directors are set out within section [180-184] of the CA. The directors are obligated to safeguard the shareholders who entrusts their interest upon the directors hence, any breach will hold the directors liable. In addition to the general law, which requires the directors to act in the best interest of the shareholders and company, section [181] of the CA stipulates that a director must discharge their duties and exercise their power in good faith and best interests of the company for a proper purpose.
Here, it may be deemed that ‘corporation’ in this context is construed as the ‘shareholders’ of the company. However, there are certain circumstances, which signify that the directors may not always owe their duties to the company only as was observed in Coleman v Myers [1977][10]. Such circumstances include insolvency of the company, when the directors usually consider the interest of the creditors instead of the shareholders. In Re Smith & Fawcett Ltd [1942][11], the court held that in case of breach of section [181] of the CA, the director may use the defense that while taking decisions, it believed in good faith that such decision will promote best interest of the company. Since the courts do not intrude in business decisions taken by the directors, hence, while determining any breach of the directorial duties, the court shall consider whether the discretionary power exercised by the directors were bona fide and they believed such powers were used for the best interest of the company.
Comparison of Directorial Duties in Australia and the UK
According to Broderick and Melissa (2015), the Australian corporation law unambiguously concentrates on the ‘best interest of the company’ which is evident from the legal provision set out under section [181]of the CA as well as from the general legal duty of the directors[12]. However, is does not imply that directors are not obligated to ensure best interest of the other stakeholders. The question relating to the fact whether a director must consider the interests of stakeholders usually arises with respect to gratuitous payments as was observed in Hutton v West Cork Railway Co [1883][13]. This case is often criticized on the ground that the present corporation law is restrictive and it must permit the directors to consider the interests of other stakeholders.
In an Australian case, Woolworths v Kelly [1991][14], it was held that a company is entitled to be generous with those with whom the company deal with but such generosity shall be permitted only if it from the benefit or best purpose of the company. In Re Lee, Behrens & Co Ltd [1932][15], the director of a solvent company resolved to grant an annual pension of 500 pounds to a widow of an ex-director. Although the court held that since the grant was made with charitable motive but it was not beneficial for the company, but it establishes that directors have a wide discretion in determining how the assets of the company must be used[16].
As mentioned earlier that, general law regarding the directorial duty to act in the best interest of the company stipulated under section [172] of the UK Company Act is distinct from the directorial duty set out under section [181] of the CA 2001. As per section [172] of the Act, a director must act in good faith to promote the best interest and success of the company as well as its members. While ensuring the best interest, the directors must consider the consequence of the decision in the end, and the interests of the employees of the company. The directors are also required to promote the business relationship of the company with the customers, suppliers and others. The directorial duty also confers upon the directors with the obligation to ensure that the operation of the company has a positive impact upon the environment and the community. The directors are further obligated to maintain the reputation of the company for high standard of business conduct. Lastly, the provision stipulates that the directors must act fairly with the members of the company.
Conclusion
Hannigan (2015) states that the provision under section 172 raises the standard for all the directors requiring them to maintain significance of shareholder interests and ensure that best interest of the stakeholders is promoted. However, the UK government stated that the main purpose of codifying the directorial duties in the manner stipulated under section 172 of the Act was to ensure that the directors have clear knowledge about their obligations towards the company and the stakeholders[17]. Nevertheless, the provision is ambiguous in terms of its wordings and is difficult to implement. The provision has the following shortcomings due to which the Australian provision under section [181] of the CA must not be amended and replaced with section [172] of the Companies Act 2001.
Firstly, section [172] requires the directors to act in a manner that will promote success of the company. Here there is ambiguity associated with the term ‘success’ as it was asked whether ‘success’ can be measured or how important it is for ensuring benefits of the members of the company. The definition of success shall be construed based on the context in which or the person who will use the term. Further, the word ‘success’ is distinct from the traditional duty of the directors to ‘act in the best interest of the company’ which indicates that the legislature has purposely used alternative wordings with the intention to make it different from the director’s duty to act in the best interest of the company[18].
Secondly, the uncertainty in section 172 of the Act can be further established from the use of the wordings in explaining the requirement of the director to act for the benefit of the ‘company members as a whole’. The use of this phrase also signifies a departure from the general legal requirement that the director must ensure best interest of the company. The requirement to act for the best interest of the corporation has never been directly referred to the shareholders. Such a departure from traditional phrasing will only make the application of previous case laws more difficult.
Thirdly, the most significant shortcoming associated with section [172] of the Companies Act is that it will make it easier for the stakeholders and the other shareholders to challenge such decisions. As observed earlier that the court usually do not interfere with the decisions taken by the management of the company because it is assumed that the directors are considered as more skillful and more knowledgeable than the judges in respect of management of companies. Yet, the provision set out in section [172] of the Companies Act, makes it easier for the courts to take decisions with respect to management of the company. Halliday (2016) states that on the other hand, section [181] of the Corporations Act is flexible enabling every director to adapt the obligations as per the present situation.
Whincop (2017) further argues that if section 181 of the CA is replaced with section 172 of the Companies Act, it may have an adverse effect on the Australian business. As submitted by AICD, if the directors take into account the best interest of the stakeholders, it may adversely affect the investor’s confidence. Bottomley (2016) argued that at present, the investors are aware that their funds will be invested basically in their best interest and any dilution of this knowledge might affect the confidence of the shareholders. Further, this would imply that for every decision that are made by the directors with respect to the management of the company shall be subjected to court litigation, which will eventually affect the growth of the company.
From the above discussion, it can be inferred that directors are considered as the agents of the company and the money of the shareholders. The duties conferred upon the directors obligate them to safeguard the interests of the company. As per section [181] of the CA, the directors are required to act in the best interest of the company and for a proper purpose[19]. Although the provision does not expressly stipulate that the directors are to ensure best interest of the stakeholders, but it does not imply that the directors are barred from ensuring the best interest of the stakeholders[20]. In fact, in order to retain its growth and ensure sustainability of an organization, it is essential that directors have regard to the interests of the stakeholders. Moreover, the directors that fail to consider the best interest of the stakeholders are said to have committed a violation of their directorial duty to act with due care and diligence.
While, the provision under section [181] of the CA has been subjected to criticism due to the ambiguity in expressing the obligation of the directors to ensure best interest of the stakeholders, the same provision has been appraised for its flexibility. Its flexibility is evident from the power of the directors to make decisions in the best interest of the company. It is important for the Australian companies that the directorial duties remain flexible, as it will assist to evolve with the change in social values and expectations. Therefore, considering the flaws in the provision under section [172] of the Companies Act 1996, it can be stated that replacing the Australian provision as per such the later provision will only enhance uncertainty in the application of the laws[21]. Hence, there is no requirement to amend section [181] of the Corporations Act as the directorial duties stipulated under the section is adequate in ensuring best interests of the company.
Barker, Roger. “The Duties and Liabilities of Directors—Getting the Balance Right.” The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members (2016): 249.
Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. Routledge, 2016.
Broderick, Phil, and Melissa Brazzale. “A matter of trusts: Director’s breach of fiduciary duties results in a clawback of super contributions.” Taxation in Australia 49.9 (2015): 547.
Coleman v Myers [1977] 2 NZLR 538
Companies Act 2006 (UK)
Corporations Act 2001 (Cth)
Du Plessis, Jean Jacques, Anil Hargovan, and Jason Harris. Principles of contemporary corporate governance. Cambridge University Press, 2018.
Halliday, Karin. “ESG analysis: The value of digging deeper.” Governance Directions 68.5 (2016): 266.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Hutton v West Cork Railway Co [1883] 23 Ch D 654
Imperial Hydropathic Hotel Company Blackpool v Hampson [1882] 23 Ch D 1
Re Lee, Behrens & Co Ltd [1932] 2 Ch 46
Re Smith & Fawcett Ltd [1942] Ch 304
Sajeevi, G. A. C., and S. W. P. Mahanamahewa. “A Comparative Analysis of Directors’ Duty of Care, Skill and Diligence in Sri Lanka, Australia and UK.” GENERAL SIR JOHN KOTELAWALA DEFENCE UNIVERSITY (KDU) (2015): 79.
Tricker, RI Bob, and Robert Ian Tricker. Corporate governance: Principles, policies, and practices. Oxford University Press, USA, 2015.
Whincop, Michael J. Corporate governance in government corporations. Routledge, 2017.
Woolworths v Kelly [1991] 22 NSWLR 189
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