Fiduciary duties of directors and officers under the Corporations Act 2001
The issue involved here is to check what legal rights Solartec has in against Bill and other former executives considering the duties of a director and officers mentioned under common law and legislation.
Directors and executives are people who run the company with their skills and take decisions on behalf of the business. In such a situation, these people have certain responsibilities towards the different stakeholders of the company. Such duties are outlined under Common law as well as legislation. Duties given in common law and legislations are almost similar to each other. In Australia, the company law of the nation is detailed under the Corporations Act 2001.
Firstly to discuss fiduciary duties of directors and other executives mentioned under the Corporations Act 2001 (CA 2001), this is to state that the same is mentioned under Part 2D.1. The lead fiduciaries’ duties are given under section 180, 181, 182 and 183 of the subjective act. Section 180 (1) believes that every person who holds a position of director or an executive in a corporation then it becomes the responsibility of the same to use their powers and to perform their duties considering and keeping diligence and care. It means they should not behave negligently. It was given in the case of Daniels v Andersen, a Co (AWA Ltd) that ignorance and failure to make proper inquiry cannot be held as a defense of negligence. Section 180 (2) is one the significant section of the act that highlight the concern with respect to business judgments. As per this subsection, while making the business judgment, every director and officer of the company needs to take care of some points. Firstly, such business judgment must make in a good faith and best interest of the company. Further, such business judgment must not consist of any personal interest of such director or officer. Clause c of this section states that such judgment must be appropriate in belief of such directors and officers. The second fiduciary duty is stated under section 181 of the act. It focuses on three aspects namely good faith, best interest, and proper purpose. The section binds every director including all the officers of the company to peform their function in the good faith as well as in the best interest of the corporation. The duty is as simple as it requires directors and officers to believe that their performance lead best interest of the company. To understand what is in the best interest or not, an objective test has been used in the case of ASIC v Adler.
Section 180: Duty of care and diligence
It was given that an action cannot be held as “in the best interest of the company” if no reasonable directors believe so. In the decision of the case, courts check the true impact and then determine whether the same bring best results to the company or not and whether a reasonable director had the idea of likely outcomes or not. Under the decision of different cases, judges held different acts as “not in the good faith and best interest of the company”. Here to state that the interest of the company refers to all stakeholders and not a particular group of them. In the case of Darvall v North Sydney Brick & Tile Co Ltd the duty of directors held to be extended upto short term as well as long term interest of the corporation. The another important case to discuss here is Bailey v Mandala Private Hospital Pty Ltd where, the director and controlling shareholders of the company issues shares to his wife so that she can control the affairs of the company and its assets after his week. After considering facts of the case, the court decided that the issuance of shares was not in the best interest of the company as a personal interest of the director was involved. It means those tasks, which consists of personal interest of the director/officers are not treated as in the best interests of the company.
Proper purpose is another important aspect that needs to be considered. It is not necessary that the acts, which are in the best interest of the company, be also for the proper purpose of the same. Court uses an objective basis to determine whether an act is for proper purpose or not. As mentioned above, directors and officers of the company are an authority who runs the business it is clear that they have great powers. Office of director or officer or executive in a company is a significant position and therefore there is always a chance of misuse of such position. To control and eliminate such misuse, the next fiduciary duty has been developed which is mentioned under section 182. This section prohibits use of their position by directors or officers of the company to gain self-advantage or advantage for someone else or in a manner that may lead harm to the corporation. This duty was developed to evade conflict of interest that administrators of corporation may face while performing their job. Such fiduciary duty has a wide scope. In the case of In Regal (Hastings) Ltd v Gulliver, the court held the directors liable for the breach of statutory duty when the directors acted for their own interest while dealing on behalf of the company.
Section 181: Duty to act in good faith and in the best interests of the company
Section 183 provides similar provisions to section 182 of the act but focuses on the use of information rather than the use of position. Similar to section 180, 181 and 182, section 183 also applies to all the officers of the company in conjunction with the directors of the same. As per the provisions of section 183 of CA 2001, no director/officer of the company must use the information related to the corporation for self-benefit or provide benefit to someone else. The section also prevents the practice of using corporation information in a manner that may cause harm to the company. Adler V ASIC is the case where directors used their position as well as information of the company for the personal benefits. In this case, the person named Adler was a director in group companies and had the business information of all the companies. He used such as information and his position of director by transferring funds of one company to another company. In the decision of the case, the court held the directors liable for breach of fiduciary duties and duty of not to misuse position and information associated with the designation of the director.
While discussing the duty to not to use the position for personal benefits, corporate opportunity doctrine is another important rule to discuss. This rule states that a director cannot take the opportunity that belongs to the company. In other words to say directors must not use the corporate opportunity for their self-interest. In the case of Green v Bestobell Industries Pty Ltd it was given that director and officer held liable for taking the opportunity of the company and breaching directors duty where the company would not have benefited by such opportunity if get. Many of the times, directors resign from their office for taking such opportunities and in such cases, they become former directors of the company and seek to be free from the liability of the director’s duties in such a manner. The court provided a significant decision in the case of Industrial Development Consultants Ltd v Cooley. The facts as well as decision, both are necessary to have a look upon. In this case, a gas board contracted with cooley instead of the gas board. He took retirement from the work later on, still been held liable to surrender the profits. In the decision of this case, the court stated that the duty persists even after retirement. Similarly, Holyoak Industries (Vic) Pty Ltd v V-Flow Pty Ltd is another important case to discuss where the executives of the company named Holyoak learned that the other company i.e. V-Flow was to sale when they were negotiating on behalf of Holyoak. Later on, these executives purchased V-Flow without informing the board of Holyoak and also contacted clients of former company to get associated with the new company. In the decision of this case, the court held that irrespective of the retirement of executives, this is to notice that they have learned about the opportunity to buy V-Flow while working on behalf of Holyoak and therefore the opportunity belonged to the former company. Hence to state that not only the former directors but also the former executives of the company remain liable when they use the corporate opportunity for personal benefits. These are the fiduciary duties mentioned under CA 2001. Now to check the common law fiduciary duties of directors and executives of the company, this is to state that the first duty states that such people must act with good intentions and in the best interest of the company. According to the second duty, they must perform for a proper purpose (Section 181 of CA 2001). The third duty is the liability to not to fetter discretion and last duty is to avoid personal interest conflicts (section 182 and 183 of CA 2001).
Section 182: Duty to avoid conflicts of interest
To consider the above-mentioned rules in the scenario given hereby in question, this is to state that Bill, the managing director of the Solartec as well as other executives of this company seems to breach many of the director’s duty mentioned under common law as well as CA 2001. The very first common law, as well as statutory fiduciary duty, is a duty to exercise authority for a proper purpose and in the best interest of the company. Bill and other executives of Solartec were required to buy Aussie Solar on behalf and in the name of Solartec as it could be beneficial for the future business of the company but they did not do so. Here they have failed to do the things that could lead the best results to the company. Nevertheless, despite doing so, they have purchased the company without informing the board of Solartec. Here again, this act of them was neither in the best interest of the company not for the proper purpose. They did not behave in the good faith of the company and cheated the same. As per the provisions of Darvall v North Sydney Brick & Tile Co Ltd, Bill, and other executives were required to consider the short term as well as the long-term benefits for the company but they did neither of them hence their act was for an improper purpose.
Further, as personal benefits of these officers were involved hence as per the decision of Bailey v Mandala Private Hospital Pty Ltd, the act of directors and officers cannot be considered as in the best interest of the company.
Moving further another fiduciary duty that has been breached, this is to state that the use of company information for personal benefit is the one which is mentioned under common law and section 182 of CA 2001. Due to their position in Solartech, Bill and other executives had information that Aussie Solar was available for purchase. They used this information for earning personal benefit and breached the said duty. They have also breached the duty mentioned under section 183 as well as in common law by using their position for personal benefit. By the virtue of their position, they have contacted the customers of Solatech and prepared the client base for their new company.
The given scenario is far similar to the Holyoak Industries (Vic) Pty Ltd v V-Flow Pty Ltd. Managing director and other executives resigned from the company just before the purchase of another company that was a business opportunity for Solartech. In this manner, they seem to be held liable because the doctrine of business opportunity as well as breach of director’s duty also applies to former directors as well. Hence, to state that Solartech brings an action against Bill and other executives for the breach of all common law fiduciary duties and duties mentioned under section 181, 182 and 183 of CA 2001.
Section 183: Duty not to improperly use information
CA 2001 also outlines remedies and penalties that may be imposed on the directors and officers of the company when they breach their fiduciary duties. Penalties related to breach of section 181, 182 and 183 are mentioned under section 1317E which provides civil liability provisions. As per the provisions of section, the court has the power to make a declaration of contravention. Once such declaration is made, ASIC has the power to seek a pecuniary penalty order that is mentioned given section 1317G or else also can make a disqualification order a given under section 206C of the act. As per section 1317G of the act, a court can order to pay a pecuniary penalty worth $200000 to the person who defaulted. As per section 206C of the act, on an application received from ASIC, the court may held a person disqualified from managing affairs of the company for a particular period if such person contravenes provisions of section 1317E.
Section 184 is also an important section according to which failure in fulfilling the duty of not to use position or information for personal advantage and duty to act in the best interest of the company, attracts criminal liability. It means such defaulted director and executive can be held liable for a criminal offense if it is proved that they have been dishonest in their performance. Under common law principles, a company may force the directors and executives of the company to surrender the profits that they have earned by breaching their duties. Section 185 of the act confirms that breach of statutory duties shall be considered along with breach of common law duties. Hence, to state that Bill and other directors may hold liable for penalties mentioned under section 1317 and disqualification by the virtue of the application of section 206C. The company has the right to initiate an action against them under section 1317E.
ASIC v Adler [2002] NSWSC 171
Bailey v Mandala Private Hospital Pty Ltd (1987) 12 ACLR 641
Daniels v Andersen (1995) 13 ACLC 614
Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154,
Green v Bestobell Industries Pty Ltd [1982] 1 WAR 1
Holyoak Industries (Vic) Pty Ltd v V-Flow Pty Ltd (2011) 86 ACSR 393
Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Jason R. Harris, Anil Hargovan and Michael Andrew Adams, Australian Corporate Law (LexisNexis Butterworths, 2016)
Austlii.edu.au, Corporations Act 2001 – Sect 1317e (Austlii) < https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1317e.html>.
Lawcasesummaries.com, ASIC v Adler (2002) 41 ACSR 72 (Lawcasesummaries.com) < https://lawcasesummaries.com/knowledge-base/asic-v-adler-2002-41-acsr-72/>.
Lawhandbook.sa.gov.au, General Duties of Directors – Corporations Act 2001 (Cth) (Lawhandbook.sa.gov.au) < https://lawhandbook.sa.gov.au/ch05s04s02.php>.
Legislation.gov.au, Corporations Act 2001 (Legislation.gov.au) < https://www.legislation.gov.au/Details/C2018C00424>.
Premiers.qld.gov.au, 7.3 Corporations Act 2001 (Cth) (the Corporations Act) (Premiers.qld.gov.au) < https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx>.
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