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UNIT NAME OF STUDENT (PRINT CLEARLY) STUDENT ID. NO.

CODE: LAW 2300 SPENCE KATHERINE 0937210

TITLE: COMPANY LAW      FAMILY NAME FIRST NAME

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BRAD MOORE 20 APRIL 09     
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ASSIGNMENT ONE

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 Statutory Duties of Directors Imposed by the Corporations Act

STATUTORY DUTIES OF
DIRECTORS IMPOSED BY THE
CORPORATIONS ACT

Company Law 2300 – Assignment One

By Katherine Spence (0937210)

CONTENTS

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 Statutory Duties of Directors Imposed by the Corporations Act

ASSIGNMENT COVER SHEET........................................................................................ 0

CONTENTS............................................................................................................................. 2
INTRODUCTION................................................................................................................... 3
DUTY TO AVOID A CONFLICT OF INTEREST.............................................................4
DUTY TO PREVENT INSOLVENT TRADING................................................................7
CONCLUSION....................................................................................................................... 8
ENDNOTES............................................................................................................................. 9
BIBLIOGRAPHY................................................................................................................. 11
TABLE OF CASES............................................................................................................... 12

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 Statutory Duties of Directors Imposed by the Corporations Act

Statutory Duties of Directors Imposed by the

Corporations Act
COMPANY LAW 2300 – ASSIGNMENT ONE

INTRODUCTION
A company, for all intensive purposes, is a living entity. It has a birth, a life and a death, and in accordance
with the doctrine of the corporate veil, exists separately from its owners and in its own right. Upon its birth,
a company will appoint a number or directors whom are regarded as representing the mind and will of the
company. Section 9 of the Corporations Act 2001 defines a director as being:

 a person who is appointed to the position of director or alternate director regardless of the
name given to their position: s 9(a)
 unless a contrary intention appears, a person who is not validly appointed if they act in the
position of director: s 9(b)(i);
 unless a contrary intention appears, a person who is not validly appointed if the directors of
the company/body are accustomed to acting in accordance with the person’s instructions or
wishes: s 9(b)(ii). (1)

Directors are empowered under a company’s constitution, or in its absence, the replaceable rules, to manage
the affairs of a company on behalf of its shareholders.

There was a time when directors could hide behind the corporate veil (Salomon v Salomon & Co Ltd), which
recognises the separation between the company, its directors and its owners, thus limiting their liability for
the debts of a company, should it be forced into liquidation (death). However, this is no longer the case, and
while the liability of non-contributory owners is still limited, directors and other officers of a company, are
increasingly being held responsible and accountable for the failure of a company to meet its obligations to
shareholders and other stakeholders. Directors have the ability to control the actions of the company and as
such have a fiduciary relationship with the company and duties and obligations stemming from that
relationship. (2) In common law directors are required to act honestly, in good faith and in the best interests
of the company, to act with all due care and diligence, to avoid conflicts of interest and exercise their powers
for their proper purpose and in the interests of the company. Further to these duties, the provisions set out in
the Corporations Act also require that directors take all reasonable steps to prevent the company from
continuing to trade while insolvent: s 588G. (3)

It is in order to protect shareholders and other stakeholders from the risk of directors causing harm, either
deliberately or as the result of negligent behaviour, to a company or its assets, the Corporations Act and
common law, have imposed statutory duties on directors of companies. This risk is the result of the structure
of a company and its internal rules, placing the power to control and manage the affairs and assets of a
company in the hands a board of directors. As a result, stakeholders are left vulnerable to directors
fraudulently misappropriating assets, information or opportunities from a company for their own benefit or
mismanaging and devaluing a company through incompetence and poor decision making. (4)

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 Statutory Duties of Directors Imposed by the Corporations Act

Statutory provisions, such as those contained in ss185 and 193 of the Corporations Act, recognise and
reinforce the common law, equitable duties of directors and allow for the imposing of civil and criminal
sanctions for intentional or negligent breaches of those duties. (5) Directors are recognised in law as owing a
duty of care to the shareholders and other stakeholders of a company. They must act with all due care, skill
and diligence in order to prevent reasonably foreseeable harm, as the concept of reasonably foreseeable is set
out in Donoghue v Stevenson, that is to say, the actions that can be seen to be expected of an honest and
intelligent person, acting as a director of a company. (6) The actions expected of a director are further
outlined in Charterbridge Corporation Ltd v Lloyds Bank Ltd, which provides the test for these as being:

“whether an intelligent and honest man in the position of a director of the company concerned,
could, in the existing circumstances, have believed that the transactions were for the benefit of the
company” (7)

Two areas, in particular, which directors are required by statute to exercise their duty of care to a high
degree, are their duty to avoid a conflict of interest and their duty to prevent insolvent trading.

DUTY TO AVOID A CONFLICT OF INTEREST

As previously noted, directors have a fiduciary relationship, the nature of which is established in common
law by the precedent in Regal (Hastings) Ltd v Gulliver and later Charterbridge Corporation Ltd v Lloyds
Bank Ltd, with the company they represent and are charged with acting on behalf and in the best interests of
that company. A conflict of interest arises when directors are placed in a position where they are enabled to
place their own interests or the interests of a third party, ahead of the interests of the company and
shareholders, they are charged with representing. (8) This relationship and the common law duties
encompassed by it have been further reinforced in statute by the Corporations Act 2001, under the banner of
an undeniable legal duty to avoid conflicts of interest.

The statutory duty of a director, or officer, of a company to avoid a conflict of interest and the provision for
both civil and criminal penalties for breaches are set out the Corporations Act, as follows:

Section 181 (1) Good faith

“A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose” (9)

Section 182 (1) Use of position

“A director, secretary, other officer or employee of a corporation must not improperly use their
position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation” (10)

Section 183 (1) Use of information

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 Statutory Duties of Directors Imposed by the Corporations Act

“A person who obtains information because they are, or have been a director or other officer or
employee of a corporation must not improperly use the information to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation” (11)

Sections 181 – 183 encompass the civil obligations of a director, or other officer, and breaches of these are
subject to civil penalties. Section 184, further imposes criminal sanctions on directors and other officers, for
breaches which are found to be reckless, or intentionally dishonest, particularly with regard to the improper
use of one’s position or company information, for personal advantage or to deprive the corporation of an
opportunity. (12)

In Australia, there is one case, which above all others, illustrates the concept of a conflict of interest and the
improper and intentionally dishonest use of position for personal material advantage at the detriment of the
corporation. ATSIC v Adler deals with the collapse of HIH Insurance Ltd and its subsidiary HIHC (HIH
Casualty and General Insurance Ltd). In June 2000, HIHC, a subsidiary of HIH, made an unsecured $10
million loan to Pacific Eagle Equity Ltd (PEE), which had only recently been registered and was controlled
by Rodney Adler. At the same time Rodney Adler was also a non-executive director of HIH, although he
was not a director of its subsidiary HIHC, who made the loan. However, the loan was made the request of
Adler and organised by the CEO (Williams) and finance controller (Fodera) of HIH, without any
documentation and without the knowledge of other HIH directors. This ‘loan’ was made without following
HIH’s due processes and was supposed to be used to make ‘profitable’ investments for HIHC. (13)

The events that actually transpired and ‘investments’ were in no way in the best interests of either HIH or
HIHC. PEE in fact used $4 million to purchase shares in HIH, on behalf of Adler and formed Australian
Equities Unit Trust (AEUT), with PEE as its trustee, and used this ‘trust’ to purchase shares in unlisted
companies controlled by Adler Corporation, resulting in losses of $3.8 million. Finally, a further $2 million
in unsecured loans were made by AEUT to other companies and funds associated with Adler. (14) HIH later
collapsed, and ASIC, on behalf of shareholders and other stakeholders, bought civil penalty proceedings
against the parties involved for breaching their duties as directors and officers of HIH and HIHC in that they:

1. failed to act in good faith and for a proper purpose when obtaining the loan from HIHC in breach of
section 181
2. failed to act with due care and diligence, in further breach of section 181(1)
3. improperly used their positions as directors and officers of HIH to place undue influence on HIHC to
obtain the loan, for the advantage of Adler, which violates section 182(1)
4. finally, they improperly used company information for their own purposes and advantage, thus
further violating section 183(1) of the Corporations Act
5. contravened provisions in the Corporations Act which regulate related party transactions (Chapter
2E) and financial assistance (Part 2J.3). (15)

All of these actions were undertaken to the detriment of the corporation to which a fiduciary duty of care was
owed by the parties and with reckless disregard for the well being of HIH and HIHC, and their shareholders.

In response to these obvious breaches of their duties to HIH and HIHC, Adler, Williams and Fodera, were
subjected to extensive civil and financial penalties as prescribed in the Corporations Act. These included
pecuniary penalties of $450 000 to Adler and Adler Corporation, $250 000 to Williams and $5000 to Fodera.

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 Statutory Duties of Directors Imposed by the Corporations Act

Adler, Adler Corporation and Williams were also ordered to pay $7 986 402 in compensation to HIHC and
Adler and Williams were barred from acting as a director for 20 years and 10 years respectively. In addition,
the parties were further prosecuted under section 184(1) and (2) for criminal that is dishonest, intentional and
or reckless, breaches of the Corporations Act, despite already being punished for the same conduct in civil
proceedings. (16) As a result of these criminal proceedings, Adler pleaded guilty to four charges including
obtaining money by false statements, disseminating false information and being intentionally dishonest by
not acting in the best interests of HIH, while a director of HIH, under s 184 of the Corporations Act, and
sentenced to four and half years imprisonment. Mr. Williams was also, subsequently, sentenced to four and
half years imprisonment, for his equally reckless and dishonest conduct. (17)

Another interesting case which illustrates the duty to avoid a conflict of interest is ASIC v Vizard, which
enforces the statutory conflict of interest rules and its civil penalty provisions, despite no harm being caused
to the corporation represented by Vizard. In this case Vizard, was a non-executive director of Telstra and
admitted to using information obtained as a result of his position to make private investments, through his
accountant, in companies Telstra were looking at acquiring. Most of these investments were not profitable
and no Telstra funds were placed at risk, nor did the investments of the defendant have any influence on
those of the corporation, yet the court found that in accordance with s 183, Vizard had breached the
Corporations Act. (18) It was found that;

“a director is denied the ability to use such information for his or her own purposes. It does not
matter that the director’s action causes no harm to the company or does not rob it of an opportunity
which it might have exercised for its own advantage.” (19)

Vizard was found to have breached his civil obligations under s 183 and ordered to pay nearly $400 000 in
pecuniary penalties and disqualified from being a director of a company for 10 years. (20)

As can be seen by the above mentioned cases there are severe civil and criminal penalties for breaches of the
Corporations Act. However the liability for directors and the penalties for breaches can be limited by the
application of several defences including the delegation of responsibility to others, reliance on others and that
the director honestly and with all due care believed that the decision made was in the best interests of the
company, in good faith, for proper purposes and without consideration for personal interests (business
judgement rule). Directors are able to delegate responsibilities and rely on the judgement and skill of those
better qualified so long as they reasonably believe they are acting in the best interests of the company, they
are sufficiently monitoring the activities of the company so as to notice irregularities and that they have made
proper and sufficient inquiries as to the competence and reliability of the delegate. (21)

DUTY TO PREVENT INSOLVENT TRADING

Directors have a duty to take all reasonable steps and to act with all due care and diligence in order to
prevent a corporation, of which they are a director as outlined in s 9 of the Corporations Act, from
continuing to trade while insolvent. Insolvency can be determined by the inability of a company to pay all of
its debts as and when they fall due (s 95A) and differs from a liquidity problem in that the company has
exhausted all legal means of obtaining additional funds from trading operations, sale of assets, borrowings
and or increases in capital through the issue and sale of shares. The assessment of solvency has been
established in Fryer v Powell, for the purposes of determining solvency as required under the provisions and
duties of s588G and further recognised and acknowledged in Brooks v Heritage Hotel Adelaide Pty Ltd. (22)

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 Statutory Duties of Directors Imposed by the Corporations Act

In the case of insolvent trading the duty owed by directors shifts from the corporation and its shareholders, to
the creditors of the corporation. The statutory requirements of a director to take all reasonable steps to avoid
insolvent trading are outlined in section 588G(1) and can be summarised as being:

1. a person is a director at the time when a debt is incurred by a company

2. at that time when the debt is incurred the company is insolvent or subsequently becomes insolvent
from the raising of the additional debt
3. a reasonable person, given the circumstances, would at that time have reasonable grounds to suspect
that the company was insolvent or would become insolvent as a result of incurring that debt

ASIC v Plymin lists the indicating factors that are recognised as being reasonable grounds for suspecting
insolvency and applies an objective test based on these, rather than a director’s subjective view of the
company’s solvency. (23)

The Water Wheel Case, particularly ASIC v Elliott, illustrates the obligations of directors, including non
executive directors, to take all reasonable steps to avoid trading while insolvent, in that it finds essentially
that if directors are unable to prevent insolvent trading they should immediately resign. Water Wheel went
into voluntary administration in February 2000, although there existed reasonable grounds to suspect that it
was insolvent since late 1998, when a creditor ceased trading with the company. Throughout 1999, the
company continued to incur large debts in the course of its regular trading operations, despite reasonable
indications that it may already be insolvent. (24)

In this case the defendants were found to have breached s588G in that they allowed the company to keep
trading while insolvent and failed in their duty to take all reasonable steps to prevent it. As a result of the
breach of s 588G Elliott and Plymin were banned from being directors for 4 years and 10 years respectively,
fined $15000 and $25000 and in accordance with section 588M they were required to compensate creditors
for the amount of their loss or damage. As a result Elliott was forced into bankruptcy and has had to sell
much of his personal property to satisfy ‘Water Wheel’ debts. (25) There are no provisions for criminal
sanctions in relation to a breach of the duty to prevent insolvent trading unless it is found that a director acted
fraudulently or dishonestly and with malicious intent when allowing the company to trade while insolvent.
(26)

Like the duty to avoid a conflict of interest, the duty to avoid insolvent trading has a number of recognised
defences, which are outlined in section 588H. These include a reasonable expectation of solvency (s
588H(2)), the director’s reliance on information provided on others regarding solvency (s 588H(3)), illness
or other good reason resulting in absence from management (s 588H(4)) and the taking of all reasonable
steps to prevent the company from trading while insolvent (s588H(5)). While these defences exists they
largely do little to indemnify directors for insolvent trading as they are in direct conflict to the other statutory
obligations which require that directors play an active role in management of the company by exercising due
care and diligence in supervising delegates and ensuring their competency and sufficiently monitor activities
of the company. (27)

CONCLUSION
In the past company directors have been able to hide behind the corporate veil and avoid responsibility for
failing to meet the duty of care required as a result of the position they occupy to the company they
represent, its shareholders and other stakeholders. However, this is in the past and the actions, or inactions,

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 Statutory Duties of Directors Imposed by the Corporations Act

of directors are now more scrutinised and directors can be subjected to extensive civil and criminal penalty
provisions if they are found to negligently or dishonestly breach their obligations. Directors have statutory,
as well as common law, obligations to exercise due care, skill and diligence in representing the best interests
of a company with which they share a fiduciary relationship, to play an active role in overseeing its affairs
and to prevent conflicts of interest and insolvent trading.

ENDNOTES
1. Australian Corporations Legislation (2009). Sydney: LexisNexis Butterworths
2. Cassidy, J. (2005). Corporations Law – Text and Essential Cases. Sydney: The Federation Press
3. Ibid
4. Ford, A., Austin, R. and Ramsay, I. (2005). Ford’s Principles of Corporations Law (12th Ed).
Australia: LexisNexis Butterworths
5. Harris, J., Hargovan, A. and Adams, M. (2008). Australian Corporate Law. Sydney: LexisNexis
Butterworths
6. Latimer, P. (2002). Australian Business Law. Sydney: Prentice Hall
7. Supra n2
8. Ibid
9. Supra n1

10. Ibid

11. Ibid

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 Statutory Duties of Directors Imposed by the Corporations Act

12. Lipton, P. and Herzberg, A. (2008). Understanding Company Law (14th Ed).

Sydney: Lawbook Co

13. Woodward, S., Bird, H. and Sievers, S. (2005). Corporations Law in Principle (7th

Ed). Sydney: Lawbook Co

14. Ibid

15. Ibid

16. Ibid

17. Supra n5

18. Ibid

19. Ibid

20. Ibid

21. Ibid

22. Supra n2

23. Supra n4

24. Supra n5

25. Ibid

26. Ibid

27. Ibid

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 Statutory Duties of Directors Imposed by the Corporations Act

BIBLIOGRAPHY

Australian Corporations Legislation (2009). Sydney: LexisNexis Butterworths

Cassidy, J. (2005). Corporations Law – Text and Essential Cases. Sydney: The Federation Press

Ford, A., Austin, R. and Ramsay, I. (2005). Ford’s Principles of Corporations Law (12th Ed). Australia:
LexisNexis Butterworths

Hanrahan, P., Ramsay, I. And Stapledon, G. (2001). Commercial Applications of Company Law (7th Ed).
Sydney: CCH Australia Ltd

Harris, J., Hargovan, A. and Adams, M. (2008). Australian Corporate Law. Sydney: LexisNexis
Butterworths

Latimer, P. (2002). Australian Business Law. Sydney: Prentice Hall

Lipton, P. and Herzberg, A. (2008). Understanding Company Law (14th Ed).

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 Statutory Duties of Directors Imposed by the Corporations Act

Sydney: Lawbook Co

Woodward, S., Bird, H. and Sievers, S. (2005). Corporations Law in Principle (7th

Ed). Sydney: Lawbook Co

TABLE OF CASES

Salomon v Salomon & Co Ltd. [1897] AC 22

Donoghue v Stevenson. [1932] AC 562 at 580

Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch 62 at 74

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

ASIC v Adler [2002] 41 ACSR 72

ASIC v Vizard [2005] 145 FCR 57

R v Addler [2005] 53 ACSR 471; [2005] NSWSC 274

R v Williams [2005] 53 ACSR 534; [2005] NSWSC 315

Fryer v Powell [2001] 37 ACSR 589; [2001] SASC 59

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 Statutory Duties of Directors Imposed by the Corporations Act

Brooks v Heritage Hotel Adelaide Pty Ltd [1996] 20 ASCR 61 at 64

ASIC v Plymin [2003] 46 ACSR 126; [2003] VSC 123

ASIC v Elliott [2004] 48 ACSR 621; [2004] VSCA 54

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