Week 8 tutorial questions: Directors’ Duties1) Prepare a table of the statutory directors’ duties and the possible outcomesof those breaches. Statutory directors duties: See 10.110, 10.118, 10.120, 10.122, 10.124.Outcomes of breaches: See 10.129 – 10.135 court orders, 10.136 – 10.140 civilpenalties, 10.141 – 10.145 criminal penalties. Statutory DutyDescriptionApplies toPenaltyS 180(1)[10.110]Care and diligenceDirectors andofficersCivil Penalties onlyS 181 [10.118]Good faithDirectors andofficersCivil and CriminalpenaltiesS 182 [10.120]Misuse of positionDirectors, officersand employeesCivil and CriminalpenaltiesS183 [10.122]Misuse ofinformationDirectors, officersand employeesCivil and CriminalpenaltiesS 588G [10.124]Trading whileinsolventDirectors onlyCivil and Criminalpenalties Civil penalties: Pecuniary penalties, disqualification, compensation orders.Criminal penalties: Disqualification, fines, statutory injunctions, imprisonment.2) Designco Pty Ltd designs, manufactures and distributes craft kits forchildren. Children use the kits to construct balsa wood models of animals,which can be painted. The directors of the company are Ian and May. Ian andMay are also the only shareholders. Both Ian and May work in the business. Ianis in charge of design and marketing and May looks after manufacturing andfinance.Among other assets, Designco owns the original design drawings done by Ian.The commercial value of the drawings is about $15,000. Unfortunately, thebusiness has not been going well lately. Ian is worried that, if Designco fails, thedrawings will end up in the hands of the liquidator. He and May pass a directors’resolution donating the drawings to the Art Gallery. Have the directorscontravened any director duties of the Corporations Act and the correspondingfiduciary duty?Points for suggested answer: Main directors’ duties both under Common Law and the Corporations Act 2001(Cth): o care and diligence;o good faith;o use of position;o use of information; ando avoidance of insolvent trading Section 180(1) of the Corporations Act: imposed an obligation on directors toexercise ‘care and diligence when making business judgements’. o assumes that directors will also exercise skill in decision making.o reference in s 180(1) to a ‘reasonable person’ – i.e. what a director woulddo if they were a director of a company in the same circumstances, andoccupies the office held by, and had the same responsibilities within thecompany as the director whose actual decision-making judgement isunder scrutiny.o Objective test of a reasonable person: if the hypothetical reasonablycompetent director was placed in the same position and in the samecorporate circumstances as the director whose actual decision is underanalysis, would that reasonable director act in the same way? If yes, then no breach of the duty of care and diligence hasoccurred.If no, a breach has occurred and the director is deemed to havemade an error of judgment.Business judgment ruleoProvides a defence for directors’ conduct that may otherwise breach s 180 (1).o ‘business judgment’ means any decision to take or not take action inrespect of a matter relevant to the business operations of the company.o Requisites: director must show that they: (i) made judgment in good faith and for a proper purpose;(ii) did not have a material personal interest in the subject matterof the judgment;(iii) informed themselves about the subject matter of the judgmentto the extent they reasonably believed to be appropriate; and(iv) rationally believed that the judgment was in best interests ofthe company.Fiduciary duty to act in good faith: as fiduciaries, directors must act in good faithand in the best interests of the company.oRequires directors to exercise the discretions and powers of their officewith utmost honesty, fairness and loyalty. oDirectors should consider the many vested interests of stakeholderscomprising the company including creditors.Acting for a proper purpose: the powers that directors may exercise in management are conferred by the Corporations At, the company’s constitution(if any), and the director’s contract of employment within their company.o When these powers are exercised for the purpose intended, they arebeing used properly. Not to use the position improperly: directors must avoid conflicts of interest byalways considering only what is best for the company, rather than what maybenefit them personally.In light of the foregoing rules: Arguable that Ian and May have not exercised care and skill and diligence inmaking a business judgment to pass a resolution donating the drawings to theArt Gallery. The company has a legal personality separate from its directors. Drawings areowned by the company, not by its directors Ian and May. The drawings, which have a significant commercial value, have been effectivelygiven away for free. Both directors disposed of this asset without the companygaining any financial return. Both directors treated the company asset as theirown personal assets. If the hypothetical reasonably competent director were placed in Ian and Mary’sposition, would the director have decided and acted in the same way? Requires an assessment of the requisites of the business judgment rules:o Did Ian and May make a judgment in good faith and for a properpurpose? It is argued that in giving away a valuable commercial asset ofthe company, they did not make a judgment in good faith and for a properpurpose.o Did they not have a material personal interest in the subject matter of thejudgment? Yes – the drawings were done by Ian but owned by thecompany. Ian did not want these drawings to fall into the liquidator’shands should the company enter into insolvency – an event which hasnot yet happened; may not even happen.o Did they inform themselves about the subject matter of the judgment tothe extent they reasonably believed to be appropriate? Yes it appearsthey did: they assessed the commercial value of the drawings andjudged they were too valuable to be part of the company’s assets if thecompany went into liquidation.o Did they rationally believed that the judgment was in best interests of thecompany? Yes it arguable they did for the above reason. However, even though they had the best interest of the company in mind whenthey donated the paintings, the fact remains that they treated the companyasset as if it were their own, they disposed of it without the company gainingany financial benefit in return, and the reason they did this was to circumvent apossible liquidation process. Given this, it is submitted that Ian and May did notexercise the discretions and powers of their office with good faith and the bestinterests of the company; they did not act utmost honesty, fairness and loyaltyand breached their fiduciary duty owed to the company and its creditors.
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