duties and responsibilities 20th edition chapter 1 extract
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duties and responsiBilities
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20th edition
Duties anD responsibilities of Directors anD officers 2oth editionthe 20th edition of Duties and Responsibilities of Directors and Officers is not only a milestone in the history of governance texts, and this book in particular, but it also provides a window into the particularly challenging time that directors and boards operate under today.
for the last 30 years, this book has been a must-read for directors, corporate lawyers, academics and those focused on governance in australia, and its context internationally.
this current edition updates the latest governance milestones in australia, including the most significant cases dealing with the duties of directors, such as the new south Wales court of appeal and prospective high court decisions in the James hardie case, the full federal court decision in the fortescue case and the two important decisions of Middleton J in the centro litigation.
as per earlier editions, the 20th edition of Duties and Responsibilities of Directors and Officers spans the length and breadth of the fundamentals of directorship and board operations.
directors make tough decisions and this is one book that every director should read.
about the authorprofessor robert baxt ao faicdLife has authored Duties and Responsibilities since its 5th edition, published in 1987. he has had an illustrious career, including serving as a senior commercial partner at two leading law firms, as a former chairman of the trade practices commission (now the accc), as professor and dean of Monash law school, chairman of the australian institute of company directors law committee, and now as emeritus partner at freehills and a professorial fellow at Melbourne law school.
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2Logo colours
To cater for the numerous applications which will carry our branding we have developed a selection of logo colour variants. To help you, a library of master logo artworks has been specially created for your use.
Our logo has been specially drawn. To maintain consistency always use an original artwork from the Artwork Library.
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Masterbrand colour paletteOur logo can be used in a variety of colours when used for masterbrand applications, all are acceptable and which is used will depend on the application.
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Secondary colour paletteWhen using our logo on colours from our secondary colour palette it can only appear in blue to maintain legibility and consistency.
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Mono logo (positive)For black and white applications, such as fax sheets, use the mono version of the logo. The entire logo reproduces in solid black.
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Duties anDResponsibilities of
DiRectoRs anDofficeRs
20tH eDitionapRil 2012
professor Robert baxt ao faicDLife
DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
the australian institute of company Directors is a member institute for directors dedicated to having a positive influence on the economy and society by promoting professional directorship and good governance. company Directors delivers director development programs, information and advocacy to enrich the capabilities of directors, influence the corporate governance environment in australia and promote understanding of and respect for the role of directors. With offices in each state of australia and more than 30,000 members, company Directors represents a diverse range of organisations from the top asX 200 publicly listed companies to not-for-profits, public sector entities and private companies.
Disclaimerthe material in this publication does not constitute legal, accounting or other professional advice. While reasonable care has been taken in its preparation, company Directors does not make any express or implied representations or warranties as to the completeness, reliability or accuracy of the material in this publication. this publication should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. to the extent permitted by law, company Directors excludes all liability for any loss or damage arising out of the use of the material in the publication.
any links to third party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those third parties, any products and services offered by third parties, or as to the accuracy or currency, of the information included in third party websites.
the information contained in this work was correct at the time of printing.
copyrightcopyright strictly reserved. the text, graphics and layout of this guide are protected by australian copyright law and the comparable law of other countries. the copyright of this material is vested in company Directors. no part of this material can be reproduced or transmitted in any form, or by any means electronic or mechanical, including photocopying, recording or by any information storage and retrieval systems without the written permission of the australian institute of company Directors.
© australian institute of company Directors.
published in april 2012 by:the australian institute of company Directorslevel 30, 20 bond streetsydney nsW 2000t: 61 2 8248 6600f: 61 2 8248 6633e: [email protected]: www.companydirectors.com.au
first edition published in June 1982.
© professor R baxt ao and australian institute of company Directors.
Design by Kirk palmer Designprinted by ligare pty ltd
national library of australia cataloguing-in-publication Databaxt, R. (Robert), 1938–Duties and Responsibilities of Directors and officers20th editionisbn 978-0-9871901-5-41. corporate governance – australia2. business law – australia
iii
Contents
Key terms ix
Foreword xi
Preface xiii
Chapter One Introduction 1
1 The legal and regulatory framework 3
2 Further regulatory reform 4
3 Other regulatory and related initiatives 7
Chapter Two The company and its “components” 9
1 The structure of a company 9
1.1 Public or private company 91.2 Limited or guarantee company 10
2 Components of a company 10
2.1 Number of shareholders 112.2 Number of directors 11
3 The company as a separate “entity” or person 11
4 The Salomon case 13
5 Limited liability and when it does not apply 14
6 The division of power between the shareholders and the directors 16
7 Definition of director 20
7.1 De facto directors 207.2 Shadow directors 237.3 Nominee directors 267.4 Alternate directors 267.5 Who may be a director? 30
8 Officers 30
9 Disqualification of directors 32
10 Some interesting cases on disqualification of directors and the discretion of the court 35
10.1 The High Court’s view 4010.2 The Vines case 41
11 The rights of company directors 43
12 Resignation by directors 45
Chapter Three The duties of directors – a broad overview 49
1 Introduction 49
2 To whom are the directors’ duties owed? 50
iv DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
3 The primary duty of directors is to the company, that is, to the shareholders/members now and in the future 51
4 Duties to creditors 53
5 The group of companies 56
6 Do nominee directors owe duties to their nominators? 58
7 Duties to individual shareholders 62
8 Do directors owe a duty to employees? 64
9 Do directors owe a duty to society? 65
10 Conclusions 66
Chapter Four The fundamental duties of directors – duty to act honestly and to avoid conflicts of interest 69
1 Duty to act honestly and to avoid conflicts of interest 69
2 The duty to act in good faith and in the best interests of the company (the former duty to act honestly) 70
3 Some interesting cases involving the failure of directors to act in good faith 73
4 Can directors be liable for fraud, as well as a breach of their duty to act in good faith? 77
5 Duty to avoid conflicts of duty and interest 78
6 Statutory duty not to misuse the position of director (s.182 of the Act) 83
7 Statutory duty not to make improper use of information (s.183 of the Act) 87
8 Duty not to appropriate a corporate opportunity 90
9 Consequences of breaches of duty – civil penalties and other orders 94
10 Double jeopardy 95
11 Can shareholders forgive breaches of duty? 95
12 Conclusion 95
Chapter Five The fundamental duties of directors – duty to act with care and diligence 97
1 Introduction 97
2 The common law background 99
3 Cases on s.180 of the Act 104
3.1 Introduction 1043.2 The Adler litigation 1043.3 ASIC v. Rich 1063.4 The James Hardie litigation (ASIC v. MacDonald (No 11) (2009)) 1073.5 The Fortescue case 1093.6 ASIC v. Healey (No 1) (2011) 109
4 Responsibilities of specific types of directors 110
4.1 General comments 1104.2 Assessing the duties of different types of directors 114
4.2.1 The chairman 114
4.2.2 The chief executive officer 117
4.2.3 Other directors 117
5 Recent decisions dealing with non-executive directors 118
6 Duty of care in conflict situations 119
v Contents
7 Special problems facing company officers (especially serving in multiple capacities) 121
8 The statutory BJR and its possible “expansion” 123
8.1 Cases in which the BJR has been considered 1248.2 ASIC v. Rich 1278.3 Other recent cases 1278.4 Possible reform 128
9 Statutory safeguards for directors – “softening” the duty of care by enabling reliance/delegation 128
10 Conclusions 129
Chapter Six Day-to-day duties 131
1 Reliance on other directors, delegation and related matters 132
2 Duties in relation to accounts 134
3 Granting relief from the operation of the accounting provisions 139
4 Other danger areas 140
5 Conclusions 141
Chapter Seven Insolvent trading 143
1 Introduction 143
2 What is insolvent trading under the legislation – s.588G of the Act? 146
3 The meaning of insolvency and related issues 148
4 Defences to insolvent trading 149
4.1 General comments 1494.2 Some important case examples of s.588G in operation 150
4.2.1 ASIC v. Plymin & Ors (2003) (Elliott) 150
4.2.2 Hall v. Poolman (2007) 152
4.2.3 Re the Stake Man Pty Ltd v. Carroll [2009] (McLellan) 153
4.3 The defence of delegation 1554.4 Manpac Industries Pty Ltd v. Ceccattini (2002) – (The Manpac Industries case) 1564.5 The defence in McLellan 156
5 Shadow directors and insolvent trading 157
6 Who may sue for the company’s debts in an insolvent trading scenario? 158
7 Groups of companies and insolvent trading 159
8 Insolvent trading and failure to act with care and diligence 160
9 Conclusions 160
Chapter Eight Insurance, forgiveness by shareholders and by the court 163
1 Introduction 163
2 Insurance and indemnity 164
3 The court’s ability to forgive directors for beaches of the Act 168
3.1 Overview 1683.2 The rationale for ss.1318 and 1317S 1703.3 Recent cases involving the application (or potential application) of ss.1318 and 1317S (and its predecessor) 1703.4 The decision in Edwards (the James Hardie Research Fund case) 171
DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS vi
3.5 The Dick case – extending the application of s.1318 to breaches of statutory duty 1723.6 Hall v. Poolman (2007) 1733.7 ASIC v. Healey (No 2) (2011) 174
4 Forgiveness by shareholders/the company 175
4.1 General overview 1754.2 Directors (as shareholders) forgiving their own “misdeeds” 1764.3 No forgiveness if fraud is present 1784.4 Right of third parties 179
5 Conclusions 179
Chapter Nine Remedies for shareholders (members) and stakeholders – statutory as well as common law remedies 181
1 Overview 181
2 The statutory derivative action (Part 2F.1A of the Act) 182
2.1 Some early examples of the statutory derivative action in the courts 1852.2 Some more recent cases on the statutory derivative action as interpreted by the courts 193
2.2.1 McEvoy v. Caplan (2010) 193
2.2.2 Wood v. Links Golf Tasmania Pty Ltd (2010) 193
2.2.3 Re Gladstone Pacific Nickel Ltd (2011) 194
2.3 Litigation funding and the statutory derivative action 195
3 The oppression remedy: s.232 197
3.1 Overview 1973.2 Can a minority shareholder (member) be held to oppress a majority shareholder? 1993.3 Recent examples 200
4 Section 1324 (and s.1323) of the Act 201
5 Section 247A: the right to inspect books 205
6 Actions by ASIC on behalf of shareholders 207
7 Section 50 of the ASIC Act 207
8 Common (general) law actions 209
8.1 Foss v. Harbottle (1843) in operation 2118.2 The power of members in relation to executive remuneration 213
9 Conclusions 214
Chapter Ten Traps for the unwary director 217
Traps under the Act 217
1 Pre-registration contracts 2172 Companies financing share transactions “illegally” 2183 Liability of directors for debts incurred where the company is acting as a trustee 2194 Liabilities of directors for payment of unlawful dividends 2205 Liability as an accessory: s.79 of the Act 2206 Insider trading: s.1043A 2227 Continuous disclosure 2238 Personal liability issues 2269 Infringement notice regime 227
Contents vii
10 Liability of directors and officers for misleading or deceptive conduct 22811 Takeovers 23112 Related party transactions 23213 Criminal liability of directors in actions involving their own companies 23214 The doctrine of ultra vires and the powers of directors 23215 Directors and superannuation funds 23316 Double jeopardy 23417 Some concluding remarks on company law traps 23618 Traps under other legislation – directors sued by their company for breaches of acts of company agents 23619 Personal liability under other legislation 23820 Strict liability of directors 23921 Recent important developments 239
Appendix 1 Cases referred to in this book 241
ASIC v. Adler & Ors (2002) 41 ACSR 72; (2002) 42 ACSR 80; (2003) 46 ACSR 504 241
Duty of care 243Statutory business judgment rule (the BJR) 247Other statutory duties 249
ASIC v. Fortescue Metals Group Ltd (No 5) [2009] FCA 1586; [2011] FCAFC 19 250
ASIC v. Healey (No 1) [2011] FCA 717 (the liability decision) 255
The role of company directors and corporate governance 258
ASIC v. Healey (No 2) [2011] FCA 1003 (the penalty decision) 259
ASIC v. Macdonald (No 11) (2009) 256 ALR 199; ASIC v. Macdonald (No 12) (2009) 259 ALR 116; on appeal James Hardie Industries NV v. ASIC [2010] NSWCA 332; Morley v. ASIC [2010] NSWCA 331 261
The standard of “fairness” required of a regulator in proving such cases 263The standard of care required of non-executive directors – did the Court of Appeal provide any answers? 264
ASIC v. Plymin & Ors (2003) 175 FLR 124; Elliott & Anor v. ASIC (2004) 10 VR 369 (the Elliott case) 267
ASIC v. Rich [2009] NSWSC 1229; ASIC v. Rich (No 2) [2004] NSWSC 836; (2004) 50 ACSR 500; Re One.Tel Ltd; ASIC v. Rich (2003) 21 ACLC 672; [2003] NSWSC 186 (the One.Tel litigation) 271
Earlier cases in the One.Tel litigation saga 271The BJR 272The onus of proof 273What amounts to a “business judgment”? 274What is good faith and for a proper purpose in the context of the BJR? 275Rational belief in the best interests of the company 275
ASIC v. Vines (2006) 55 ACSR 617; on appeal to the New South Wales Court of Appeal Vines v. ASIC (2007) 62 ACSR 1 (the decision on liability); 63 ACSR 505 (the decision on penalty) 277
At first instance – Austin J (Supreme Court of New South Wales) (55 ACSR 617) 277On appeal 278Penalties 281
Brunninghausen v. Glavanics (1999) 32 ACSR 294 283
Campbell v. Backoffice Investments Pty Ltd (2009) 238 CLR 304; (2009) 257 ALR 610; (2009) 83 ALJR 903; (2009) 73 ACSR 1; [2009] HCA 25 284
Carabelas v. Scott (2003) 177 FLR 334; affirmed in Angas Law Services Pty Ltd (in liquidation) v. Carabelas (2005) 226 CLR 507 286
viii DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
Darvall v. North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 290
Hall v. Poolman (2007) 65 ACSR 123 291
Metropolitan Fire Systems Pty Ltd v. Miller & Ewins (1997) 23 ACSR 699 294
Phoenix Constructions (Queensland) Pty Ltd v. Coastline Constructions Pty Ltd [2011] QSC 167; Phoenix Constructions (Queensland) Pty Limited v. McCracken [2011] QCA 259 297
R v. Byrnes & Hopwood (1995) 183 CLR 501; (1995) 130 ALR 529 299
Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235 301
Southern Cross Interiors Pty Ltd (in liquidation) & Anor v. Deputy Commissioner of Taxation & Ors (2001) 39 ACSR 305 303
State Bank of South Australia v. Marcus Clark (1996) 19 ACSR 606 306
Statewide Tobacco Services Ltd v. Morley (1990) 2 ACSR 405 308
Streeter v. Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291; (2011) 82 ACSR 1; [2011] WASCA 17 310
Streeter’s pursuit of the ANPC proposal 311Dealings in relation to the Cue tenements 312
Appendix 2 Major relevant provisions of the Act discussed or referred to in this book are set out below 313
180 Care and diligence – civil obligation only 313
Care and diligence – directors and other officers 313
Business judgment rule (BJR) 313
181 Good faith – civil obligations 314
Good faith – directors and other officers 314
187 Directors of wholly-owned subsidiaries 315
189 Reliance on information or advice provided by others 315
190 Responsibility for actions of delegate 316
198D Delegation 316
198F Right of access to company books 317
Right while director 317
Right during seven years after ceasing to be director 317
Right to take copies 317
Company not to refuse access 317
Interaction with other rules 318
199A Indemnification and exemption of officer or auditor 318
Exemptions not allowed 318
When indemnity for liability (other than for legal costs) not allowed 318
When indemnity for legal costs not allowed 318
199B Insurance premiums for certain liabilities of director, secretary, other officer or auditor 319
201K Alternate directors (replaceable rule – see section 135) 320
Infringement Notices or on-the-spot fines – Part 9.4AA 320
Failing to comply with the reporting and accounting provisions of the Act – Parts 2M.2 and 2M.3 321
Case references 323
ACCC Australian Competition and Consumer Commission (the regulator responsible for administering the Competition and Consumer Act 2010 (Cwlth)*
Act Corporations Act 2001 ACLC Australian Company Law CasesACSR Australian Corporations and Securities ReportsAICD Australian Institute of Company DirectorsAJ Associate JusticeAPRA Australian Prudential Regulation AuthorityASC Australian Securities Commission (the former regulator for
the Corporations Law in Australia)ASIC Australian Securities and Investments Commission (now the major regulator not only
for the Corporations Law, but also for aspects of the insurance and superannuation industry. The responsible minister is the Minister for Financial Services)
ASX Australian Securities ExchangeBJR business judgment ruleCAMAC Corporations and Markets Advisory Committee. See also CASACCASAC Companies and Securities Advisory Committee. From March 2002, CAMACCCA Competition and Consumer Act 2010CL Corporations LawCLERP Corporate Law Economic Reform ProgramCLERP Act Corporate Law Economic Reform Program Act 1999CLERP 9 Corporate Law Economic Reform Program Act 2004CLRA Company Law Review Act 1998CJ Chief JusticeCOAG Council of Australian GovernmentsFSR Act Financial Services Reform Act 2001J JusticeJA Appeal Justice of a State Supreme CourtITAA Income Tax Assessment Act 1936Minco Ministerial Council for CorporationsNCSC National Companies and Securities Commissionobiter dictum An opinion by a judge in deciding a case, upon a matter not essential to the decision,
and therefore not binding.P PresidentPrivy Council A United Kingdom court of appeal to which cases from countries in the
Commonwealth could be referred. Australia no longer has that access, unlike New Zealand, but the decisions of the Privy Council are relevant to Australia as they form part of the common law.
RBA Reserve Bank of AustraliaTPA Trade Practices Act 1974
* All statutes referred to in this book are Commonwealth statutes unless otherwise noted. The traditional abbreviation “Cwlth”, meaning Commonwealth statute, will not be used.
ix
Key terms
x DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
xi
Foreword
Thirty years ago, our predecessors recognised the need for a quality publication outlining the duties and responsibilities of directors and officers. So began the life of this book.
Professor Robert Baxt AO FAICDLife has authored Duties and Responsibilities since its 5th edition, published in 1987 and has followed developments in corporate, securities, competition and tax law with passion and vigour for more than 50 years.
In the face of an ever-changing governance landscape, Professor Baxt has updated each edition to incorporate significant case law, regulatory developments and the resulting implications for directors and officers.
The result is a book that is an essential addition to every director’s desk. And having informed three decades of lawyers and academics, it can also be found on the shelves of law firms and universities around the country.
The Australian Institute of Company Directors remains committed to providing a suite of world class resources, such as Duties and Responsibilities to ensure directors have current and powerful information at the ready.
Whether you have just been appointed to a board, are seeking a refresher of your duties, or looking for insightful commentary on recent case law, this milestone 20th edition remains as relevant today as it ever was.
I congratulate Professor Baxt on his significant contribution to the science and art of governance, and commend this book to every director.
Rick Lee FAICDChairman Australian Institute of Company DirectorsApril 2012
DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERSxii
Preface
This work covers the most important aspects of a director’s duties and responsibilities. Directors can take four positive steps to protect their position and that of their company. First, appoint properly qualified officers
and advisers. Second, ensure that not only their own knowledge is kept up to date, but also that the knowledge of everyone else in the company who is responsible for this area is kept up to date. Third, implement a proper risk management program and compliance program. Fourth, take out adequate insurance cover for directors and colleagues despite the fact that the insurance cover may be limited in operation.
Since the Commonwealth Criminal Code became part of our law in 2001, compliance by companies is an essential feature of their operations. There is a presumption of guilt if companies do not employ a culture of compliance when prosecutions are brought in for certain Commonwealth legislation. The existence of such a culture may also lead to lower penalties being sought by the relevant regulators or imposed by the court. The states and territories are likely to implement similar legislation in the not too distant future to deal with this area of the law.
The Australian Institute of Company Directors encourages the adoption of such a culture of compliance. Members of the Australian Institute of Company Directors and readers of this work are well advised to ensure that they and their organisations take whatever steps are necessary to ensure that they are as up to date as possible in dealing with these areas of the law.
I would like to thank Samantha Loff, graduate elect and Kate Wilson, paralegal at Freehills, for their assistance in preparing this new edition.
As always, special thanks go to Lorna Frick who has done the keying in for this edition of the manuscript. Also to Alicia Beverley at the Australian Institute of Company Directors for her support and assistance in arranging the material in its final form.
Professor Robert Baxt AO FAICDLifeEmeritus Partner, FreehillsProfessorial Associate, The University of MelbourneHonorary Professor, Griffith UniversityHonorary Life member of the Business Law Section of the Law Council of AustraliaChair of the Law Committee of the Australian Institute of Company Directors
xiii
DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS xiv
This work refers to the Corporations Act 2001 as “the Act”. This is basically Commonwealth law, but because of constitutional difficulties faced by the Commonwealth Government, the legislation is a combination of
Commonwealth, state and territory legislation with the states and territories referring certain legislative powers to the Commonwealth (see below). This referral needs to be refreshed periodically. This work refers to either a corporation or a company interchangeably. The other source of law that is important in understanding Australian company law generally is the common law (or the general law) and these terms may also be used interchangeably.
Until 2010, the Australian Securities Exchange (the ASX), formerly the Australian Stock Exchange, played a very major role in regulating the operation of rules in this area of the law. As a result of significant changes to the Act in 2010, the major responsibility previously vested in the ASX has largely been shifted to the Australian Securities and Investments Commission (ASIC). The ASX will continue to play a significant role in relation to the listing of securities on its exchange. While competition has been allowed for a new operator to participate in the market (a company known as “Chi-X” has been registered as a second operator and commenced on 30 October 2011), it will not for the moment run the business of listing the securities of a company. It will deal
1
Chapter One
Introduction
mainly in the trading of listed securities and only a small number of listed securities will be able to be traded on its market.
The powers vested in the ASX under ss.793 and 1101B of the Act will now largely be powers exercised by ASIC. They provide that ASIC will be responsible for the operation of the Listing Rules which are overseen to a certain extent by the ASX, and the market rules which will be applied to the operation not only of the ASX, but also to Chi-X.
The role previously played by the ASX in order to oversee certain practices that were regarded as irregular or raised problems (for example, market information and the activities of certain brokers) has to a large extent been covered by ongoing legislative change and rule-making, thus the main role when overseeing this activity will now also rest with ASIC.
Other regulators relevant in overseeing the operations of companies, their directors and officers, are the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA), and in the context of competition law issues, the Australian Competition and Consumer Commission (the ACCC).
The period 2009 to 2011 was a very turbulent and important one for companies and their directors and officers. In line with overseas influences and developments, and despite the robustness of the Australian economy, there have occurred a large number of corporate collapses, some of a very high profile nature, in those years. As a result of increased agitation both in the media and elsewhere, a plethora of further legislation and regulation governing the affairs of companies and their directors and officers in different ways have been introduced. Perhaps the most significant of these for Australian company directors has been the executive remuneration legislation (referred to briefly later in Chapter 9, Section 8.2 of this book). There have also been a number of Senate and other Parliamentary reports following corporate collapses. These in turn have often resulted in calls for more action on the part of ASIC or more regulation. Many cases have been brought both by ASIC and by private litigants against company directors and officers. At the time of going to press, the High Court of Australia has reserved judgment in the important appeal in the James Hardie cases (details of which are discussed in later chapters). A decision is expected later this year.
2 DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
1 The legal and regulatory framework
This work, written primarily for directors and officers of companies, provides an overview of the major legal responsibilities and duties imposed upon directors and officers in carrying out their roles. Some of these duties and responsibilities are derived from the national statute in operation – the Act. This overriding Commonwealth legislation became increasingly important because of the Wakim litigation (Re Wakim; Ex parte McNally (1999)). In that case, the High Court of Australia held that the national Corporations Law (CL) scheme then in force was unconstitutional. It was found in that case by a 6:1 majority that the states did not have the power to confer certain jurisdiction on the Federal Court, as the various state Jurisdiction of Courts (Cross-Vesting) Acts and various versions of the Act (Corporations Law) purported to do. To overcome this difficulty the states and the territories agreed to confer certain powers on the Commonwealth, resulting in the enactment of the Act in 2001. The financial and other difficulties mentioned earlier led to greater cooperation between the states and territories with the Commonwealth Government through the operation of the Council of Australian Governments (COAG). There is an increasing likelihood that more parts of this area of regulation will be transferred by the states and territories to the Commonwealth.
The duties and responsibilities of directors emanate not only from the Act, but also from the common (or general) law – the body of precedent developed as cases have been decided in Australia and in other jurisdictions, especially the United Kingdom (UK). While there is a prevalence for Australian cases to be the dominant sources of these common law rules, cases from the UK, and increasingly the United States of America (US), play a part in the interpretation of our law.
This work discusses the operation of the relevant rules (statutory and common law) as they affect directors, although most of the rules also apply to officers. Where there is a distinction of importance, it is noted.
As well as the rules of company law, directors and officers need to be aware that a range of other rules (and this is an increasing range of rules) affect their obligations as directors and officers of companies. These other rules include responsibilities under the competition and consumer laws, environmental protection
3introduCtion
law, occupational health and safety law, equal opportunity law, taxation law, privacy principles and the implementation of rules on climate change.
The Commonwealth Criminal Code, which came into effect in 2001, plays a significant role by placing a premium on compliance. Risk management and corporate compliance have therefore become central features of the organisation of a company and of compliance by its directors and officers. Failing to ensure that the company complies strictly with laws in these and other areas may have far-reaching ramifications for company directors and officers.
The Act is the fundamental statute referred to in this work. The duties and responsibilities apply to public and private (proprietary) companies. A new form of company, the “one-person” or one-director, one-shareholder company introduced by the First Corporate Law Simplification Act 1995 has in a sense provided more flexibility for small businesses for clarification of the law.
In so far as company directors are concerned, the most significant changes were brought about in the early part of this century by the introduction of what is known as a “statutory business judgment rule” (BJR) in s.180 of the Act. This rule was intended to “soften” the effect of the harsher readings by the courts about the directors’ duty of care. While certain other rules were introduced into the legislation (namely ss.189 and 198D) these have been seen to be largely ineffective (see a discussion of these provisions in Chapter 6). At the same time the BJR was introduced, a new statutory derivative action was introduced for shareholders (members) which was intended to overcome rules that previously limited their ability to enforce claims either against the company (and its directors) or against outsiders.
2 Further regulatory reform
As the financial system becomes more generally relevant for consumers as a result of the significant deregulation of the financial services market following the Wallis Report, the interests of investors, and in particular smaller investors (and Australia has a very high percentage of smaller investors owning securities listed on the ASX), litigation against directors in companies has grown significantly. A major factor in this growth of litigation has been the recognition by the High Court of
4 DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
Australia in the Fostif ’s case (Campbell’s Cash and Carry Pty Ltd v. Fostif Pty Ltd (2006)) whereby there was no rule of public policy against funding agreements that provide money to a party to prosecute proceedings in return for a share of the proceeds of the litigation. The old English general law rules about funding litigation were no longer a bar to arrangements which have become known as “litigation funding”. In effect, what the High Court decision means is that provided the arrangements put in place between the litigation funder and the relevant party were reviewed by the court, plaintiffs (and indeed defendants) in litigation could obtain financial support for the pursuit of litigation. In addition, class actions, involving cases brought on behalf of a group of shareholders or others, and discussed in various chapters in this book, have relied on such funding. In the US the popular use of contingency fees (where the lawyers acting for the relevant parties take a percentage cut of the damages or award that they obtain, but receive no payment if their case is lost) has led to a proliferation of litigation against directors and their companies especially where companies fail. This litigation is rampant in the US in this area and it is becoming more prolific in Australia as litigation funders support shareholders in this area.
The operation of litigation funding is under review by the Standing Committee of Attorneys-General, but there has been no report as yet from that body. The courts have had some interesting things to say about litigation funding and whether it should be “protected” or otherwise, for example in the Green’s case (Green v. CGU Insurance Ltd (2008)).
One major litigation funder has been established in Australia – IMF (International) Ltd. Smaller companies have also been established but have been challenged as being illegal organisations by virtue of certain provisions in the Act. While these arguments have been held to be technically correct, the current federal government believes that it is important for litigation funders to be allowed to operate and they have been excused from complying with those provisions of the legislation that deal with management of investment companies. Regulations to clarify the situation are currently being finalised.
There have been many significant reforms introduced over the last few years. Perhaps the most important broad change was the passage of the Financial Services Reform Act 2001 which clarified rules about disclosure and the operation and
5introduCtion
control of rules in relation to financial products. The Financial Services Reform Act created a single licensing regime for financial sales, advice and dealings on financial products, consistent and comparable financial product disclosure, and a single authorisation procedure for financial exchanges and clearing and settlement facilities. It has been heavily criticised and attempts continue to simplify the law.
Although it was described at the time as the final chapter of law reform, the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9) was not in fact the last chapter. That legislation introduced a number of changes in the areas of continuous disclosure, auditor independence, the right of shareholders to obtain information about directors’ remuneration and a number of other important changes on whistleblowing. There were further moves to review and possibly expand the operation of the BJR. However, as we describe in more detail in Chapter 7, that initiative has now stalled.
With the election of a new federal government in November 2007 the spotlight was again placed on corporate law reform and corporate governance in particular. One of the more significant areas of concern for company directors, especially directors of smaller companies (although the same sentiment applies to all companies), is the existence of well over 700 statutes (on the last count undertaken by researchers and the Australian Institute of Company Directors) which provide for strict liability on the part of directors where their company breaches a particular statutory provision (in such areas as, for example, occupational health and safety, environment protection and road transport). Alternatively, the legislation reverses the onus of proof in that regard. In 2006, the Corporations and Markets Advisory Committee (CAMAC) published a report entitled Personal Liability for Corporate Fault. In the report it criticised the use of this type of legislation which, in effect, reverses a traditional English (and Australian) common law – a person is innocent until proven guilty. Following an initial initiative taken by the then Minister for Superannuation and Corporate Law, Senator Nick Sherry, he later announced that our laws should have a balance between corporate laws which promote accountability and which ensure that suitable people are willing to serve as directors and take appropriate business risks. Later the new Minister for Corporate Law, the Hon. Chris Bowen, announced in late 2009 that the Ministerial Council for Corporations (Minco) would oversee and audit all relevant state, territory and Commonwealth legislation of this kind.
6 DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
7introduCtion
This would be done through COAG. He indicated that Minco in progressing this initiative would concentrate on these issues:
• Wherecompaniescontravenestatutoryrequirements,liabilityshouldbeimposed in the first instance on the company itself.
• Personalcriminalliabilityofacorporateofficerforthemisconductofthecorporation should generally be limited to situations where the officer encourages or assists the commission of the offence (accessorial liability).
• Inexceptionalcircumstances,wherethereisapublicpolicyneedtogobeyond the ordinary principles of accessorial liability, a form of deemed liability could be imposed on a corporate officer only using a “designated officer” approach (for minor offences) or a “modified accessorial” approach (for more serious offences).
Regrettably, only New South Wales and South Australia have made significant strides in their audit (see COAG Reform Council’s progress report, National Partnership Agreement to Deliver a Seamless National Economy: Performance report for 2009-10 (December 2010)). Neither I, nor the Australian Institute of Company Directors, are happy with the way in which this audit process has progressed. There has been a more recent statement made by COAG (through Senator Sherry) that no further changes to the principles or issues set out above will be agreed to by the relevant governments.
This is disappointing because the principle of persons being presumed innocent and having to be proved guilty has been eroded by the use of these strict liability/reversal of onus of proof regimes.
3 Other regulatory and related initiatives
The collapse of a significant number of high-profile companies, the growth of class actions and litigation (discussed again later), the numerous reports emanating from CAMAC (such as its report Social Responsibility of Corporations (December 2006)) and from parliamentary committees, has led to a spate of law reforms across a number of areas. In particular, laws relating to corporate accounts and financial reporting have been reviewed and have been expanded to a certain extent. The
8 DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS
critical nature of the accounting obligations have been targeted by ASIC, recently culminating in the decision in ASIC v. Healey (No 1) (2011) (discussed in Chapters 5 and 6). It is not possible in this work to detail all of the initiatives that have been taken, some of which have had more spectacular consequences than others. Quite clearly, as a result of some of these recent decisions and initiatives, directors and officers must seek specialist advice on a more regular basis (from lawyers and others). Even in the case where such a specialist adviser is needed, the directors must deal with these issues themselves.
Throughout this book we will highlight other important initiatives. To keep abreast of all of these developments that will continue to occur in this area of the law, readers may find it useful to read the writer’s monthly column in Company Director (the magazine of the Australian Institute of Company Directors) as well as the Company and Securities Law Journal and the Baxt Report. The Australian Institute of Company Directors runs a highly respected and very useful set of educational courses aimed at assisting directors or would-be directors to better appreciate legal and other professional obligations.