LAW 2505 Lecture Notes - Lecture 6: Fiduciary, Aberdeen Railway, Breach (Security Exploit)
23 May 2018
School
Department
Course
Professor
DIRECTORS DUTIES
STEP 1: This answer seeks to advise (Client) as to the best avenues for pursuing
▪ (Def) personally for the Co’s debts of …
▪ The (Defs), if they are Ds of the (Co) for potential breaches of their director’s duties.
(Def.1) has potentially breached…. (Def.2) has potentially breached… each Defendant will be considered
separately. This answer will also consider venues of enforcement of the duties and what remedy is available
to, and appropriate for, them
STEP 2: (repeat process for each defendant- cross reference back to law, but apply the different facts)
1. Does the person owe duties?
2. what conduct? – if multiple acts of misconduct breaching multiple duties- break up & consider
separately
3. Which duty? - was it breached?
4. Does the D have a defence? OR has the Co sought to limit D’s liability? (will be invalid)
DOES THE PERSON OWE DUTIES?
1. Ds owe all common law/ equitable duties as fiduciaries of the Co (Hospital Products)
2. ‘Directors’ defined in s 9 owe statutory duties
• (a) a director is a person who is formally APPOINTED to the position of a director/ alternate director
and is acting in that capacity regardless of the name given to their position
→ Person appointed as a NON-EXECUTIVE D without an employment c* with company. Likely to
have issue with duty of care and diligence
• (b) a director is a person who is not validly appointed but
(i) acts in the position of a D- considered a ‘DEFACTO D’.
→ whether they act in the position of a D depends on the size/context of the particular Co in its
circumstances DCT v Austin; defacto D if the individual undertakes tasks significant that it
would not be delegated to someone unless they were a director Grimaldi
(ii) A person not validly appointed, but upon whose instructions the Ds of the Co are accustomed to act
is considered a SHADOW D - Test Buzzle
1. Identify the Ds- establish the SD directed those Ds how to act in relation to the company;
2. Causal link between instructions of SD and outcomes Grimaldi
→ SD, not independent will of the board making board decisions Bluecorp; and
→ Ds perform positive acts, don’t just stand aside Bluecorp
3. That they were accustomed so to act – Habitual. SD calls the tune, Ds dance Bluecorp
4. Exception: not a SD merely because the Ds act on advice given in the proper performance of
functions attaching to the person in professional capacity/ business relationship with Ds,
company or body Bluecorp
3. Officers, defined in S 9 CA, owe statutory duties
• An officer is a person APPOINTED to the position of a director or secretary; Receiver, liquidator,
administrator; If a secretary + a lawyer can breach duties no matter which capacity you act in-Shafron
• An OUTSIDE PERSON making or participating in making decisions affecting business may be an
officer. They must have the capacity to affect significantly the corporations' financial standing and the
directors must be accustomed to act upon their instructions - gives drive and direction to company Dywer
• Decision making capacity- depends on size of company – eg: $10 m not enough to affect financial
standing of an international bank ASIC v Citigroup-
• person making decisions in a parent company's investment committee that practically affects the
financial position of the subsidiary Adler
4. Secretaries owe statutory Ds as ‘company officer’ under s 9
5. ‘Those involved in a contravention’ – lawyers/ advisors- accessorial liability s 79 if they have
(a) aided, abetted, counselled or procured the contravention; or
Somerville – lawyer involved as they advised on, and provided the documents required to effect,
the transactions. Court found that, but for his involvement, the transactions would not have taken
place.
(b) induced, whether by threats or promises or otherwise, the contravention; or
(c) been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the
contravention; or
(d) conspired with others to effect the contravention.
• Note* Lawyer may have engaged misconduct under s 68/69 LPA- consider separately
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DEFENDANT’S CONDUCT GIVING RISE TO BREACH- state fact
WHICH DUTY APPLIES? WAS IT BREACHED?
Can be concurrent breach of statutory and non-statutory duties- statute does not replace the common law DDs
s 185. statute does not override common law in relation to conflicts of interest s 193)
Category
Common law
statute
Loyalty
No conflict/ no profit
Duty not to fetter discretion
Duty to act in good faith and best interests of the
company
Duty to use powers for a proper purpose
Material interests must be discloses ss
191-196
Related party transactions Ch 2E
Duty not to misuse information or
position
Duty to act in good faith, in best
interests and use pwrs for proper purpose
ss 181, 184
Care and
diligence
Duty to act with reasonable care, skill and
diligence
Duty to act with care and diligence s
180
Duty to avoid insolvent trading s 588G
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LOYALTY
No conflict/ no profit- material interests, related party, misuse info/position
COMMON LAW
STATUTE
No conflict/ no profit
Breaches of both often
occur simultaneously (breach no conflict and get
profit)
1. No conflict
• Must not allow real or
substantial conflict to arise between
their interests/ duties and the duties to
the company Hospital Products
• Objective test- Would a reasonable
person would think there was
a sensible possibility of
conflict? Phipps v Boardman
• Conflicts of interest and duty
▪ Director dealing with the
company; buying/ selling to
company in pursuit of personal
interest Aberdeen Railway
• Conflicts of duty and duty
▪ Arises where there are multiple
directors
2. No profit
• Fiduciary may not secretly profit from
their position in the relationship to
gain personal advantage Hospital
Products
• No secret/ unauthorised
remuneration or financial
benefit Dale v Inland
Examples
• taking of opportunities or bribes
▪ Regal; Cook v deeds: 3 of 4
directors set up another company
and took on a contract which
would have gone to the first
company causing the first
company detriment- as directors
of the first company they
breached their duty not to profit
• taking of corporate property
▪ Groeneveld; Canadian
aero: officers found to be
fiduciaries. Took up opportunity
on the side as an independent
business venture using assets
from Canadian Aero
3. Defence- ratification of other business
venture- fully informed consent.
• Resolution of GM Furs: telling the
chair not sufficient. Left out
information. Told secret formula of
product
• Resolution of board of
directors QM v Hudson: sufficient to
tell directors alone if they are also the
only shareholders are the same time
Material interests must be disclosed 191-196
1. D with material personal interest in a matter
relating to company affairs to give the other Ds
notice of that interest s 191(1)
• Affairs of a company- includes anything
2. If D has an interest, may give standing notice to
other Ds about nature and extent of
interest BEFORE it becomes a material
personal interest s 192(d)
• As soon as practicable, give written notice
to the directors at a board meeting
• Notice not required in Pty company if
other Ds aware
3. No disclosure req if exempt under s
191(2)(a)(i): Interest arises because the D is a
member of the company; (ii) interest is related
to remuneration as a D
EFFECT OF DISCLOSURE
1. PTY Co- if D disclosed using s 191 procedure;
or the interest doesn’t need to be disclosed
under s 191(2)
• D may (c) vote, (d)transactions may
proceed (e) may retain benefits (f) the
company cannot avoid the transaction
because of the existence of the interest s
194
2. D of a PUBLIC co prohibited from
being present during discussions of and voting
on matters in which they have a material
personal interest s 195
• But may participate if disinterested Ds
pass a resolution approving so which: s
195(2)(a) identifies the D, the nature and
extent to the interest in the matter and its
relation to the affairs of the company
(b) states that those directors are satisfied
that the interest should not disqualify the D
from voting or being resent
Related party transactions Ch 2E
1. Protects PUBLIC Co and its shareholders
against un-commercial transactions entered
into between the company and related parties
without member approval s 208
2. Transaction must involve getting a Financial
Benefit- s 229 broad interpretation.
Substance over form. Non exhaustive list
• Providing finance or property s 229(3)(a)
• Buying or selling an asset s 229(3)(b)
• Supplying or receiving services s
229(3)(d)
• Issuing securities s 229(3)(e)
3. The FB must be given by a PUBLIC Co
4. The recipient of the FB must be a related
party of the public co s 228
• Ds, Ds of entity that controls public co-
spouses, parents, children
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