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#3346 - Directors Duties Crib Sheet - Business Law and Practice

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Directors’ Duties

  1. Who is a director?

    1. 250 Includes a person occupying the position of a director even if not termed that

    2. 251 Shadow director is a person in accordance with whose directions or instructions directors of a company act

  2. Duties of a director?

    1. 170(1) general duties are owed by a director of the company to the company (not to the shareholders or other directors)

      1. Directors are subject to fiduciary duties whereby they must be the interests of the company above their own interests. These duties are codified in 172-177 CA 2006

    2. 170(2) a person who ceases to be a director continues to be subject to 2 duties

      1. 175 conflict of interest

        1. Exploitation of any information, property or opportunity that he became aware of at the time he was a director

      2. 176 duty not to accept benefit from third parties

        1. Things done or omitted to be done before ceasing to be a director

    3. 171 Duty to act within powers

      1. Must act in accordance with the company’s constitution

      2. Only exercise powers for the purpose

    4. 172 Duty to promote the success of the company

      1. Subjective test

        1. Director must act in way he considers, in good faith, most likely to promote the success of the company

        2. If director makes a business decision in good faith that he believed would benefit the company, the court will not find him in breach

      2. 172(1) Director must have regard to:

        1. Likely consequences of any decision in the long term

        2. The interests of the company’s employees

        3. Need to foster the company’s business relationships with suppliers, customers & others

        4. Impact of the company’s operations on the community & the environment

        5. Desirability of the company maintaining a reputation for high standards of business conduct

        6. Need to act fairly between members of the company

      3. Directors should keep minutes of meetings to document their considerations

    5. 173 Duty to exercise independent judgment

      1. No breach if director acts as authorised by company’s articles

      2. 173(2) Duty is not infringed if director acts in accordance with an agreement entered into by the company which restricts future discretion of its directors

      3. Duty does not prevent directors relying on advice, as long as directors exercise own judgment in deciding whether or not to follow advice

    6. 174 Duty to Exercise reasonable care, skill & diligence

      1. Covers negligence or the incompetence of a director

      2. Subjective & objective test

        1. Director must exercise same standard of care, skill & diligence that would be exercised by a reasonably diligent person with

          1. The general knowledge, skill & experience that the director actually has AND

          2. The general knowledge, skill & experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company

      3. Directors cannot escape liability by delegating their responsibilities or being inactive, they must exercise their powers of supervision adequately & play an active role

    7. 175 Duty to avoid conflicts of interest

      1. Avoiding a situation in which a director has or can have a direct or indirect interest that conflicts or may possibly conflict with the interests of the company

        1. Simply being appointed a non-executive director of a competitor is not enough to put you into breach Pull v Lever, Plus Group Limited and Others v Pike

          1. But there is no hard and fast rule – the moment you hear any confidential information you are potentially in a conflict area

      2. 175(2) Making personal use of information, property or opportunities belonging to the company

        1. It is immaterial whether the Company could take advantage of the information, property or opportunity

      3. Cannot make a profit in the course of being a director without the authorisation of the company

      4. Exceptions

        1. 175(3) duty does not apply to a conflict arising in relation to a transaction or an arrangement with the company

          1. A contract made between a director and the company (issue of shares)

          2. Directors conflicted interest relates to another company that transacts with the director’s company

          3. GO TO 177

        2. 175(4) Duty not infringed if matter authorised by directors of the company passing a resolution under 175(4)(b) and 174(5)

          1. 175(6) board authorisation is effective only if the conflicted director has not taken part in the decision or the decision is valid even without the participation of the conflicted director

            1. QUORUM REQUIREMENTS – is meeting still quorate?

          2. Board authorisation is only effective if nothing in the constitution invalidates it

          3. If company incorporated before 1 October 2008 shareholders will have to pass an ORDINARY RESOLUTION allowing directors to authorise conflicts under this section

        3. Duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest

      5. MA 14 - any director with a conflict cannot vote in an authorisation of the action

    8. 176 Duty not to accept benefits from third parties

      1. Director cannot accept benefit conferred on him by reason of his position BUT

      2. 176(4) Duty is not infringed for accepting a benefit which cannot reasonably be regarded as likely to give rise to a conflict of interest

      3. 180(4) Members of the company may authorise a director’s acceptance of benefits

    9. 177 Duty to declare interest in proposed transaction or arrangement with the company

      1. Declaration must be made before company enters into the transaction & the nature and extent of the interest must be declared

        1. 177(2)(a) declaration may be made at a meeting of the directors or

        2. 177(2)(b) declaration may be made by notice to the directors in writing in accordance with 184 or by general notice in accordance with 185

      2. EXCEPTIONS – Declaration not required

        1. 177(5) director is not aware of his interest in the transaction or of the transaction itself

          1. Director will be deemed to be aware of the transaction & interest if he ought to have been aware of it

          2. 177(6)(a) interest cannot reasonably be regarded as likely to give rise to a conflict of interests

          3. 177(6)(b) other directors are already aware of the interest

            1. PRACTICE LINE IS TO DECLARE ANYWAY

          4. 177(6)(c) interest concerns terms of directors service contract which has been discussed by a board meeting

      3. MA 14 – any director with a conflict cannot vote in an authorisation of the action

    10. 182 Duty to declare interest in existing transaction or arrangement with the company

      1. 182(1) Director must declare the nature & extent of his direct or indirect interest in an existing transaction to the extent that the interest has not been declared under 177

      2. 182(2) Must be made at a board meeting by notice in writing (184) or General Notice (185)

      3. 182(4) Must be made as soon as is reasonably practicably

      4. EXCEPTIONS – Declaration not required

        1. 182(5) Director is not aware of his interest in the transaction or of the transaction itself

          1. Director will be deemed to be aware of the transaction & interest if he ought to have been aware of it

        2. 182(6)(a) interest cannot reasonably be regarded as likely to give rise to a conflict of interests

          1. 182(6)(b) other directors are already aware of the interest

            1. PRACTICE LINE IS TO DECLARE ANYWAY

        3. Interest concerns terms of directors service contract which has been discussed by a board meeting

      5. Consequences of breach

        1. 183(1) Director who fails to comply commits an offence

          1. 183(2) liable to a fine

        2. 2 CDDA director disqualification

  3. Consequences of Breaching 171-177

    1. 178(1) civil consequences of breach

      1. Injunction to prevent director carrying on with offence

      2. Setting aside the transaction

      3. Restoration of company property held...

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