17 June 2022
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Paula
Pyburne and Jaan Murphy
Law and Bills Digest Section
Background
Australian law imposes numerous duties and obligations upon
various people who are employed by, or who act on behalf of, an Australian
company. The particular duties depend upon the role of the person within the
company. The Corporations
Act 2001 sets out the rules for the formation and registration of
companies in Australia and provides that there may be directors,
members and officers of a company.
The Corporations Act requires that a proprietary
company have at least one director and that person must ordinarily reside
in Australia [subsection
201A(1)]. A public
company must have at least three directors, two of whom must ordinarily
reside in Australia [subsection
201A(2)].
Nature of the duties
Part 2D.1 of the Corporations Act sets out the statutory
duties
and powers of directors and officers of corporations. A corporation is:
- a company
-
any body corporate (whether incorporated in this jurisdiction or
elsewhere)
- an unincorporated body that under the law of its place of origin,
may sue or be sued, or may hold property in the name of its secretary or of an
office holder of the body duly appointed for that purpose and
- includes an Aboriginal and Torres Strait Islander corporation
that has been incorporated under the Corporations
(Aboriginal and Torres Strait Islander) Act 2006 [section
57A].
The relevant duties are set out below.
Duty to exercise reasonable care
and diligence
First, a director, or other officer, of a corporation must
exercise their powers and discharge their duties with the degree
of care and diligence that a reasonable person would exercise if they were
a director or officer of a corporation in the corporation’s circumstances; and
occupied the office held by, and had the same responsibilities within the
corporation, as the director or officer [subsection
180(1)].
A director, or other officer, of a corporation who makes a business
judgment is taken to satisfy the duty (and their equivalent duties at
common law and in equity) in respect of the judgment if they do all of
the following:
-
make the judgment in good faith for a proper purpose
- do not have a material personal interest in the subject matter of
the judgment
- inform themselves about the subject matter of the judgment to the
extent they reasonably believe to be appropriate and
-
rationally believe that the judgment is in the best interests of
the corporation [subsection 180(2)].
At first glance, this would appear to provide a presumption
in favour of directors. However, since the decision of Austin J in Australian
Securities and Investments Commission v Rich at [7269] [Duty of
Care and Diligence and the Business Judgment Rule], it has been generally
accepted that the business judgement rule operates only as a defence—casting
the onus on the director to defend his, or her, decision-making [pp. 15–16].
This is a
civil penalty provision. A breach of this duty will not give rise to a
criminal offence.
Duty to act in good faith
Second, a director or other officer of a corporation must exercise
their powers and discharge their duties in good
faith in the best interests of the corporation and for a proper
purpose [section
181]. This is a civil penalty provision.
In the case of Australian
Securities and Investments Commission v Maxwell Brereton J emphasised that section 181 is not
concerned with the conduct of a director in relation to creditors, other
persons dealing with or concerned with the company, or anybody else but the
company itself; and that a breach of the obligation to act bona fide in the
interests of the company involves a consciousness that what is being done is not
in the interests of the company, and deliberate conduct in disregard of
that knowledge at [107–110].
In addition, the Corporations Act creates a criminal
offence in equivalent circumstances to section 181 [subsection
184(1)]. The fault
elements of the offence are dishonesty and intention; and dishonesty and
recklessness. The penalty is a maximum of 15
years imprisonment [Schedule 3].
Duty not to improperly use position/information
Third, a director, secretary, other officer or employee of a
corporation must not improperly
use their position to gain an advantage for themselves or someone else; or
cause detriment to the corporation [section
182].
Fourth, and in similar terms, 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 gain an advantage for themselves or someone else; or
cause detriment to the corporation
[section 183].
Each of these duties is a civil penalty provision. In
addition, the Corporations Act creates criminal offences in equivalent
circumstances. The fault
elements of the offences are intention and recklessness [subsections
184(2) and 184(3)]. The penalty for a criminal offence in respect of each
of the duties is a maximum of 15 years imprisonment [Schedule 3].
Importantly, it is not a defence in a court proceeding
for an offence in relation to these duties that the person uses their position
or information with the result of, or with the intention of, gaining an
advantage for the corporation [subsections
184(2A) and 184(4)].
Breach of the duties
Breach of a civil penalty provision
An action against a person for a breach of a civil penalty
provision is made by
application from the Australian Securities
and Investments Commission (ASIC) to the relevant Court
[section 1317J].
If the Court is satisfied that the breach of directors’ duties is a
contravention of a corporation/scheme
civil penalty provision, the Court must issue a certificate
of declaration to that effect [section
1317E].
Order for pecuniary penalty
Once the Court has issued a certificate
of declaration that the duty has been breached, it may order the payment of
a pecuniary
penalty if the contravention:
- materially prejudices the interests of the corporation … or its
members
- materially prejudices the corporation’s ability to pay its
creditors or
-
is serious [paragraphs
1317G(1)(a) and (b)].
The amount of the pecuniary penalty to be paid by an
individual is the greater of 5,000 penalty units (currently
equivalent to $1,110,000) and, if the Court can determine the benefit
derived and detriment avoided because of the contravention—that amount
multiplied by three [subsection 1317G(3)].
However, the amount is capped and cannot exceed the pecuniary penalty otherwise
payable for the contravention of the civil penalty provision [subsection 1317G(2)].
In determining the amount of the pecuniary penalty, the
Court must take into account a range of relevant matters, including, but not
limited to, the nature and extent of the contravention, the circumstances in
which the contravention took place and whether the person has previously been
found by a court (including a court in a foreign country) to have engaged in
similar conduct [subsection 1317G(6)].
A pecuniary penalty is a debt
payable to ASIC on behalf of the Commonwealth [section 1317GAA].
Make a relinquishment order
A relinquishment
order aims to neutralise any financial benefit that might have been gained
from the relevant misconduct [page 57].
That being the case, the relevant Court can make a
relinquishment order on its own initiative during proceedings before the Court,
or on application from ASIC [subsection 1317GAB(2)]. The amount to be
paid under the order is equal to the benefit derived and detriment
avoided—that is, the sum of the total value of all benefits obtained by
one or more persons that are reasonably attributable to the contravention, and
the total value of all detriments avoided by one or more persons that are
reasonably attributable to the contravention [section 1317GAD].
Make a compensation order
Further, a Court may order a person (including a
director) to compensate a corporation, registered scheme or notified foreign
passport fund for damage suffered by the corporation, scheme or fund if the
person has contravened a corporation/scheme civil penalty provision (that is,
directors’ duties) and the damage resulted from the contravention [subsection 1317H(1)].
Criminal offences
A person who does an act or thing that the person is
prohibited from doing under a provision of the Corporations
Act or does not do an act or thing that the person is required
or directed to do by a provision of the Corporations Act is guilty of a
criminal offence [section 1311]. An offence is
punishable by the criminal sanctions of imprisonment or fine [section 1311B].
The Criminal Code Act
1995 contains the Criminal
Code (the Criminal Code). Chapter 2 of the Criminal Code comprises a
comprehensive statement of principles of criminal responsibility for Commonwealth
offences which applies
to all Corporations Act offences [section 1308A]. The Criminal Code
provides that offences have physical
elements, for example, doing or not doing an action, and fault
elements, such as intention, knowledge, recklessness or negligence [section 3.1].
What is recklessness?
According to the Criminal Code a person is reckless
with respect to a circumstance if he, or she, is aware of a substantial risk
that the circumstance exists or will exist; and having regard to the
circumstances known to him, or her, it is unjustifiable to take the risk.
Similarly, a person is reckless with respect to a result if he, or she, is
aware of a substantial risk that the result will occur; and having regard to
the circumstances known to him or her, it is unjustifiable to take the risk [section 5.4].
What is a proper purpose?
Where directors engage in intentional acts that would amount
to unlawful conduct, they are likely to breach their duties. As noted by the Federal
Court of Australia in Australian
Securities and Investments Commission v Cassimatis (No 8) (the Storm
Financial case):
A corporation has a real and substantial interest in the
lawful or legitimate conduct of its activity independently of whether the
illegitimacy of that conduct will be detected or would cause loss … it would
be hard to imagine examples where it could be in a corporation’s interests for
the corporation to engage in serious unlawful conduct even if that serious
unlawful conduct was highly profitable and was reasonably considered by the
director to be virtually undetectable during a limitation period for liability (at
[482]).
Critically this means that where a director has facilitated
a corporation engaging in an illegal activity it will be difficult (if not
impossible) for the director to prove that they acted for a proper purpose.
Consequences of a breach of duties
Disqualification
The Corporations Act provides that a person is automatically
disqualified from managing a corporation in certain circumstances. In
particular, if a person is convicted of an offence under the Corporations
Act that is a breach of directors’ duties (other than the duty to exercise
reasonable care and diligence which is only a civil penalty provision) the
disqualification provision will apply [subparagraph
206B(1)(b)(i)].
The period of disqualification is five years [subsection 206B(2)]. The
disqualification may be extended by the Court on application by ASIC for up to
an additional 15 years [subsections 206BA(2) and (3)]. In determining
whether an extension is justified (and if so, for how long), the Court may have
regard to any matters that the Court considers appropriate [subsection 206BA(5)].
A person who breaches the first directors’ duty—the duty to exercise reasonable care and diligence—may
also be disqualified from managing a corporation. However, the disqualification
is not automatic. ASIC may apply to the Court for a disqualification order once
a certificate
of declaration is made. It is for the Court to determine whether
disqualification is justified, and if so, the period of disqualification [section 206C].
Other remedies
Questions about whether directors have complied with their
duties will often arise in the context of the administration or liquidation of
a company—particularly if there have been allegations that the company was
subject to ‘phoenixing’.
It is important to note that the Corporations Act
contains significant penalties for breaches of other requirements which are
separate from directors’ duties—but which may impose obligations on directors
outside of the directors’ duties outlined in Part 2D.1. Where the evidence is
insufficient to prove a breach of directors’ duties it may be that the relevant
conduct contravenes another provision of the Corporations Act (for
instance a failure
to keep financial records or a director’s
duty to prevent creditor-defeating dispositions in the context of
insolvency).
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