Understanding Duties And Responsibilities Of Directors And Officers

Background of the Case

Discuss About The Duties Responsibilities Directors Officers?

The Corporations Act, 2001 (Cth) is the act which dictates the manner in which different aspects of the companies in Australia are to be conducted, as it provides different provisions for its incorporation, its winding up, constitution and other related provisions for the companies (Abbott, Pendlebury and Wardman, 2007). Under Part 2D.1 of this act, the directors of the company, along with the officers of the company in certain cases, have been given certain duties, which have to be fulfilled by them, or else, civil and criminal penalties are imposed on the relevant breaching individual (Gibson and Fraser, 2014). The case of McGellin v Mount King Mining NL (1998) 144 FLR 288, deals with such a breach of director duties based on the conflict of interest (Austlii, 2017a). And through this discussion, the different aspects of this case, with a particular reference to the breached duty, have been elucidated.

In this case, the plaintiff had been the director of the defendant. The case was made for the oral contract which the plaintiff entered into with the defendant on July 03^rd, 1996 whereby it was agreed that the plaintiff would be issued shares in the company at one cent per share price, where the par value of such shares was 20 cents. This promise was made in consideration of funds which were contributed towards the exploration work cost by the plaintiff, on defendant’s behalf. This particular Management was stated to have been entered in the board meeting and was pleaded to cover the implied terms regarding the issuance of the shares by the defendant to the plaintiff, after contribution of funds and in a reasonable time frame (Austlii, 2017a).

The plaintiff contented that he had made a contribution of $1500 for the exploration costs and this amount was paid to the bank account of defendant on August 21^st, 1996. And that the defendant had breached in their agreement as the promised 150,000 shares were not issued to the plaintiff at all, within a reasonable time frame of August 21^st, 1996. And so, a claim was initiated for the alleged contract to be specifically performed; and in case that is not possible, to be paid damages and interests as per the value of 150,000 shares, which stood at $108,000 on the basis of 72 cents for each share. This price was attained from thee price which was paid by the company who took over the defendant and acquired all of its shares on February 04^th, 1967 (Austlii, 2017a).

Duties breached

The key matter which was related to the director duties in this case was regarding the material interest. In case the contract had been made, was the article 15.15 of the Article of Association of the defendant was beached, as the director had not precluded himself from voting on an arrangement or a contract, where the director had a material interest. And in case the contract had been made, was that to be deemed as void of voidable, as the contract which was performed in this case by the plaintiff had been contravened by the defendant, which would allow the plaintiff for specific performance for the share allotment or for the damages in lieu of it (Austlii, 2017a).

Section 191 of the Corporations Act requires the directors to disclose the material personal interest which they have. As per this section, it is the duty of the directors to notify the other directors regarding material personal interest where a conflict is raised (WIPO, 2015). The material personal interest is related to the affairs of the company, or something which is being transacted at the meeting, where the director should notify the other directors about their material interest in such transaction (Austlii, 2017b). A contravention of this section results in both civil and criminal penalties. So, where a material personal interest is raised, it is the duty of the director to notify the other directors as per this section (Paolini, 2014).

The term “material personal interest” has not been defined, but the meaning of the same can be clarified as the matter which has some real substance, and which has the ability of the vote of the director being influenced (Cassidy, 2006). Hence, the directors are required to give the details of both the nature and the extent of their interest in the particular issue. The rationale behind this section is to avoid any conflict of interest, which can make a transaction unfair (Latimer, 2012).

In the case of McGellin v Mount King Mining NL, the director failed to disclose that he made entered into an oral contract with the plaintiff for allocating him certain shares for the work being done by the plaintiff on behalf of the company. And yet the director voted upon the acquisition of shares by Sipa Resources International NL, without informing the board of this conflicting situation (Austlii, 2017a). Hence, the director duties in this case had been contravened.

Critical analysis of decision court

Apart from breach of section 191, there had been breach of different other duties of the directors, particularly of section 180, which required the director to be show care and diligence in discharging their duties and using their powers (Federal Register of Legislation, 2017). This was clearly not done due to the conflict of interest present in this case. Apart from this, the directors had a duty under section 181, of good faith, under section 182, use of position of company director in a diligent manner and under section 184, to work in good faith and proper purpose (ICNL, 2017).

By allowing a conflict of interest to be present, where they had material person interest in the transaction being undertaken they failed to work for the best interest of the company, and so, the duties stated here, were breached. Also, they misused their position by promising the plaintiff that he would be given the shares, and was actually not given any, so the director actually misused their position and fooled the plaintiff. Hence, the presence of material personal interest led to a conflict of interest, effectively translating in the breach of director duties.

This case became famous for the definition of material interest given by Justice Murray, which has been since quoted a number of times in other cases. As per the judge, the “material” meant the interest which involved a relationship of an actual substance regarding the matter at hand, or the proposed contract or arrangement (GWRDC, 2012). In this manner, the very nature of the interest had to be taken under consideration, in terms of having the capacity of influencing the vote of a director in the matter of particular decision (Lacey, 2015). The substance of interest, its capacity and the very nature of it had to be considered for having an impact over the director’s ability to discharge their fiduciary duties (Bartholomeusz, 2015).

The judge stated that the plaintiff had director or indirectly, but not too contingently or remotely, a material personal interest. And in this context, the claimed contract which would provide the defendant to reimburse the plaintiff for the contribution made in the exploration work’s cost was tainted by conflict of interest.  However, the claims of the plaintiff could not be upheld as the alleged contract could not be established to have been made before the court. Hence, to award the specific performance or the claimed damages was not possible for Justice Murray. And so, the appeal made by the plaintiff was not upheld (Austlii, 2017a).

Even though the points stated by the judge in this case were quite right, but in the view of the writer, the decision given was unfair on the plaintiff. This is due to the fact that the court did not uphold the breach of fiduciary duties on part of the director, where they clearly should have been. The director did not disclose that he had made plaintiff the promise of being allocated certain shares. This resulted in a conflict of interest situation being present. Economics, the part where the judges stated that it was difficult to contest these points, due to the oral contract not being able to be proved before the court of law, which ultimately led to the failure of plaintiff’s claims, was correct.

Conclusion 

Even though the claims of the plaintiff in this case could not be established owing to the lack of the establishing that an oral contract had indeed been formed between the plaintiff and the defendant, this case continues to be quoted more than often, as a result of the definition of material personal interest given by Justice Murray. This case is not only significant in respect of this definition, but also presents a strong case for drawing up written contracts. Had a written contract been drawn in this case, the breach of director duties could have easily been established due to the presence of material personal interest and a conflict of interest; and this would have allowed the plaintiff to either get the specific performance of being allocated the promised shares, or being paid the compensation amount, as was calculated by the plaintiff on the basis of the business of the defendant being acquired by another company.

References

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Austlii. (2017a) Thomas Paul Mcgellin & Ors v Mount King Mining Nl (Acn 060 118 201) & Anor [1998] WASC 96 (7 April 1998). [Online] Austlii. Available from: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/wa/WASC/1998/96.html?context=1;query=McGellin%20v%20Mount%20King%20Mining%20NL [Accessed on: 18/09/17]

Austlii. (2017b) Corporations Act 2001. [Online] Austlii. Available from: https://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions [Accessed on: 18/09/17]

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Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19^th ed. Sydney, NSW: The Australian Institute of Company Management.

Cassidy, J. (2006) Concise Corporations Law. 5^th ed. NSW: The Federation Press.

Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 18/09/17]

Gibson, A., and Fraser, D. (2014) Business Law 2014. 8^th ed. Melbourne, Pearson Education Australia.

GWRDC. (2012) Directors’ Interests Policy. [Online] GWRDC. Available from: https://www.gwrdc.com.au/wp-content/uploads/2013/12/GOV1-Directors-Interests-Policy-WEB.pdf [Accessed on: 18/09/17]

ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 18/09/17]

Lacey, A. (2015) Avoiding a conflict of interest: what can directors do?. [Online] McCabes. Available from: https://www.mccabes.com.au/avoiding-conflict-interest-what-can-directors-do/ [Accessed on: 18/09/17]

Latimer, P. (2012) Australian Business Law 2012. 31^st ed. Sydney, NSW: CCH Australia Limited.

Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA: Edward Elgar.

WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 18/09/17]