Directors’ Duties: Fiduciary Duties, Management Duties, Avoiding Conflict Of Interest

Introduction to Directors’ Duties

The duties of directors can be classified as:

Fiduciary duties, Management duties, to avoid conflict of interest, to exercise independent judgment, Contractual or constitutional duties (Andrew, 2016)

The director is expected to exercise diligence while performing his duties and act in good faith and for the best interest of the company. He should refrain from accepting benefits from third parties using his position. Director must not intentionally misuse their position. They are not to gain an undue advantage (Watts, 2009).

A director is given the power to:

Manage or direct the business of the company.
Make decisions on behalf of the company.

The power is given to them for the purpose of:

Reducing the risk of fraud
Removing the chance of mismanagement (Mortimore, 2013)

As a director of ERH Transport Services Pty Ltd, Mr Edward Harold Pye was expected to:

Use his position appropriately.
Prioritise the interest of the company.
Act in a way that a reasonable director would have acted in his position.
Exercise his powers for the actual purpose for which he used those powers.

Actual purpose for exercising powers:

Section 181 of the Corporations Act 2001, requires a director to discharge their duties and exercise their powers for a proper purpose.
Section 182 of the Act obliges a director to use their position properly.
Illustration: ‘A’ is the director of the company named ‘B’. While making a decision for the company, he should not entertain his own interest, which he knows to be against the interest of the company.
Section 181 of the Corporations Act 2001, requires a director to discharge their duties and exercise their powers for a proper purpose.
Section 182 of the Act obliges a director to use their position properly.
Illustration: ‘A’ is the director of the company named ‘B’. While making a decision for the company, he should not entertain his own interest, which he knows to be against the interest of the company.

Edward Harold Pye failed to exercise his power for the best interest of the company.
He tried to gain an advantage by using position.
He used his position improperly, to transfer money.
The misappropriation of funds were within knowledge to cause a disadvantage to the company.
This activities of Edward Harold Pye is outside the legal purpose for exercising powers.

References

ANDREW. KEAY, L. L. B. (2016). DIRECTORS’DUTIES. JORDAN PUBLISHING Limited.

Corporations Act 2001

Mortimore, S. (2013). Company directors: duties, liabilities, and remedies. Oxford University Press.

Watts, P. G. (2009). Directors’ powers and duties (p. 260). Wellington: LexisNexis.

Failure to perform the duties of directors shall be amount to be a breach of duty. According to Section 180(2) of the Corporations Act 2001, director making a business judgement for his self-interest shall commit a breach of his duties. Breach is committed when director uses his position to gain advantages.

A director is required to take decisions on behalf of the company. Their decisions must be justified and free from any conflicts. The duties are given to them manage the operations of the company. A breach of duty occurs, when there is conflict of interest between their obligation towards the company and their self-interests and the director has a duty to be performed but fails to do so.

In this case, to avoid the breach of duties by Edward Harold Pye, he should have:

Disclosed the conflicts of interests to the company.
In Fitzsimmons v R, the Court instructed a minimum disclosure of the interest, if it is against the interest of the company.
The fully informed consent of the members of the company is compelled when the conflict of interests arises.
Section 191 of the Corporations Act should be mandated for a company to avoid this kind of breach.
A director of a company having a personal interest in a subject matter of the company should give a notice of the interest.
At the time of appointment, the directors should be informed of consequences of the breach of their duties.
A duty to take positive action in addition to make disclosure shall reside, as per the judgment of The Bell Group Ltd v Westpac Banking Corporation (No 9).

Related party transaction refers to provide financial benefit to a related party. Related party transaction can be provided by a public company or registered managed investment schemes (Asic.gov.au, 2018). The related parties can be a director, their spouse or their relatives. Related parties can influence the decision making of the directors. This type of transactions includes conflict of interests.

Connections between transferring funds by Mr Pye and related party transaction:

The transactions done by Mr. Edward Harold Pye cannot be recognised as related party transaction.
Related party transaction requires transparency and disclosure of interest..
According to Chapter 2E, Mr Pye was required to obtain approval of members before providing the finacial benefit.
Mr Pye did not oblige to the requirements to make related party transactions.

References:

Asic.gov.au. (2018). [online] Available at: https://download.asic.gov.au/media/1239851/rg76-published-11-may-2011.pdf [Accessed 24 Oct. 2018]

Corporations Act 2001.

Section 198A of the Corporations Act 2001 enables a company to appoint director for managing the business. Directors have certain duties while acting on their position. The duties has been reinforced by Section 181, 182 and 183 of the Act. A directors shall be deemed to have committed the breach of his duties when he fails to or refuses to perform their duty, then he shall be liable for breach of duty. In ASIC v Cassimatis, the court found that a director shall be responsible for not performing his duties. The consequences for breach shall amount to remedies and penalties.

The Corporations Act 2001, provides a civil penalty under Part 9.4B where a breach of duty has resulted into loss for the company. Section 206C disqualifies the person from managing the corporation. A director shall be liable for criminal offences who was intentionally dishonest in exercising his powers to gain an advantage (Asic.gov.au. 2018). For the loss incurred by the breach of duties by Mr Edward Harold Pye, he shall be liable for:

His personal assets for compensating the loss or damage of the company.
A penalty of a maximum amount of $200,000 or a imprisonment up to five years or both.
A civil penalty of up to $200,000.

References:

Asic.gov.au (2018). [online] Asic.gov.au. Available at: https://asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-articles/when-are-directors-liable-for-breaches-by-the-company/ [Accessed 24 Oct. 2018].

Asic.gov.au. (2018). Retrieved from https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/#losses [Accessed 24 Oct. 2018].

A director must oblige with the responsibilities set out under the Corporations Act 2001, which are:

To act for the best interest of the company.
To use the position for the proper purpose.
To exercise due diligence and care.
To avoid any conflicts of personal and the company’s interest.
To act in good faith (Asic.gov.au, 2018).

Mr Edward Harold Pye Made the two transaction one on his account and another to the account of someone else. In this respect had breached:

The duty to act for the best interest of the company, as he did not make disclosure of his interest.
Duty to exercise power for the proper purpose, as he tried to gain improper advantage using his position.
To avoid conflict between the interest of the company and his personal interest.

References:

When the funds of the company are used by the director for his personal gain, instead of using it for the advantage of the business, it is the misuse of the funds by the director (Moneysmart.gov.au. 2018). Mr Pye did not make any disclosure to the members before transferring the funds. He misused the funds of the company and made money in the accounts of his own and another people.

ASIC shall investigate an allegation of fraud by the company director (Mccabecurwood.com.au, 2018). Punishments may be imposed on the directors in the form of penalties and remedies, which may include: