The Relationship and Duties of the Director - Coursework Example

Introduction: In its most original form the statutory duty of care that was owed by the directors to the company as whole and other directors of the board was interpreted in the light of the subjective approach to common law. Section 180(1), as with its predecessor s 232(4), incorporates an objective ‘reasonable director’ test. In accordance with the current common law position, under s 180(1) the director may not plead personal idiosyncrasies in defence of a claim that he or she has breached a duty of due care and diligence1. The duty exists in cases where the intrinsic function of one of the parties in question is to take care of the best interests of the other in manner that could be exemplified. The relationship of the director in the given position entails a requirement of trust and confidence. This warrants acts of honesty on part of directors privy to this trust; so as to maintain good faith, and uphold interests of the beneficiaries of such relationships.  Directors are liable for corporate losses since their primary role vests controlling and managing the company. As explained by Weinberg J in Downey v Crawford (2004) 51 ASCR 182 at [172], “power to control the management of a company is generally vested by the company’s constitution in its board of directors2”. Theoretically speaking, In any given corporate at any given point of time therefore, the appointed directors by virtue of the fact that they have responsibility of the company and some kind of answerability to the organization, are responsible for the well being of the company3. In this context therefore the behavior of company directors and officials is open to fastidious inspection and analysis, given the fact that most such directors and executive charge the company high fees in return for their services, the fact that they owe the company a duty of trust and care is fair and justified. Sections 180-184 of the Corporations Act 2001 (Cathy) consist of the statutory values of behavior that are requisite from the directors in any given company. The sections codify to a large extent the already existing case law principles with respect to the duties that a director has towards the company4. Ever since the Act was passed and for a number of years thereafter, care and diligence were the consistencies of these principles and as well as duties of loyalty (all for the progress and uplift of the company and its interests). As per the provisions of ss 180-184 of the Act a director who contravenes this Act is liable for paying compensation or civil penalties. He can also be terminated or criminal penalties for dishonest or intentional misconduct initiated against him. It is in the context of the s 180(1) of the Corporations Act that the judgment given in Daniels v Anderson (1995) 37 NSWLR 438 will be analyzed in the following essay. The analysis will seek to first outline the details of the subsection and based on this the interpretation provided by Clarke and Shellar JJA with respect to the above-mentioned judgment. After outlining the major principles provided by the judgment, the essay will conclude remarking on whether or not the judgment was in keeping with the underlying principles of s 180(1) of the Corporations Act, 2001. Duties of a director: Before one goes into the analysis of the case in question, it would be relevant to discuss the duties that a director owes so that the discussion later could be placed in context. Broadly a director’s responsibility is governed by three sets of duties to the company, which include the duty of care and skill, the duty to act within his powers, and the fiduciary duties. The standards are the same for executives and non-executive directors5. The duty will vary according to the size and business of the particular company and the experience or skills that the director holds himself out as possessing6. A non-executive director cannot be expected to have the detailed knowledge of the company’s affairs required of an executive director but even non-executive directors are required to take reasonable steps to guide and monitor the management of the company7. 1. Duty to act within his powers: The directors of a company owe a duty to act both within the company’s powers and within the powers conferred to them by the company’s memorandum and articles or (so far as lawful) by the members of the company in a general meeting8. Where they act in excess of their powers then unless the resulting transaction is validly ratified by the members of the board, it is liable to be set aside if the other party did not act in good faith, and the directors will be liable for any loss sustained by the company even if they acted in good faith and without negligence. 2. The duty of reasonable skill and care A director is required to exercise reasonable care, skill, and diligence in the performance of his duties. This duty is owed both at common law and in equity but it is not fiduciary duty9. However, common law has tended to pitch the standard of care at a relatively low level. It has thus been held that a director: Need not be an expert in the type of business in which his company is engaged so that is suffices if he used care and skill of the non-professional reasonable man10 Does not require to devote whole time attention and time to the company affairs If a non-executive director, is entitled to rely on the executive directors and officers of the company, e.g. for the accuracy of the financial statements presented Is entitled to rely on outside advice by a person whom he reasonably believes to be competent to give it, so long as he exercises his own judgment as to such advice. The three main submissions that have been accepted as accurate and within the law made by counsels for the defence of plaintiffs are: A director is needed to exhibit his duties in the form of a degree of skill and ample knowledge A director is needed to perform his duties such as care as an ordinary man might be expected on his behalf A director must exhibit honesty in exercising any power vested in him. All actions must be in good faith of the company One can now delve deeper into the nuances of the judgment that was passes by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, 500-501). They stated, “The insolvent trading cases demonstrate that ignorance is no longer necessarily a defence to proceedings brought against a director. In some respects, at least, the director must inform himself or herself about the affairs of the company. That is apart from fulfilling his greater duty of rising above his particular field of experience11. This involves knowing the company, its way for progresses and knowing it from inside out. He must know how to run the company effectively.The board may be assisted by subcommittees consisting of its members, including non-executive directors” As opposed to the standard of procedure legalized in preceding judgments that usually placed the duty of the director at a much lower level, the judgment in this appeal was a stark contrast to the set precedents. The judges stated that they did not just believe that the duty of the director was to act within the confines of his ability and skill, but extended the spectrum of directorial duties and responsibility manifold when they stated that12: “In our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. The board of AWA met only once a month for half a day. Nevertheless, to our mind the board should meet as often as it deems necessary to carry out its functions properly. The question is what in the particular case are the duties and responsibilities of the directors and then what time is required of them as a board to carry out these duties and responsibilities. It is not a matter of tailoring the extent of the duty or function to pre-fixed intervals between board meetings”. The judgment was in essence an application of the principles of the Hawkins Case. The judges held that the directors of the company owe a duty of care to the company to take reasonable care in the performance of their office. This duty was found to be in addition to any statutory contractual and/or equitable duties, which the directors may concurrently owe to the company. According to the judgment, the source of the duty of care within the purview of common law rests in the relationship of proximity. Many of the relationship cases have concerned professional work done by a person who follows a skilled calling such as a solicitor or an architect. In Hawkins v Clayton (at 576) Dean J, with whose judgment in this regard Mason CJ and Wilson J agreed, said that in cases where the plaintiff’s claim is for puree economic loss, the categories of case in which the requisite relationship of proximity is to be found are probably to be seen as special in that they will be characterized by some additional elements which would be commonly consisting of reliance or dependence13. There is also the case of assumption of responsibility or a combination of the two. The judges referred to the rulings from the cases of Hedley Byrne and Co Ltd v Heller and Partners Ltd [1964] AC 465 to state that the nuances of the proximity test needed to be satisfied. They also stated that there a judgment on whether or not the director observed and acted in accordance with the duty of care needed to be based on an analysis of the reasons of policy. The arguments that were stated against the directors being under the common duty o care as based on the historical considerations were according to them outdated. They also stated that more recently, the courts particularly in the cases involving insolvent trading recognized that within the purview of law, there is usually more that is required of the director than “supine indifference”. The law therefore requires to recognize both diligence and action. Their honors found further support for a duty being owed in the fact concept of negligence depends ultimately “upon a general sentiment of wrong doing for which the offender must pay”. They also found that the duty by the directors to their company turns upon the natural expectation and placed the shareholders on the experience and skill of a particular director. Their Honors (at 501-2) were not prepared to say that the modern public company director should be treated as having acquired a professional status. This led to recognition that entrepreneurial spirit must be used by directors to make viable and valid business, and they are not required to behave like conservative investment trustees. They continued (at 501-2): "We are not impressed by this perceived barrier against imposing on directors a duty of care at common law. We also do not think that directors hailing from different backgrounds perform any lesser than their counterparts who hold trade-specific expertise.. This consideration has given rise to the proposition that a director need not exhibit a greater degree of skill than may reasonably be expected of a person of the director's knowledge and ability. In Fletcher v National Mutual Live Nominees Ltd (1990) 3 NZLR 641, Henry J (at 661) expressed reservations about whether the subjective qualities of the particular director are appropriate factors to applied in determining the yardstick for the standard of care to be exercised by a director in today's business world. … The law of negligence can accommodate different degrees of duty owed by people with different skills but that does not mean that a director can safely proceed on the basis that ignorance and the failure to inquire are a protection against liability for negligence.” In their decision-making process the judgment made use of the decision by Pollock J in the Francis case where Pollock J had said that14 A director needs to be familiar with the essentials governing the management of the organization and the business in which his corporation is engaged The judgment also stated that a director is under continuous compulsion to keep himself abreast of the developments of the company and the overall related environment within which the company is functioning. The director is also required to be knowledgeable of the overall affairs of the corporation affairs and its intrinsic policies; The director should also ensure familiarity with the economics of the company of which he is a part; this is a simple enough requirement that could be achieved by reviewing financial statements. Finally the director should also be prepared to make enquiries into the matters of the company that are shown to him based on these statements. This means that a director should clear doubts regarding the statements and not doing so would be considered a negligence of the duty of care entrusted to him. It is noteworthy that these matters extend beyond diligence into areas normally encompassed by the word "competence", or perhaps even "skill". Finally they concluded that (at 504): “Although there was no reference to skill in s 229(2) of the Companies (New South Wales) Code - nor is there in s 232(4) of the Corporations Law, Malcolm CJ in Vrisakis(at 407-408) thought that the duties imposed by the section reflected the general concept of negligence at common law. This means conduct ordinarily measured by reference to what the reasonable man of ordinary prudence would do in the circumstances. Skill is that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work: Voli v Inglewood Shy Council (1963) 110 CLR 74…”. … The judgment could be viewed by some as being harsh on the directors as it is a common notion that the directors of a company fulfill their duties by just being present at meetings and by ensuring the fulfillment of their individual responsibilities. The judgment on the other hand has placed the onus of initiative on the director’s shoulder where it would be considered a non-fulfillment of responsibility and incorrect action if the director does not take it upon himself to be a more proactive member of the overall corporate team. The essential principles that have been stated in the judgment and have been followed by later cases are that the director is required to show a pro-active pursuit of the up to date material facts as to the company’s financial condition and performance15. The director is also required to ensure a more frequent monitoring of facts and a critical appraisal of information received is also part of his responsibilities. If one was to discuss whether or not the judgment has remained in line with the facts of the Corporation Act and its clauses about the duty of care and trust that a director owes his corporation it would be interesting to debate whether or not the judgment has in fact remained in line with the nuances of the law. The decision about making the director responsible is probably the most logical manifestation of the duty of care that could be extended to the directors, who are after all the ones that make use of the company’s profitability. There needs to be some difference in the identification of the duties of trust and the fiduciary duties that the director owes the company16. The idea as inherent in the judgment is not just to ensure that the director remains loyal to the company but also to ensure efficiency in work, absence of which would constitute as the absence of the proper conduct of the duty of care by the director towards the company and the other directors of the company in particular. Conclusion: In conclusion, one can analyze some of the things in a non-legal environment that actually constituted the reasoning for the passage of the judgment. With globalization coming of age and the heretofore-unseen expansion of corporates around the world being a norm rather than an exception, it would be in fact the wisest thing for a company to do if it were to place the onus of responsibility on the shoulders of the directors. The spirit of the Corporation Act is to ensure a decent standard of work from the directors by ensuring that they remain loyal to the company. It is in this regard that the judgment in Daniels v Anderson needs to be viewed and accepted. The problem with the judgment is that the onus of proof to falls completely on the shoulders of the plaintiff, as it is he that needs to prove a contravention of the duty of loyalty, care and trust by the director under injunction. It can however be stated with a certain amount of confidence that subsequent judgments have in fact remained true to the spirit of Daniels v Anderson, and that this judgment furthers the logical extension of s 180-184 of the Corporations Act. Reference: Campbell C, 2007, International Liability of Corporate Directors, pub, A1Books Publications, pp30-34 Cassidy J, 2006, Concise Corporations Law, pub, The Federation Press, Edn.5th, pp275-277 Cockburn T, 1996, Disclosure Obligations in business Relationships, pub, The Federation Press, pp75-77 Durack P, 2008, Paper for insolvency and restructuring Law Conference, Recent Judgments, accessed, August 27, 2009, Read More