Question

Hello can someone help me in this question.

Bitbynet Ltd was incorporated on 21 January 2000 and has adopted the replaceable rules as its constitution. What happens to the company’s internal governance rules if the Corporation Act 2001 (Cth) is amended?

Answer 1

To consider whether the current statutory directors’ duties require amendment, and specifically section 181 of the Corporations Act, it is first necessary to understand the current directors’ duties under the general law and statute. In most cases the power to manage the company is granted by the company to its directors.7 This power is derived from both the Corporations Act and the company’s constitution. Section 198A of the Corporations Act, a replaceable rule, states that the business of the company is to be managed by or under the direction of the directors. Although section 198A is a replaceable rule, many company constitutions contain a similar provision, delegating authority to manage the business of the company to its directors.8 Consequently, absent a specific provision in the company constitution limiting this power, it is up to the directors to determine how and why corporate funds are to be spent. In large companies, this can mean that directors have power over a large amount of assets. The directors’ power to manage the business has been interpreted by courts to be very wide. As stated by the Senate Committee in 1989 ‘directors are the mind and soul of the corporate sector’.9 In fact, as was confirmed by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd, 10 directors can make decisions against the majority shareholders’ wishes. Similarly, in Imperial Hydropathic Hotel Company Blackpool v Hampson, 11 it was held that a resolution of the members is ineffective to override a decision by the directors if the power to manage the business of the company is granted to them. This means that once such a power is granted, the shareholders’ only choice is to alter the constitution and limit the directors’ powers, thereby preventing future similar decisions being made.

This does not mean that decisions made by directors are unchallengeable. Due to the immense power of directors, the general law imposes several duties on them. As directors’ managerial powers are the result of a delegation from the shareholders, the role of directors’ duties has historically been focused on the promotion of shareholder interests. Directors owe common law duties to the company both through contract and tort.12 In addition, directors owe fiduciary duties to the company in equity.13 The general law requires directors to act for a proper purpose and in the interests of the corporation.14 This means that decisions made in breach of directors’ duties can be challenged by shareholders.

Strong remedies exist for the company if directors breach their duties even if it has suffered no actual loss. In fact, as is the case of all beneficiaries, the company can obtain a windfall remedy in equity if profits are improperly obtained by a director in breach of their duties.15 This is due to the fact that fiduciary law aims to prevent improper conduct rather than to remedy its consequences.16 The general law directors’ duties are reinforced by the statutory duties in sections 180-184 of the Corporations Act. The codification of directors’ duties is in addition to and not in derogation of the general law duty.17 Codification of directors’ duties, first introduced into Australian legislation by the Companies Act 1958(Cth), was the first of its kind in the English speaking world.18 Codification not only enhanced the duties owed by directors to companies, it has also provided an avenue for government, via the Australian Securities and Investments Commission (‘ASIC’), to enforce a breach of directors’ duties, which could previously only be enforced by the company.

Directors’ duties do not only protect the company against misuse of their powers. Equity, contract and tort require directors to discharge their duties with proper care and diligence. Section 180 of the Corporations Act codifies this duty. Nevertheless, courts have traditionally been reluctant to interfere with business decisions made by directors.29 In Re Smith & Fawcett Ltd, 30 Lord Greene M.R. said in relation to the manner in which directors must discharge their duties ‘They must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purposes Rather, the courts have traditionally been more concerned that a director’s power has been exercised for a proper purpose – i.e. that the directors believed that they were acting in the interests of the company Correspondingly, it is a defence to a breach of section 180, if directors can show that they rationally believed that the decision was in the best interest of the corporation (section 180(2) Corporations Act).

The extent to which the current Australian law allows directors to take into account the interests of other stakeholders has been reviewed by the Australian government numerous times. So far, all reviews have recommended no change as they have generally determined that the current law is adequate and flexible enough to allow directors to take into account all relevant interests. A recommendation to the contrary would have meant that the directors’ duties now contained in sections 180-184 of the Corporations Act would require amendment. As a minimum, section 181 of the Corporations Act would require amendment.