BUSL250 Directors Statutory Duties Corporate Governance Financial and reporting obligations Audit 1 Section 191 s191 Requires that a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless s191(2) says otherwise. \"Material personal interest\" involves a real possibility of conflict s191(2) - examples when disclosure not needed: director's remuneration Interests where the director is a guarantor of a loan to the company Where (in Pty company) the directors are already aware of such interests 2 Directors Statutory Duties The Act sets out that general law re directors' fiduciary duties are still relevant (s185) Statutory duties apply not only to directors but also apply to other company officers (s9 & s179) and in some cases employees (s 182 and s 183). The statutory duties are enforced by ASIC - specific penalties apply depending on the section breached 3 Directors' Statutory Duties The provisions in the Corporations Act dealing with directors' duties can be divided into 4 main groups: Director's position - good faith, proper purpose & avoid conflict interest (s181,182 & 183) Dishonest or reckless conduct ( for example s184) Management standards - care and diligence (s180 & s588G) Disclosure obligations (s191 & s192) 4 Directors Statutory Duties - s181, s182, s183 s181 Mirrors the general law duty to act in good faith, in the best interests of the company and for a proper purpose. s182 Duty not misuse position to gain advantage S183 Duty not misuse information to gain advantage Sections 181, 182 & 183 are civil penalty provisions and breach may result in the imposition of civil penalties 5 Civil Penalties Section 1317G - this section sets out a maximum pecuniary penalty of $200,000 Section 1317H - this section applies where there is a breach of the civil penalty provisions and enables the court to order a person to compensate the company for damage resulting from the contravention Section 206C provides for disqualification where a civil penalty provision is breached 6 Criminal Penalties - s184 s184 Where a director fails to act in good faith or for a proper purpose (as in 181), or misuses his position (182) or information (183) for gain and where the conduct is reckless or intentionally dishonest then this will be in breach of s184. The Criminal penalty provisions apply to a breach of s184 There are several sections of the Corporations Act that contain criminal penalties - a list of these sections and the specific penalties can be found in Schedule 3 of the Corporations Act and include: Fines Imprisonment 7 The Duty of Care and Diligence Arises under: General law Under general law whether a director had breached the duty of care and diligence depended on a largely subjective assessment of the director's own skills and knowledge This general law standard (as applied in Re City Equitable) is no longer relevant - assessing care and diligence is an objective exercise today Statute Law S180 s180 (1) - act with reasonable care and diligence s180 (2) - business judgment rule (BJR) 8 Care and Diligence Accountability and objectivity have altered the application of the general law standard in regards to a director's duty of care In Daniels v Anderson the Court of Appeal found the executive directors of AWA Ltd had been negligent and that directors must understand the nature of the duty they are required to perform and be familiar with the business of the company Directors must be pro-active in their approach to management. Keeping themselves informed about company matters Regular attendance at meetings Making their own inquiries and not merely relying on the information of others Participating in the decision making processes Directors cannot simply rely of the fact that systems are in place and have an objective duty to be able to read and understand the company's financial statements (ASIC v Healey) 9 s180 s180 (1) imposes an objective 'reasonable person' test to be applied and clearly sets out the standard of the duty of care and diligence which must be observed by the directors and officers of the company Consideration of whether a director has acted reasonably will include a consideration of the company's circumstances and the responsibilities of the director 10 Business Judgment Rule s180(2) - Business Judgment Rule (BJR) a) The director makes the business judgment in good faith for a proper purpose b) Has no material interest in the subject matter of the decision (avoid conflicts of interest) c) Informed themselves as to the subject matter d) Rationally believe the business judgment is in the best interests of the company. s180(3) - defines a business judgment to mean any decision to take or not take action in respect of a matter relevant to the business operations of the company 11 Business Judgment Rule The BJR was used as a defence in ASIC v Adler however this was not successful as the court held that Mr Adler clearly had a material personal interest in relation to the relevant transaction The BJR does not protect a director where the breach involves a failure to monitor the company's affairs The director bears the onus of proving that the BJR applies 12 ASIC V ADLER Williams (CEO) and Fodera (CFO) organised $10M advance by HIHC on Adler's behalf Other directors unaware HIH Insurance Limited (HIH) Adler - non exec director HIH Casualty and General Insurance Limited (HIHC) [Wholly owned subsidiary of HIH] Advanced $10M to PEE Pacific Eagle Equity Pty Ltd (PEE) Adler controls Buys HIH shares - trustee of AEUT - Australian Equities Unit Trusts (AEUT) Bought shares owned by Adler Corp - Made unsecured loans - Adler Corporation Adler and wife only shareholders 13 s 588G - Insolvent Trading Pursuant to s 588G, a director has a statutory duty to prevent the company from trading whilst insolvent. The director has an obligation to ensure that the company is not insolvent at the time a debt is incurred or they will run the risk of personal liability for debts incurred. In a similar way to s 180 the standard imposed upon a director under s 588G will be that of a reasonable person in the circumstances Thus, the directors are required to keep themselves informed as to the financial position of the company 14 Financial and Reporting Obligations Fundamental reporting obligations upon a company: to keep financial records (s 286) - all companies to prepare financial and directors' report for each financial year (s 292) - large pty and public companies audited financial reports and obtain auditor's report (s 301) - large pty and public companies Pursuant to s 302, a disclosing entity (definition s 111AC - for example a listed company) must prepare an audited financial report and directors reports half-yearly. Small proprietary companies are not required to prepare annual financial reports unless directed to do so by the members (holding 5% or more the voting shares) - s 293. By ASIC - s 294 15 Financial and Reporting Obligations The financial reports must: Comply with accounting standards (s 296); and give a \"true and fair view\" of the financial performance of the company (s 297) Directors Reports in listed companies must include details of remuneration matters and directors interests in shares, options, debentures or contracts with the company (s 298 to 300B) Financial records must be kept for 7 years after the transactions covered by the records are completed and also must available in hard copy. (s 286 (2)) Records kept in electronic form must be converted (s 288) A written notice to ASIC is required to notify the whereabouts of financial records kept outside Australia (s 289) 16 Continuous Disclosure Disclosing entities are required to disclose material information in relation to the company's operations or financial position on a continuous basis (s 674) The requirements of continuous disclosure vary depending on whether the disclosing entity is listed or unlisted. For listed companies the ASX Listing Rules apply The continuous disclosure provisions are investor/market focussed Non-disclosure, misleading disclosure, and selective disclosure are all targeted Section 674 is a civil penalty provision 17 Auditor Independence There is a general requirement that auditors remain independent of the audited body in the sense that they avoid conflicts of interest - s 324CA The Corporations Act sets out examples of relevant relationships that may amount to a conflict - s 324CH There is a 2 year waiting period before an auditor can become an officer (take a management role) in a client company - s 324CL A significant role auditor must be rotated after a maximum of 5 successive years of servicing a particular audit client - s 324DA 18 Auditors Duties General Law Duties to the company to use reasonable care and skill A contractual duty to the company engaging them Tort - relationship of auditor and client give rise to a duty of care towards the client Duties to Outsider The crucial issue is \"proximity\" Case: Esanda Finance v Peat Marwick 19 Auditors Corporations Act Duties (s 307 to s 313) Forming an opinion whether the financial report Complies with AASB (s 296 or s 304) Presents a true and fair view (s 297 or s 303) Reporting to members (ss 295 to 297 and s 303) For listed company, attending the AGM and providing answer to written questions (ss 250RA and 250 PA) Complying with Auditing standards (s 307A) Must report to ASIC if there are reasonable grounds to suspect a contravention of the Act (s 311) 20