Role of Director in Australia
• As the senior corporate officer; companies must act through directors as human agents.
• Directors have the power to manage based on section 226A or a similar rule in a company's constitution.
• A director has no inherent right to a salary. It is not oppressive or unjust for a proprietary company to resolve to pay directors' salaries only to those directors who performed some function (See Doiske Pty Ltd v Johnson (1997) 15 ACLC 181).

Types of Directors
• Executive Director – A full time employee such as a managing director.
• Nominee Director - This is a director appointed to represent an interest outside the company, e.g. a particular shareholder.
• Alternate Director – Appointed director to represent another director who is unable to act (see S.225A).
• Non-Executive Director - Not a full time director, but who attends board meetings and is seen in an independent role.
• Governing Director - Directors in small proprietary who have broad and extensive powers under its constitution.

Important sections in the Corporations Law regarding to Directors
Section 60 - Definition of Director
“A person occupying or acting in the position of director regardless of the title being used and whether or not the person has being properly appointed.”
“ A person who directs and instructs directors in the way they behave within the company.”

A de facto director
The consequences of this was that the director/company could be sued under the insolvent trading provisions (Antico’s case)

1st example:
Mistmorn Pty Ltd (in liq.) and Anor v Michael Yassen (1996) 14 ACLC 1,387
Whether someone is a director will depend on whether his involvement in the affairs of the business was a driving force behind it. In this case Mr Yassen was a director as he was the driving force and was involved in all matters in which a director would normally be involved although he was not listed as a director at the co.

The court held that the difference between a consultant and a director is that the former was engaged to perform specific functions while the latter was engaged in the affairs of the corporation generally. Claims of breach against him were based on a number of payments by the company to him, allowing the company to build up large quantities of uninsured stock which were later stolen. The liquidator suffice in bringing an action under Section 598 of the Corporations Law against Mr Yassen for alleged negligence, default, breach of trust or breach of duty by irresponsibly purchasing large quantities of stock in that situation. Thus, he was in fact a director subject to the duties of a director.


2nd example:
Someone can be said to be “acting as a director” if he or she has acted in circumstances of emergency or as a friend of those legally bound to run a company.

Deputy Commissioner of Taxation v Austin (1998) 16 ACJC 1,555
The test in this case was whether a person has occupied or acted in the position of director not whether a person had done acts which only a director can lawfully do. The court held that at the period where Austin was helping out the company and exercised the top level of management functions in the company cannot be regarded as having acted as a specialist aide or consultant.


Section 221 - Number of Directors
- In a public company there must be at least 3 directors and in a proprietary company at least 1.
- A company cannot be appointed a director.
- In a public company 2 directors must reside in Australia and in a proprietary company 1.

Section 222A - Consent to act as Director or Secretary
- A person is required to give the company a signed consent to act as director or secretary before being appointed; the company must keep the signed consent. If this is not done the company contravenes the section.

Section 224B - Single Director/Shareholder Proprietary Companies
- The director may appoint another director by recording and signing the appointment.
- The director can use all the powers of the company, except any powers that can only be exercised by the general meeting. The director is to manage the company's business.
- The director is to be paid for being a director in any way and the company is required to pay traveling and other expenses properly incurred by the director.

Section 224 - Vacation of office of Director
- A director must give up the position if there has been breach such as section 229 where an insolvent under administration must not manage a company without the Court’s permission or section 559 where the Court may order a person not to manage a corporation if that person was a director of a company which has been wound up because of inability to pay debts.

Section 224A - Appointment of a new director on death, mental incapacity or bankruptcy, of a single director I shareholder of a proprietary company.
- The personal representative or trustee can appoint a person as director of the company, where a single director and a single shareholder and that person dies or because of mental incapacity cannot manage the company.
- A trustee in bankruptcy can appoint a director of the company in such a circumstance.
- A trustee, personal representative or trustee in bankruptcy can appoint his or herself as director of the company.

Section 225 - Appointment of Directors of a Public Company
- Appointment must be carried by a single individual motion, unless a previous motion has been carried unanimously approving of the motion to appoint two or more persons as directors by a single motion.

Section 226 - Validity of Acts of Directors
- Even if there is a defect in the appointment of a director, discovered after the appointment, the acts of the director are valid, but note that this is only to apply to a defect rather than a failure to appoint (see Morris v Kanssen (1946) 1 ALL ER 586).

Section 227 - Removal of Directors
- Removal for public directors from office can be done at any time by a resolution regardless of what is contained in the constitution or in an agreement between the director and the company (see S.227(1)).
- Special notice is required for removal of a director of a public company (see S.22 7(3)(3A))
- A copy of the notice to the director must be sent by the company and the director is entitled to be heard on the resolution at the meeting (see S.227(4)).
- A director is entitled to make written representations to the company which on request by the director can be circulated to members (see S.227(5)).
- A director removed is still entitled to seek compensation or damages in respect of the termination of the appointment (see S.227(11)).
- The directors of a public company cannot remove a fellow director by a resolution regardless of what is contained in the constitution or in a separate agreement (see S.227(W).
- A number of directors can be removed by a single resolution (see Claremont Petroleum NX. v Indosuez Nominees Pty Ltd (1986) 4 ACLC 315).

Section 228 - Age of Director
- Min age is 18 years old (S.228(W),
- A director of a public company or a subsidiary of a public company must stand down at the conclusion of the annual general meeting which occurs immediately after the director turns 72 years of age. This does not apply if the subsidiary company is proprietary company (S. 228(3), 228(3 A)).
- The re-appointment of a director who has turned 72 years of age can only take place if 14 days written notice of the re-appointment is given to all members and three quarters of those who vote, vote in favor of the re-appointment (S.228(7)); the resolution under section 228(7) does not apply if the subsidiary is a proprietary company (S.228(8A)).
- This procedure must be followed each year after the director turns 72 years of age except where the subsidiary is a proprietary company.

Section 229 - Certain Persons not to Manage
- Situations wherein a director is not permitted to manage corporation without leave of the Court e.g. where a director becomes insolvent under administration, or where the director has been convicted of serious fraud.
- Under section 229(3) a director convicted of certain breaches of the Corporations Law faces a five year ban on acting as a director or manager of corporations. This ban may be relaxed by the Court but only in respect of a specific and identified company set up in an application to the Court.

The Court does not have the power to relax the ban so that the offender can again participate as manager or director of companies not yet identified (See Re Schneider (1997) 15 ACLC90). This case was not followed in Re Harrison (1998) 16 ACLC 1138 where the Court held that an order could be made under section 229(3) to grant leave to a banned director to be involved in the management of a type of corporation as well as a specifically identified corporation.

However, the Court did caution that the circumstances in which a general order may be made would be very rare especially where leave was being sought to manage trading companies. Permission was given to be involved in the management of semi government authorities or community organization providing community service in this case, however, the Court have refused the application of leave in for sales and marketing advice.


Section 230 - Court May Order Person Not to Manage a Corporation
- Under this section, certain prescribed persons e.g, liquidators and creditors may apply to the Court for an order prohibiting a relevant officer e.g, director from managing a corporation if that person has failed to take relevant steps to prevent the company from breaching the Corporations Law on two or more occasions or has failed to act honestly and with reasonable care and diligence.

Section 237 - Payment for Loss of Office
- A general meeting of shareholders must approve of any payment to be made to a director of the company or related company for loss of office, but only after full disclosure of all the details have been made. Note there are exceptions (S:237 (5) & (6)).
- Section 599 - Court May Order Persons Not To Manage Certain Corporations.
- Court may order on an application of the ASIC that a director who for seven years was involved in managing two or more companies which have been wound up or placed in receivership, should not be permitted to manage a corporation.

Section 600 - Commission May Order Persons Not To Manage Corporations

Directors and Replaceable Rules
A company is required to have rules of internal management. These rules can be set out in a separate constitution, which the company can adopt, or they can be the replaceable rules set out in the Corporations Law.

Section 135 sets out which replaceable rules apply and section 141 sets out a table of replaceable rules. Some of the important replaceable rules, which apply to directors, are as follows:
- Section 224C - Company may appoint a person as a director by a resolution passed at a general meeting.
- Section 224D - Directors may appoint a person as a director. If the appointment is to a proprietary company the company must confirm it within two months. If the company is a public company it must be confirmed at the next AGM.
- Section 225 A - A director can appoint an alternate to exercise some or all of the directors powers for a set time, providing the other directors approve.
- Section 226A - The business of the company is to be managed by the directors or under the direction of directors and directors can exercise all the powers of the company except the powers of the general meeting.
- Section 226B - Any two directors can sign, execute etc., a negotiable instrument.
- Section 226C - Directors can appoint one or more managing directors on terms they deem fit.
- Section 226D - Directors' powers may be delegated to a committee of directors.
- Section 226E - In a proprietary company, the members can remove directors by a resolution and can appoint a new director to replace the director removed.
- Section 227A - A director of a company may resign by giving written notice to the company at its registered office.
- Section 231(1 A) - Where a director of a proprietary company discloses the nature and extent of his or her interest in a contract to a meeting of directors, the director may vote on the contract and if the disclosure is made before the contract was entered into, the director may retain the benefits of the contract which cannot be avoided by the company because of the director's interest.
- Section 236A - Directors are to be paid the remuneration as determined by the company including traveling and other expenses.

Managing Directors and Service Contracts
- Common service contract for a director may conditions of employment, remuneration package, severance pay/ etc.
- Legal problems can arise where there is a separate service contract but which incorporates the constitution (see Southern Foundries Ltd v Shirlaw [1940] 2 All ER 445).
- If the service agreement does not incorporate the constitution and is separate to it, the company cannot use its constitution to disadvantage the director (see Allen v Gold Reefs of West Africa [1900] 1 Ch 656).
- As the company has the power to alter its constitution in a way in which it might disadvantage the director, and it will not be in breach of contract, a separate service contract is recommended by the managing director. Note that a company has the power to alter its constitution at any time, and it cannot bind itself not to alter its constitution (see Shuttleworth v Cox Brothers & Co. (Maidenhead) Ltd. [1927] 2KB 9).


Powers of Directors
- The power brokers in a large listed company can be divided as follows: - the directors - senior management - shareholders – employees
- Directors have the power to manage; this comes from section 226A or a similar provision in the company's constitution.
- The strong managerial position of directors was judicially established in the Automatic Self Cleaning Case [1906] 2 Ch 34. See also NRMA v Parker (1986) 4 ACLC 609.
- The unique position of senior management in the large listed company was recognized in the AWA Case No 1 (1992) 10 ACLC 933 (see page 164 for summary of case).
- Shareholders act through company meetings e.g. annual general meeting and in the end have the power to vote directors in and out of office.
- The power of employees does not exist in a corporate law sense but certainly can be seen in the area of contract and industrial law.

Statutory Duties of Directors

Section 231 - Directors to Disclose Certain Interests
- A director of a proprietary company who is in any way interested in a contract or a proposed contract with the company shall as soon as possible declare the nature of the interest at a meeting of directors.
- This section does not apply to a director of a proprietary company if the director is the only director and only shareholder of that company (5.231(10)).
- Obligations to disclose under this section are in addition to obligations to disclose under Common Law (see Centofani v Eckimitor Pty Ltd (1995) 13 ACLC 315).

Section 232 - Duty & Liability of Officers of a Corporation
- Officers are defined to include directors, secretary, executive officer and others (S.232(1)).

- Section 232 (2)- An officer must act honestly in the discharge of the duties of office. It is not necessary to prove fraud in an action under this section unless it involves criminal proceedings under Section 1317FA.

The section seems to pick up the general law duties of acting in good faith in the interests of the company and for a proper purpose. However even if a director exercises powers honestly in the belief that what is being done is in the company's interests, there will be a breach of section 232(2) even though it would not amount to a criminal offence. A belief by a director that he or she is exercising their powers honestly will not save them if the law finds the exercise of power is held to be improper (see Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR261).

- An officer must exercise the degree of care and diligence that a reasonable person in a like would exercise in the corporation's circumstances (S.232(4J).

- Section 232(4) sets out an objective test which is to be the applied to directors (Daniels v Anderson (1995) 13 ACLC 614 and Commonwealth Bank v Friedrich & Ors (1991)9 ACLC 946.) Note that this policy is not intended to dampen business enterprise and penalize legitimate but unsuccessful entrepreneurial activity. In running a company, directors must take some calculated risks in the decisions they put into operation (see Vrisakis v ASC (1993)11 ACLC763).

- Directors' duties under section 232(4) do not require them to take actions which do not have any chance of succeeding (see Hurley v NCSC (1993) 11 ACLC 443).

- An officer or employee of a corporation or former officer or employee must not make improper use of information acquired by virtue of his or her position as officer or employee to gain directly or indirectly an advantage for himself or herself or for any other person (S.232(5)).

- An officer or an employee must not make improper use of his or her position to gain directly or indirectly an advantage for himself or herself or for any other person (S.23K6)). R v Byrnes & Hopwood (1995) 13 ACLC 1488 the High Court held that it is not necessary to show intention to cause detriment to the corporation in order to establish improper use of position. It was held that the directors had acted improperly to gain an advantage for the company. This was enough to make out the offence, even though the directors did not intend to cause harm to the company.

- ASC v Matthews (1995) 13 ACLC 497: the test of improper use of an officer's position is an objective one but that the subjective belief of that officer is a factor to be taken into account. In this case two directors caused the company to make an unsecured loan to a related company at commercial interest rates. It was held that although there was an intention to benefit the related company the directors also believed their company would benefit. Applying an objective test, the directors had not acted improperly taking into account their subjective belief that their company would benefit.

- In R v Cook Ex parte Commonwealth DPP (1996) 14 ACLC 94, the Queensland Court of Appeal held that a director who had arranged to transfer a large sum of money from the company's account to a joint account he had with his wife had made improper use of his position under section 232(6) to gain and advantage for himself and to disadvantage the company. The defendant argued that he believed he was acting the best interests of the company. Referring to the High Court decision in R v Byrnes and Hopwood the Court said that where the charge of failing to act properly in relation to the company is an abuse of power, the belief of the director might be relevant in determining whether the conduct was improper. However where the act of the director was simply beyond the director's legitimate powers, the director's state of mind was irrelevant.

- The concept or notion of profit is not a necessary element of the expression "to gain directly or indirectly an advantage" (see R v Donald (1993) 10 ACSR 435).

- Civil penalty sections: Subsections 232 (2), (4), (5) & (6) and part 9.4B provides civil and criminal consequences for breach e.g. prohibition from managing a corporation, penalty of up to $200,000, order to pay profits.

Section 232A - Voting by Interested Director of Public Company.
- A director of a public company who has a material personal interest in any matter being considered at a board meeting must not vote on the matter and must not be present while the matter is before the meeting (S.232A (1)).
- This does not apply if the board resolves that the interest should not disqualify the director from considering or voting on the matter (S.232A (3)).

NOTE: Extended meaning of "public company" in section 9.
- On any matter for discussion at the board meeting of directors of a public company there must be at least 2 directors present who are entitled to vote on any motion (S.232A (4)).

Section 235 - Notification of Interests to ASX by Directors of Listed Companies.
- This section provides that a director of a listed company must notify the ASX of certain relevant interests in the company or a related company and notify it of any changes made within 14 days.

Section 239 - Powers to Require Disclosure of Directors Emoluments.
- This section provides a procedure whereby shareholders can require directors to disclose emoluments and other benefits they receive from the company.

Section 241 - Provisions Indemnifying or Insuring Officers or Auditors.
- A company or a related body corporate must not hold an officer of the company free from a liability incurred by the person acting in that capacity and any agreement or otherwise which attempts to do so is void (S.24K1), S.241(1 A)).
- Where an officer has acted in good faith in carrying out his or her duties but has incurred a liability to another person other than the company or a related body corporate, then in these circumstances the company may indemnify such officer (S.241(2)).
- However a company may in its articles or in a separate contract indemnify an officer against liability in any civil or criminal proceedings provided such proceedings have been decided in the officer's favor (S.24K3)).
- In this section, "officer" does not include employees of the company (S.241(4)).
- A company is not permitted to insure its officers or former officers against a liability which results from a deliberate breach of duty to the company or a breach of sections 232(5) or (6); any contract of insurance which attempts to insure a person in contravention of section 241A(1) is void (S.241AH), S.241AQ)).
- However, the company can insure an officer against any liability for costs and expenses incurred by that person in defending civil or criminal proceedings, whether or not the person has been successful in defending those proceedings; (S.241A(3)).


• Fiduciary Duty
• Duty of Care, Skill and Diligence
• Duty to Creditors



FIDUCIARY DUTY
- The relationship between the company and its directors is a fiduciary one. The directors have a fiduciary duty towards the company.

- The fiduciary duty is owed by the directors to the company and not to individual shareholders, (see Percival v Wright [1902] 2 Ch 421). However, comments by Mahoney JA have isolated this case: "The restrictions upon directors profiting from 'insider information' are now substantial. It is sufficient to conclude, as I do, that the factual and legislative context which the principles in Percival v Wright was applied is now different (see Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACLC 895).
-

- The traditional view that directors owed fiduciary duties to their company rather than to individual shareholders has received yet another set back. In Glavanics v Brunninghausen (1996) 14 ACLC 345,it was held that this distinction between shareholders and the company was extremely difficult to maintain when there were only two shareholders and they were the only two directors in the company. In this case Glavanics, one of the shareholders and a director, took no part in management. After a period of co-operation between the two, there was a falling out. Glavanics agreed to sell his shareholding to Brunninghausen for $100,000. Shortly after the sale, Brunninghausen agreed to sell the company for $4 million. At no time did he tell Glavanics about the offer of $4 million. The Court said that Brunninghau sen's retention of his advantageous position was outside the range of honest dealing according to ordinary community standards and should not be permitted by the Court to keep the purchase price.

- In a two person company that is "in its death throes", the directors owe fiduciary duties to each other as well as to the company, (see Mesenberg v Cord Industrial Recruiters Pty Ltd & Ors. (1996) 14 ACLC 519).


This general fiduciary duty can be broken down into the following sub-groups:
The Duty to Act in Good Faith
- This can best be described as a responsibility of the directors to do what they honestly believe will be in the best interests of the company.
- If directors act in their own interests they are in breach of their fiduciary duty (Ngurli v McCann Ltd [1953] 90 CLR 425).
- This part of the fiduciary duty does not extend to employees; Parke v Daily News Ltd [1962] Ch 927).
- It would seem that creditors’ interests are included in the interests of the company and that the duty of the directors to act in good faith extends to the company's creditors (Walker v Wimborne [1976] 137 CLR 1 and Kinsela v Russell Kinsela Pty Ltd [1986] 4 NSWLR 722). This is dealt with as a separate category; see page 106 .

Duty to Exercise Powers for a Proper Purpose
- Under the articles directors can be given extensive powers of management. Some measure of control is necessary in this area.
- The principal has been developed from the wider fiduciary duty, that directors in exercising their powers must do so for the purpose for which they were intended.
- Put another way, directors must not use their power for any collateral purpose; they must exercise their powers for proper purposes.
- An objective test is to be applied to determine whether directors are acting for the benefit of the company. However the Court will consider the subjective belief of the directors (Permanent Building Society (in Eia v Wheeler (1994) 14 ACSR 109).
- Most of the cases in this area are concerned with the power to issue shares and normally directors will issue shares for the purpose of raising capital for the company; but it is not the only valid purpose for which shares may be issued (see Howard Smith v Ampol [1974] AC 821). In this case the directors argued that the substantial purpose for issuing the shares was to raise capital. The Court rejected this argument and held that on the evidence the substantial purpose was to break down the majority voting. This case is to be contrasted with the decision in Marlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1967) 121 CLR 483 where the Court held that an issue of shares by directors was made for the purpose of securing the financial stability of the company despite the fact that it had the effect of defeating a takeover offer from another company.
- Directors who issue shares in the climate of a hostile takeover bid for the company, take the risk that the issue of the shares will be seen as being made to strengthen their own position. Although in some cases the Courts have said that the issue of shares in this environment will not be invalid, if on the evidence it improves the commercial viability of the company or increases the share value (see Pine Vale Investments Ltd v McDonnell East Ltd (1983) 8 ACER 199).
- In Darvall v North Sydney Brick and Tile Co Ltd (1988) 12 ACER 537) the directors responded to a hostile takeover by selling the company's major asset, land into a subsidary company and entering into a joint venture to develop it. The Court held that this was not an improper exercise of director's power; they were acting in the interests of the company by providing alternatives which would put the company in a better financial position for its shareholders. In this case it was said that there was a distinction between a transaction entered into which was intended to defeat a takeover and one entered into because the directors thought it was good for the company. It should be noted that in this case there was no issue of shares therefore no dilution of shareholdings.

In many cases where directors issue shares, it can be said that there are any number of reasons as to why the shares have been issued. Earlier cases looked for what was seen as the substantial reason as to why the shares were issued (see Mills v Mills (1938) 60 CLR 150). However in Whitehouse v Carlton Hotel Pty Ltd (1989) 5 A.CLC 421 the Court referred to the "but for test" and said that it was inappropriate to be looking for a dominant or substantial purpose behind the issue of shares. The issue of shares will be invalid if the improper purpose has been a cause of the issue in the sense that but for its presence, no issue would have been made.

Directors have been held to be in breach of this aspect of their fiduciary duty by using their position on the board to ensure that new nominees for the position of director would not be successful. Although they honestly believed it was not in the best interests of the company to have these new people or the board, the Court held that they abused their authority and acted outside their powers (Advance Bank Australia Ltd v FAJ Insurances Ltd (1987) 8 ACLC 725).

Duties in Regard to Use of Discretions
Directors as the managers of a company must be allowed freedom to conduct the company's business, however the principle has been developed that they should not be allowed to limit the exercise of their discretions. Thus they can not enter into a contract which will bind them into voting in a particular way at board meetings.

If it can be shown that a contract to vote a certain way is in the believe of the directors in the company's best interests, the directors will not be in breach of their duty. (Thorby v Goldberg [1964] 111 CLR 597).

Duty to Avoid Conflicts of Interest
Where the law imposes a duty to act honestly it is important that the person is seen to be acting honestly.

Where a director is in a conflict of interest it is no defense to show that the company did not suffer any loss or that it was not in a position to take up the contract or that the contract was fair. (Aberdeen Railway Co v Blaikie Brothers [1954] 1 Macq HL 461 and Green v Bestobell Industries Ltd [1982] WAR 1).

If a director is put in a position of conflict the only defence is that the company was informed and ratified the transaction. (Queensland Mines Ltd. v Hudson [1978] 52 ALJR 399, see also Permanent Building Society (in Liquidation) v McGee & Ors (1993) 11 ACLC 761).

In Centofani v Eckimitor P/L (1995) 13 ACLC 315 a director disclosed a conflict of interest at a meeting of directors and abstained from voting. The company's articles provided that a director could vote in respect of a contract in which he or she was interested so long as section 231 was complied with i.e. the director must declare the nature of his or her interest, at a meeting of directors.

It was argued against him that at law he was obliged to disclose to shareholders. It was held that he complied with the articles of the company and the Corporations Law by declaring his interest to the directors. In the circumstances there was no overriding obligation to obtain ratification by the shareholders. Olsson J noted that "directors do not occupy a general fiduciary duty relationship to shareholders".

In Fitzsimnons v R (W.A) (1997) 15 ACLC 666, the Court held that a person who is a director of two companies cannot allow his duty to one company to override his duty to the other company; at least he should disclose a conflict of interest.

DUTY OF CARE, SKILL AND DILIGENCE
Directors need only display the skill and care as would be expected of such person with his or her experience and knowledge. Thus little knowledge and skill on the part of the director would mean a low standard of care and skill. (Re City Equitable Case [1925] Ch 407).

The NSW Court of Appeal's decision in the AWA case now means that directors can be held liable at common law for negligence where a breach of duty has resulted in economic loss.

It can be said that the principles arising out of the Re City Equitable case are not over taxing in so far as the duties of care and skill are concerned. However, in the light of comments in Friedrich's case, and the AWA Case No.1, the Re City Equitable case might be passing into judicial oblivion. The Court of Appeal's decision in the AWA case is another well placed nail in its coffin.

In considering whether or not a director had been negligent, a director could not rely on the proposition that he or she has been brought on to the board of directors as a specialist in a particular area. This did not remove the general duty of a director to pay attention to any matters that might reasonably attract inquiry even if outside his or her expertise. If for example there was reason to suspect irregularity in the company's financial affairs, this could not be ignored and left to a financial expert.

Furthermore, the duty to inquire would arise if the director had notice of facts reasonably warning of the true state of affairs (see Re Property Force Consultancy Pty Ltd (1995) 15 ACLC1,510).

DUTY TO CREDITORS
- Unsecured creditors have limited rights against the company's assets.
- They have rights to wind up the company and to execute judgment against company assets.
- The liquidator has rights against a director under section 588G and in some instances creditors can bring an action (S.588R and S.588T).
- More recently Courts have recognized that directors of a company which is insolvent or nearly insolvent, have a duty to consider the position of creditors. In Walker v Wimborne (1976) 137 CLR 1 a failure to consider the interests of creditors was seen as acting in neglect of the interests of the company.
- In Kinsela v Russell Kinsela Pty Ltd [1986] 4 NSW 722 the Court recognised that directors of insolvent companies had an obligation to consider the interests of creditors and in addition, shareholders in a general meeting did not have the power to grant relief to directors, of a breach of their duties, where the breach prejudiced the position of creditors.
- In Scycotex Pty Ltd v Baseler (1994) 13 ACSR 766 it was said that "where the company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders."

Relief from Breach of Duty
If a director has breached his or her duty it is possible for them to be excused by the:
- the company,
- or the constitution,
- or by the Court

• Relief by the Company
Directors can make a full disclosure to the meeting which can then vote to absolve the directors of any wrong doing (Bamford v Bamford [1970] Ch 212).

It should be noted that the general meeting cannot ratify all wrong doing on the part of the directors. (Kinsela v Russell Kinsela Pty Ltd [1986] 4 NSWLR 722). In that case the company gave a lease of its property to two directors on favorable terms. At the time of the execution of the lease the company was in serious financial difficulties and in danger of collapse. The directors argued the lease was approved by the unanimous consent of the shareholders. The Court held that the shareholders did have the power to authorize or ratify a breach of director' duties where the interests of shareholders are affected. However where the interests of creditors are at risk, shareholders cannot not legally authorize the breach of duty.

It is possible for the general meeting to vote in favor of an improper exercise by directors' powers which has not yet been carried through (Winthrop Investments Ltd v Winns Ltd. [1975] NSWLR 666).

A general meeting cannot ratify or excuse an improper exercise of directors' powers if it would amount to an oppression of the minority shareholders within the meaning of S.246AA Gray Eisdell Timms v Combined Auctions (1995) 17 ACSR 303).

• Relief by the Constitution
The constitution can indemnify directors in regard to certain liabilities but only if criminal or civil proceedings are resolved in favor of the director (S.241, 241A).

• Relief by the Court
If a director is faced with civil proceedings for negligence, breach of trust or breach of duty, he or she may seek to be excused by the Court (S.1318).

Civil Penalty Provisions in Regard to Directors' Duties
- Under the Corporations Law subsection 232 (2), (4), (5) and (6) are civil penalty provisions.
- A breach of a civil penalty provision can result in any one of the following:
 A director being prohibited from managing a corporation (S.1317 EA (3)(a)).
 A penalty of up to $200,000 (S.1317EA(3)(b)).
 An order to compensate the company for any loss suffered (S.1317HA, S.1317 HD).
 An order to pay over to the company any profits (S.1317 HD (l)(a)). Punitive damages, within the discretion of the Court (S.1317 JC).
- Criminal liability (S.1317 FA).

Section 232(2)
In Barker v Tuscan Fed. Court unreported 1995 a solicitor alleged that a company owed him $30,000 in unpaid legal fees for a breach to act honestly under s232 (2). The court held that a breach under this section did not give rise to any right to recover civil damages only to civil penalties and orders for compensation to the company.

Further more, the court took a view that a shareholder/ any other person could not enforce breach of section 232 therefore seek an injunction. Therefore only ASIC can do this. (Meseuberg v Cord Industrial Recruiters Ltd. & Ors (1996) 14 ACLC 519)

However, the court has refused to follow this decision in Airpeak Pty Ltd & Ors v Jetstream Aircraft Ltd (1997) 15ACLC 715 and held that a creditor has standing under section 1324 to bring an action claiming a breach of director's duties under section 232.


Section 1317EA
The Court in ASC v Donovan (1998) 28 ACSR 583 held that section 1317EA(3)(a) was a protective section of the public to prevent a corporate structure being used by individuals in a manner contrary to proper commercial standards. In doing so, the officer’s prior corporate conduct will be regarded.

Furthermore, section 1317EA(3)(b) was held to be a punitive in character. The punishment is to act as a personal deterrent against repetition of such an act. In this case, the ASC made an application for orders under 1317EA to prohibit the directors from managing a corporation. However, the company continued to trade after receiving advice from accountants. ASC applied to impose pecuniary penalties on them, too. The company went into liquidation. ASC brought an action against them. Penalties of $40,000 and $4,000 were imposed on the two directors and they were prohibited from managing a corporation for ten years and three years respectively.


Financial Benefits to Related Parties (S. 243A - 243ZI)
• These sections prohibit a public company or "child entity" of a public company from giving a financial benefit to a related party of the public company.
• This prohibition is subject to a number of exceptions; under two categories;
- specific benefits,
- benefits approved by shareholders.
- Individuals involved in a breach are subject to civil and criminal penalties.

The Company Secretary
• A company is required to have at least one secretary who is appointed by the directors; that person must have attained the age of 18 years and must reside in Australia (S.240 (1)-(4))
• Note section 240 (7A) applies when the only director of a proprietary company is also the only secretary.
• They have a responsibility in regard to keeping the office open during specified hours, where applicable and lodging annual returns (sections 121,142, 145, 240(5), 345, 347).

Corporate Governance
The terms simply refer to the system of accountability and regulation within the corporate structure, beginning with the board of directors. It includes a close examination of how companies had been governed and how they should be governed. This must take into account the balance between the need for directors to take risks, and the entrepreneurial for the benefit of the company.

Some examples of practices which are considered to be good corporate governance:
• Companies should have independent audit committees.
• Boards of directors of companies should have a majority of independent directors.

Directors and Legal Professional Privilege
Farrow Mortgage Services Pty Ltd. v Webb v Ors (1996) 14 ACLC 1240 was a case concerning the potential liability of directors for insolvent trading and their right to legal privilege. The issue concerned legal advice which was obtained and paid for by the company; the advice was potentially harmful to directors if proceedings were brought against them under Section 592 of the Corporations Law. The company went into liquidation and the liquidator made the legal advice available to the company.

The directors sought an injunction restraining Farrow from using it and argued that legal profession privilege in the documents providing the legal advice was jointly that of the company and the directors. The company on the other hand argued that the directors were not entitled to claim privilege as the lawyers' client was the company. If the directors were successful they could claim privilege over the documents and prevent them from being admitted into evidence.

The Court of Appeal upheld the single judge's decision and said that the legal advice had been provided under a legal contract between the company and its legal advisers. However, the information was sought by the company and its directors and it was therefore subject to joint privilege which could not be waived by the liquidator alone. The end result was that the potentially damaging legal advice could not be admitted into evidence without the directors' permission. Waiver in this sense, means to give up your rights.

Relevant Cases
General Meetings and Ratifications in directors’ duties
BAMFORD v BAMFORD Chancery Division (1970) Ch 212
Bamford Ltd was the subject of a take over bid and to prevent a successful bid the directors issued shares. The problem was that the issuing of shares was not made in good faith for the benefit of the company. A general meeting was called and the directors ratified the issue of shares. The directors were excused from liability. The reason being was that they had made a full disclosure to the general meeting and that their actions were capable of being ratified.

Furthermore, in Winthrop Investments Ltd v Winns Ltd the court held that a general meeting could give advance authority for an exercise of power which would involve a breach of directors’ duties. However, the court also note that the general meeting could be in breach of its duty to act in good faith for the benefit of the company in ratifying in advance a prospective breach of directors' duties.

Purposes in issuing shares
NGURLI LTD v McCANN High Court of Australia (1953) 90 CLR 425
When issue of shares by a controlling director who also was a substantial shareholder, The High Court said that; "he could take advantage of the power to benefit himself if such a benefit was incidental to a bona fide exercise of the power but he could not use the power ostensibly to benefit the company but really to benefit himself at the expense of minority shareholders." Thus, the director/shareholder entitled to have regard to his / her own self interest. This principle was set out in Mills v Mills where the Court said that directors were not expected to live in an unreal world and to act with vague high ideals. The Court will look to the substantial motive behind their use of the power and if this can be seen as being used in their own self interest then it will be an improper exercise of that power and invalid.

In this case, C.S. held one share in Ngurli Ltd but under the articles of association he was the governing director and had total control over the company's affairs. There were two other shareholders of Ngurli Ltd. C.S. died and a trustee company held his shares in Ngurli Ltd for the benefit of H.S., another director of the company. This gave H.S. the same control as C.S.

H.S. issued new shares to the trustee company on the understanding that they would be later transferred to H.S. with the result that he would permanently control Ngurli Ltd after the trustee company had finalized its administration of C.S.'s estate and disappeared from the share register. The other two shareholders brought an action arguing that the issue of the new shares to the trustee company was invalid.

It was held that the issue of the shares was not for the benefit of the company. H.S. was acting in his own self interest. The power to issue shares must be used for the purpose it was conferred, that is to raise sufficient capital for the benefit of the company as a whole. It must not be used as a disguise for some other purpose such as keeping control of the company.

In a later decision of the High Court in Whitehouse v Carlton Hotels Pip Ltd three members of the Court in obiter dicta decided that in cases of directors / shareholders issuing shares for mixed purposes a "but for" test should be applied.

QUEENSLAND MINES LTD v HUDSON Privy Council 52 ALJR 399
H was the managing director of Queensland Mines Ltd and in this position took up mining exploration licenses when the company was not in a financial position to do so. At all times he made a full disclosure. He resigned from his position and developed the venture.

Control of Queensland Mines Ltd changed and proceedings were brought against Hudson. It was argued that he had breached his duty and abused his position as managing director. It was held that on the evidence Hudson did acquire the opportunity to earn the profits while managing director of Queensland Mines Ltd, however, he fully informed the board of all relevant facts. Note that in regard to a director's duty to avoid conflicts of interest, the Privy Council in this case said that there must be a real, sensible possibility of conflict and not just a theoretical technical or remote one.

Whom must a director disclose?
- The High Court in Furs Ltd v Tomkies held that the director's disclosure to a board of directors was inadequate. It has been suggested (Afterrnan & Baxt) that the Privy Council in Hudson's case did not follow Furs Ltd v Tomkies because Queensland Mines Ltd was a small company in which the directors were also the shareholders. Thus the disclosure was effectively to all shareholders even if not formally done at a general meeting.
- However, another view (Lipton & Herzberg) is that the two cases represent a difference in opinion and that the English case of Regal (Hastings) Ltd v Gulliver supports the position taken in Furs Ltd v Tomkies that the disclosure must be made to the general meeting in order for a breach of duty to be ratified.
- One final view on this difference of opinion, and it is expressed in this way by Ffrench; "where there is use of corporate information or opportunity, (as in Hudson's case) if the board consents to the use there is deemed to be no conflict of interest and therefore no breach of duty needing general meeting approval.

Power of management of directors
AUTOMATIC SELF CLEANSING FILTER SYNDICATE LTD v CUNNINGHAME Court of Chancery (1906) 2 Ch 34
The general meeting of a company passed an ordinary resolution to sell major assets of the company. The directors took the view that the resolution was not in the best interests of the company and did their best not to co-operate to effect the resolution. To support the position they had taken, the directors relied on the articles of association.

The members of the company argued before the Court that the powers of management given to the directors by the articles were always to be subject to the principle that the directors were agents of the company and must follow the directions of the company i.e. the general meeting of the shareholders.

It was held that the articles gave the directors powers of management which could only be reduced by an extraordinary resolution of the company. Thus the directors were justified in not carrying out the ordinary resolution of the shareholders to sell certain assets. The Court said that the directors were more than just agents of the shareholders, they were managers of a company provided that there was a suitable provision in the constitution such as section 226 A. It could be said that if an extraordinary resolution was passed it would have the same impact as an alteration to the constitution because it needs a three-quarter majority to be passed. This is the same as a special resolution under the Corporations Law.

Exclusive power of management directors
NRMA v PARKER (1986) 4 ACLC 609

The articles of association of the NRMA provided that half of the Council (Board) members stand down every year and seek re-election. The articles also provided that the Council should choose the returning officer for the election of the new Council members and that he or she had a discretion on polling methods to be used.

A number of members of the NRMA requisitioned a general meeting of members, the purpose of which was to pass a resolution to direct the Council to choose a particular returning officer and direct the returning officer to use a particular polling method which was a postal ballot system.

The Court upheld a challenge to the validity of the meeting and the resolution was passed. The Court said that this resolution was not one which could be passed by such a meeting. The articles vested power in the Council to appoint a returning officer who in turn had a discretion on the choice of a polling system. This case illustrates the exclusive powers of management, directors have at the expense of members, where the articles gives powers of management to the board of directors. In this case the Court said, "it is no part of the function of the members of the company in general meeting by resolution... to express an opinion as to how a power vested by the constitution of the company in some other body ... ought to be exercised by that other body..."

Purpose of issuing shares
Whitehouse vs Carlton Hotel Pty Ltd High Court of Australia (1989) 5 ACLC 421
The capital of Carlton Hotel Pty Ltd had three classes of shares. Mr W held one class which entitled him to full voting rights. The articles provided that he was to be the permanent governing director for life with all the powers normally vested in the board of directors. The second class of shares were held by Mrs W and these had full voting rights on the death of Mr W. The third class of shares were held by the children of the marriage with no voting rights.
Mr and Mrs W. separated and were divorced and Mr W issued the second class of shares to his sons to prevent his daughters linking up with Mrs W to control the company on his death. Some time later the father and the sons had a difference of opinion and the father through his control of the company argued that the issue of the shares was made for an improper purpose and was therefore invalid.

HELD:
It was held that the issue of the shares was invalid as a result of the governing director's breach of duty. It is no part of the function of directors to favor one shareholder by exercising a fiduciary power to issue shares for the purpose of breaking down the voting power attached to the issued shares held by some other shareholder.

The High Court was not impressed by the argument that Mr W was not motivated by selfish reasoning; he believed that by changing the voting power in favor of his sons at the expense of his former wife he was acting in the best interests of the company. The Court said that the exercise of a power for an improper purpose is still bad even though the reasons and motives are genuine and sincere.

This case is also important for the introduction of the ''but for" test in cases where there is more than one purpose behind the issue of shares. The High Court said that where there was more than one reason or purpose behind the issue of the shares it was not appropriate to look for the substantial or dominant purpose or reason.

Three members of the Court in obiter dicta said that the issue will be invalid if the improper purpose has been a cause in the sense that "but for" its presence no issue would have been made.

Directors exceeded their power for proper purpose
ADVANCE BANK AUSTRALIA LTD v FAI INSURANCE LTD N.S.W. Court of Appeal (1987) 5 ACLC 725

The directors of the Bank spent the bank's funds and used its resources in an election campaign for the company's directors. They were trying to prevent nominees from FAI getting on to the board as they believed that if they did it would not be in the best interests of the company.

Held:
Although the directors acted honestly and in good faith, they exceeded their power and did not exercise their power for a proper purpose. The case is important for what was said about directors who acted honestly but who exceeded their powers. Kirby P. said that even if it is found that the directors have acted in good faith and for the purposes of the company their conduct may still go beyond their authority if they exceed or abused their powers.

The case is also important for comments made about the difficulty Courts face in dealing with the subjective intention of directors, Kirby P., said "that statements by the directors about their subjective intention whilst relevant are not conclusive of the bona fides of the directors or of the purpose for which they acted as they did. In this sense although the search is for the subjective intentions of the directors, it is a search which must be conducted objectively as the Court decides whether to accept or discount the assertions which the directors make about their motives and purposes".
Gillies has given two reasons why Courts are reluctant to intervene and declare invalid an exercise of power by a director where he or she has acted honestly and not for an irrelevant purpose. First, directors not Courts must exercise powers of management and to call them to account too often would slow down and stifle management. Second, which is an extension of the first, if Courts intervene too readily they will be looked upon as being an alternative source of management.

A further reason could be that Judges are trained in law not commerce and business and therefore do not have the expertise to grapple with management decisions.
It is submitted that these principles are good in theory but commercial and legal realities are that Judges are being called upon to review management decisions in Court proceedings (See Re Spargos Mining N.L. and Re Enterprise Gold Mines N.L.).

Breaches under section 229 and 233
CUMMINGS & ANOR v CLAREMONT PETROLEUM NL (1993)11 ACLC 125

F & C were directors of Claremont and because of their dominant position in the company organized the appointment of their private firms as consultants to the company. The consultancy agreements provided for their use of luxury cars and generous termination penalties.

A new board was appointed to the company and the private consultancy agreements were brought to an end. Under the agreements the directors were entitled to keep the luxury cars free of cost and were entitled to extremely generous termination penalties. One of the directors subsequently resigned, the other failed to get re-elected.

The company sought to recover the termination penalties and also alleged that the directors were in breach of Section 229 of the old Companies Code.

HELD:
It was held by the Full Federal Court that the directors were in breach of section 233 and section 229 and that they were liable to repay the amounts to the company. Whether the benefits due to the directors on termination were reasonable or not, was only one factor to consider in examining a breach of the directors' duties and in fact even if it were held that the benefits were reasonable, it would not stop the Court in deciding that they were in breach of their duties. The manner, the extent and level of the benefits were important factors to consider.

The directors took no steps to ensure an independent appraisal of the terms of their agreement with the company and in fact undertook a course of conduct designed to prevent any independent assessment of the level of the benefits under the agreements.

Breach of section 229(4) Improper use of position
R v DONALD (1993)11 ACLC712

A husband and wife were half owners of a company and also directors of that company (Ardina Pty Ltd). The other directors and owners played no part in the day to day running of the company. Later, the husband and wife became directors of two other companies they controlled. Both these companies entered into business dealings with Ardina Pty Ltd and invoices sent to Ardina Pty Ltd were dealt with by the husband only and not other appropriate officers. The silent partners in Ardina Pty Ltd were not aware of the husband and wife's interests in the other two companies.
The husband was charged under section 229(4) of the old Companies Code that officers (directors) of a corporation should not make improper use of their position to gain directly or indirectly an advantage for themselves or any other person.

HELD:
The Queensland Court of Appeal noted that the husband had been acting in breach of his fiduciary duties and that it could be said that the husband had acted improperly in ensuring that claims for payment by his companies were checked by him and not the appropriate officer. The idea or notion of earning a profit was not a necessary element of the expression "to gain an advantage". The Court found that even though the two companies may have had a contractual right to be paid it did not mean that the husband did not intend to gain an advantage for them.

In this case the defendant argued that the payments to his companies were debts incurred in the ordinary course of business and were entitled to be paid. How then could it be said that they gained an advantage when they were paid what they were entitled to.

The Court answered this by saying that it was improper to pay the debts promptly and without close scrutiny or inquiry as to their propriety or validity. Thus a payment made as a result of improper conduct of an officer of the company can constitute the gaining of an advantage even if the person is entitled to those payments.

Conflict of Interests
PERMANENT BUILDING SOCIETY (In liquidation) v McGEE & ORS (1993)11 ACLC761

W was the chairman of two companies "P" and "C". He also had effective control of both companies. P made a large loan to C which at the time was in financial difficulties. W abstained from voting on the resolution passed approving of the loan.
P brought proceedings against the directors of the company alleging that they were in breach of their fiduciary duty in not exercising their powers for the benefit of the company. It was further alleged that W was in a position of conflict because of his chairmanship of both companies and his personal interest in C.

The Supreme Court of Western Australia found that the directors were aware of C's financial difficulty and therefore in the circumstances the giving of the loan was in breach of their fiduciary duties.

The Court also held that W was in a position of conflict because of his interest in both companies and that by simply abstaining from voting he did not fulfill his duty to avoid the conflict of interest. In these circumstances he had a positive duty and obligation to prevent the transaction.

This is an important decision concerning directors who are placed in a position of conflict. Previous decisions seem to say that when faced with a conflict of interest a director should make a full disclosure. This case seems to be saying that in some circumstances a full disclosure or in this case abstaining from voting is not enough. Depending on the circumstances a director might be called upon to do something more, as in this case take positive steps to prevent the transaction taking place.

ASC v GALLAGHER (1993) 11 ACLC 286

Rothwells, a merchant bank, was under investigation by the NCSC. It was also in the midst of a liquidity crisis. The investigation by the NCSC was discontinued on the condition that the board of directors was reconstituted. At the same time a "rescue" of the bank was partially underwritten by the Government of Western Australia.
A number of reports were written by one director outlining the problems the bank had with its loan portfolio. This information was not passed on to Gallagher, one of the other directors (non executive).

Rothwells entered into negotiations to liquidate its loan portfolio and also mortgaged fees owed to it. Gallagher discussed these matters with the executive chairman of the company and expressed his concern over a number of board meetings that had been cancelled. Gallagher was on the board of the company to whom the fees were mortgaged and as such stood down from discussions on those matters.
Gallagher was charged with failing to exercise reasonable care and diligence in the discharge of his duty and that he failed to reasonably inform himself of the financial affairs of Rothwells.

Against him it was alleged that he did not make sufficient inquiries into the financial position of the company. The case was dismissed by the magistrate and the matter
appealed.

HELD
The Full Court of Western Australian Supreme Court dismissed the appeal and made the following findings:
1. Non executive directors had a duty to inform themselves so that they could make independent judgments.
2. Inquiries they were expected to make depended on the extent to which they were put on inquiry.
3. To determine whether a director had performed his or her duties in a reasonable manner it was necessary to consider what an ordinary person with the knowledge and experience of the director might be expected to do if acting on their own behalf.
4. It was reasonable for Gallagher to rely on other directors providing him with important information.
5. It was reasonable for Gallagher to rely on his communications with the chairman without the need to make further inquiries.
6. On determining whether the director was acting reasonably a Court could look at whether or not further inquiries would be worthwhile.
7. A failure to determine critical information could of itself make it easy to prove a breach of the section.

In this case the Court handed down a number of specific guidelines for non executive directors to follow in regard to their fiduciary duties to the company.
Thus, while they are expected to inform themselves of important company matters, at the same time it was reasonable for them to rely on other directors giving them important information.

Furthermore, in considering if a director has acted reasonably the Court should look at whether or not further inquiries on the part of the director would be worthwhile.
The approach taken on this last point is not unlike the approach taken by the Court in Hurley's case, where the defendant successfully argued that he was not in breach of his duty to exercise reasonable care and diligence by not taking action which he knew was doomed to failure.

Directors and criminal conduct
HURLEY v NCSC (1993 11 ACLC 443)

Hurley was a director of two companies, Rothwells and Oakhill. As a result of a business dealing involving both companies and a third company, Oakhill invoiced Rothwells for expenses and a commission due to Connell and Partners in respect of the business dealing. Rothwells paid the commission even though at no stage had it been under a contractual liability to do so. Hurley was aware of the payment but took no steps to stop it.

Criminal charges were brought against Hurley under section 229(2) of the old Companies Code. It was alleged that he was in breach of his duty to exercise reasonable care and diligence in the exercise of his powers as a director by permitting the payments and by failing to take active steps to recover the payments.
Hurley was convicted before a magistrate and appealed.

HELD:
The appeal was allowed. The Court said that the failure to take steps to recover the payment in circumstances where the director was of the view that it would not be successful, was not the same as permitting the payment to be made. Section 229 of the old Companies Code did not impose upon a director the obligation to take action which was doomed to failure. It should be noted that this case involved a criminal prosecution which meant that the Crown had to prove beyond all reasonable doubt.

On appeal White J. said that the prosecution had an obligation to satisfy the magistrate that there were available to the director, steps which he should have reasonably taken whereby Rothwells could have recovered the moneys paid to Connell & Partners. It was not enough to say that his failure to take some unidentified action was sufficient to make him guilty of criminal conduct.

The Full Court of Western Austraia confirmed the decision of White J. to set aside the conviction of Hurley for failure to exercise reasonable care and diligence in the exercise of his duties (NCSC v Hurley (1995) 13 ACLC 312.)

Breach of section 232 (6)
R v BYRNES High Court of Australia (1995) 13 ACLC

B & H were directors of Jeffcott and Magnacrete. An offer of shares was made to Jeffcott shareholders which involved a sub-underwriting scheme which shareholders were not aware of. This scheme involved officers of the company affixing the seal of Magnacrete to a loan guarantee, they also signed loan documents which gave financial security to support the sub-underwriting scheme. The articles of Magnacrete required the board of directors' approval for these transactions but they were not obtained. Furthermore the other directors were not aware of these transactions.

The directors were charged with making improper use of their positions as directors of Magnacrete to gain an advantage for Jeffcott or to cause detriment to Magnacrete under the equivalent of section 232(6).

On appeal from the South Australian Court of Criminal Appeal, the High Court of Australia allowed the appeal by the Crown and convictions were entered.

The High Court said that the Court of Appeal had failed to properly distinguish between improper use of position and improper use of purpose and that it was not necessary to show intention to cause detriment to the corporation to get a conviction under the section.

In the High Court's view, the directors had acted improperly by causing the transactions to be obtained without the authority of the board of directors, this was sufficient to establish a breach of the section. Intention to cause detriment to Jeffcott was not an issue.

The South Australian Court of Appeal overturned the convictions against the directors on the basis of an absence of criminal intention; there was no intention to cause detriment to the corporation therefore no improper use of position under the section. As a matter of fact, it was established that the directors reasonably believed the sub underwriting scheme was beneficial to Magnacrete and that the scheme would have been legal if the proper board resolutions had been obtained. On this basis the Court of Appeal found that there was no intention to cause detriment to the corporation. This argument did not impress the High Court; it took view that on the evidence the directors acted improperly and this was sufficient to establish the charge.

What a ratification cannot do, taking account creditor’s positions when co is near insolvency
KlNSELA v RUSSELL KINSELA PTY LTD (1986) 4 NSWLR 722

A family company was in financial difficulties and at a shareholders meeting, a resolution was passed giving the lease of its business premises to two of the directors of the company, on terms that were of considerable advantage to them.

The directors of the company had also passed a similar resolution. After the company was wound up the liquidators took action to set aside the lease on the grounds that it was not in the company's interests, to transfer the lease to the directors. The directors argued that the shareholders had ratified the transfer of the lease and therefore the board of directors were not in breach of their fiduciary duties; furthermore there could be no argument that the transfer was not in the interests of the company if all the shareholders had voted in favor of the lease transfer.

HELD:
The granting of the lease was not outside the company's power. The lease however was voidable on the basis that the shareholders had failed to consider the position of the creditors of the company. By failing to consider the creditors, in circumstances where the company was near insolvency, the shareholders were not acting in the interests of the company.

In this case the directors failed to realize that when a company is near insolvency, their duties to the company as a whole extends to a close consideration of the position of the creditors. In these circumstances the shareholders cannot and do not have the power to authorize or ratify a breach of director's duties. If the interests of the creditors and not the shareholders are at risk, shareholders do not have the power to authorize a breach.
 

BUSINESS RELATIONSHIPS AND FIDUCIARY DUTIES

THE BIG PICTURE: SOURCES OF RIGHTS, DUTIES OR LIABILITIES IN BUSINESS RELATIONSHIPS

BUSINESS RELATIONSHIPS - THE NORM IS ARM'S LENGTH DEALINGS (AND CAVEAT EMPTOR / LAISSEZ FAIRE)

"OUTSIDE THE NORM" RELATIONSHIPS (OR TRANSACTIONS) THAT GIVE RISE TO SPECIAL DUTIES FIDUCIARY RELATIONSHIPS (OR POSITIONS) AND FIDUCIARY DUTIES:

- WHAT IS A FIDUCIARY RELATIONSHIP OR POSITION?
- WHAT ARE THE FIDUCIARY DUTIES? REMEDIES FOR BREACH OF FIDUCIARY DUTIES
- GATEWAY ISSUE: HOW DO FIDUCIARY RELATIONSHIPS OR FIDUCIARY DUTIES ARISE?

THE BIG PICTURE: MAJOR SOURCES OF RIGHTS, DUTIES OR LIABILITIES IN BUSINESS RELATIONSHIPS (SELECTIVE LIST)
I. LAW OF TORTS - implied duties not to harm other persons or certain classes of persons (example: tort of negligence)
II. LAW OF CONTRACT - promises (express or implied) made with the objective intent to be contractually bound
III. LAW OF RESTITUTION (quasi-contract) - court intervention to avoid "unjust enrichment" or a "total failure of consideration"
IV. STATUTORY INTERVENTION INTO BUSINESS TRANSACTIONS - Parliament steps in to supplement or modify common law rights and duties (examples: implied terms under SGA and TPA and the State and Territory Fair Trading Acts)
V. LAW CONCERNING OUTSIDE-THE-NORM BUSINESS RELATIONSHIPS: FIDUCIARY RELATIONSHIPS AND FIDUCIARY DUTIES; CONTRACTS OF UTMOST GOOD FAITH
VI. LAW OF AGENCY
VII. LAW OF BUSINESS ORGANISATIONS: CORPORATIONS; TRUSTS; PARTNERSHIPS; JOINT VENTURES, ETC
VIII. LAW OF BAILMENT
IX. LAW OF BUSINESS FINANCE: CONCEPTS OF PROPERTY, SECURITY DEVICES etc.


BUSINESS RELATIONSHIPS - THE NORM IS 'ARM'S LENGTH' COMMERCIAL DEALINGS (AND "CAVEAT EMPTOR": LET THE BUYER BEWARE; AND "LAISSEZ FAIRE": NON-INTERFERENCE BY GOVERNMENT AND COURTS WITH COMMERCIAL FREEDOM AND SANCTITY OF CONTRACTS)
"ARM'S LENGTH" = there is no pre-existing relationship between the parties nor any other special aspect to the transaction in question that obligates one party to look out for the other's best interests

or as stated by one commentator: "What do courts mean when they speak of persons being at arm's length? They seem to be saying that each of them is engaged in conducting his own affairs .... If, in a particular matter, I am acting as your solicitor, agent, or employee, I am engaged in conducting your affairs, not mine. If that is so, I am required to act in your interests. This is what is often signified by contrasting an "arm's length" transaction with one in which a person is expected to act in the interests of the other party" (a handy but quite incomplete explanation of "arm's length" and as to what circumstances might override "caveat emptor" and give rise to a duty to look out for the interests of another - see below)
 

a.      EACH PARTY PUTS ITS OWN INTERESTS FIRST AND NEGOTIATES THE BEST DEAL IT CAN FOR ITS OWN ADVANTAGE (without significant regard for the commercial well-being or interests of the other parties)

b.      UNDER THE COMMON LAW, THERE IS NO GENERAL DUTY TO FULLY INFORM A PROSPECTIVE CONTRACTUAL PARTY OR BUSINESS ASSOCIATE ABOUT THE SUBJECT-MATTER OF THE NEGOTIATIONS OR TO MAKE SURE THAT THEY ARE NOT LABOURING UNDER SOME MISTAKEN BELIEF OR MISUNDERSTANDING (subject to vitiating factors and some other exceptions.

 

THE TWO MAIN CATEGORIES OF "OUTSIDE THE NORM" RELATIONSHIPS (OR TRANSACTIONS) THAT GIVE RISE TO SPECIAL DUTIES UNDER PRINCIPLES OF COMMON LAW AND EQUITY:

        a. CONTRACTS OF "UTMOST GOOD FAITH" (contracts "uberrimae fidei")

                               I.      "contracts of indemnity" - meaning contracts where one party agrees to make good losses that might later be suffered by the other party (most typically, insurance contracts)

                                                              i.      main characteristic of category is duty of full and honest disclosure of all "material information" both in pre-contractual negotiations and during the pendency of the contract, particularly disclosure by the person taking out the insurance or getting the indemnity (the "insured") to the insurance company or person giving the indemnity (the "insurer")

 

"material information" determined by an objective test:   "would a reasonable person in the position of the insured have realised that the withheld information was of significant import for the insurer to decide whether to insure / indemnify against the risk and/or what premium/price to charge for this service"

with business or commercial insurance (in contrast to "consumer" insurance), if the insurer fails to ask for certain information, the insured still has a duty to supply all relevant information - generally insured cannot escape duty of utmost good faith and requirement for full disclosure by pointing to defect in questions asked by the insurer IF that insured knows, or a reasonable person would have realised, that the withheld information was material

II. Under common law, failure by insured to comply with this duty of disclosure gave insurer absolute right to walk away from the deal and refuse to pay out on claims (insurer could rescind or terminate the insurance contract)

III. Under Commonwealth statute (Insurance Contracts Act 1984), insurer only allowed to deduct from payout the actual loss or damage caused by non-disclosure (for example: the insurer can deduct the higher premium amount that it would have charged on the policy had all relevant information been disclosed by the insured)

except:

1) if non-disclosure by insured is fraudulent (subjective standard) contract voidable and insurer can refuse any payout
but fraud is very difficult to prove - must prove actual state of knowledge and actual intent of insured even if fraudulent non-disclosure is proved, court, in the interests of justice, has discretion to require full or partial payout if non-disclosure not related to loss suffered (for example: non-disclosure concerned prior flood losses, but loss now incurred is by theft)

2) even if not fraudulent, if insurer can prove it would not have insured at all (for any premium) if information had been disclosed, insurer can refuse any payout (but must refund premiums) usually difficult to convince court that would not have insured the risk no matter how high the premium. Example:

Permanent Trustee Australia Ltd v FAI General Insurances Ltd [2001] NSWCA 20 affirming (1998) 153 ALR 529 (NSW SC) (Permanent claims $10.2 million against FAI on professional negligence insurance that had initial one year period from 1st October 1990 - claim arises during 30 day extension period FAI had granted 1st to 30th October 1991 - FAI not advised by Permanent that FAI was to be left out of group insuring Permanent for balance of 1991/1992 - not a fraud such as to make the extension voidable, but court convinced that FAI would not have granted the extension at any premium if knew it was to be left out of the insurance group for next year - FAI liability only to extent of refunding extension period premium)

 

3)     to the extent the court retains discretion in the matter, the court will always consider whether or not the matter that was not disclosed is in any way related to (or relevant to) the event that caused the loss of contracts of "utmost good faith" do not impose "fiduciary duties" (see below) - do not confuse the two!

 

B. FIDUCIARY RELATIONSHIPS OR POSITIONS

(for example: lawyer/client; company director/company; principal/agent; partners) (s more complete list, below)

"Courts have, again and again, in cases where there has been a fiduciary relation, interfered and set aside acts which, between persons in a wholly independent position, would have been perfectly valid" (Fletcher Moulton LJ in Coomber v Coomber [1911] 1 Ch 723)

The source of fiduciary duties, and the remedies for breach those duties, has historically been the Law of Equity (initially developed in the Courts of Chancery) - there is now substantial statutory adoption of these duties and remedies, particularly in areas governing the activities of "professionals" (see below)

 

FIDUCIARY RELATIONSHIPS AND FIDUCIARY DUTIES (equitable doctrines)

A. WHAT IS A FIDUCIARY RELATIONSHIP? DEFINITIONS:

1.      "A relationship of confidence in which equity imposes duties upon the person in whom confidence is reposed in order to prevent the abuse of that confidence" (common textbook definition)

a.      but while trusting (confidence in) the alleged fiduciary or sharing confidential information is almost always part of a fiduciary relationship, by itself it is not enough to create one

- for example:  you may have absolute trust in the mechanic who fixes your car, but that does not mean that car owner/mechanic is a fiduciary relationship

b.      Whether there was "SUBJECTIVE" trust, may be of interest to the court but subjective trust is not required for imposition of fiduciary duties

- can prove instead that under the circumstances the first party could reasonably ("OBJECTIVE" test) expect the alleged fiduciary to "look out for" the first party's interests, even to the extent of subordinating the alleged fiduciary's self-interest Glavanics v Brunninghausen (1996) 19 ACSR 204 (SC NSW) affirmed (1999) 32 ACSR 204 (NSW CA) (in laws were co-owners of business and had a falling out – no longer held each other in high regard or trusted each other in fact, but still owed each other fiduciary duties - duty of one that remained active in the business to inform the other of outsider offer to purchase the business before

concluding negotiations for that active one to buy out the interest of the other)

2.      "An undertaking by one person (the "fiduciary") to act on behalf of another person in the exercise of a power or discretion which will effect the interests of that other person in a legal sense (creating a special vulnerability of that other)

 

a.      but in some instances fiduciary duties will be imposed on someone who has not voluntarily undertaken them

b.      if this definition was read broadly, it could be stretched so that fiduciary duties cover many everyday types of contracts where one party, in a practical sense, has power over the personal or economic well-being of another (so the special vulnerability of one party is not enough)

c.      special vulnerability of one party is not only, by itself insufficient to raise fiduciary duties, but also is not always essential for a fiduciary relationship

C-Shirt Pty Ltd v Barnett Marketing & Management Pty Ltd (1996) 37 IPR 315 (FCA) ("vulnerability may be a " characteristic of many fiduciary relationships, but it is not the touchstone {a determining or essential attribute} of fiduciary obligations")

 

3. "A RELATIONSHIP WHERE, BECAUSE OF THE CIRCUMSTANCES, ONE PARTY IS REQUIRED TO PUT THE INTERESTS OF THE OTHER PERSON OR ENTITY AT LEAST ON A LEVEL WITH ITS OWN (AND USUALLY MUST PUT INTERESTS OF THE OTHER PARTY AT A HIGHER LEVEL - MUST SEE TO THE INTERESTS Of 1 OTHER PARTY FIRST)"

a.     But that definition is circular in reasoning (it begs the question)

b.     WHAT ARE THE FIDUCIARY DUTIES? (refer to the law of agency)

fiduciary duties are one-sided - owed by the fiduciary to the other party - both parties in the relationship not usually fiduciaries relative to the) other party. GENERALLY, A DUTY TO EXERCISE WHATEVER POWER AND  DISCRETIONS YOU HAVE IN THE BEST INTERESTS OF THE  PERSON OR ENTITY TO WHOM YOU OWE THE FIDUCIARY  DUTIES.

The terminology differs among the various courts and commentators and there is considerable overlap between the duties listed below:

                               I.      NO CONFLICT OF DUTY - DO NOT PUT YOURSELF IN A POSITION OF "SERVING TWO MASTERS", WHERE DUTIES OWED TO DIFFERENT PERSONS CONFLICT

Bristol and West Building Society v May May & Merrimam [1996] 2 All ER 801 (solicitor representing both lender and borrower does not disclose to lender that valuation of property relied upon by lender is way above price for which property purchased by borrower - information known by solicitor breach of confidential relationship with borrower - liable for breach duty to borrower if disclose information and liable for bread)] duty to lender if do not disclose information = irreconcilable conflict of duty)

Blackwell v Barroile Pty Ltd (1994) 123 ALR 81 (FCAFC)

(different sections of same firm of solicitors acting for opposed clients - firm had a policy prohibiting exchange of information between partners about clients who may have opposing or conflicting interests {NOTE: such internal policies and procedures are known as "paper walls" or "chinese walls" ad are discussed in more detail, below} - court finds situation improper despite firm's "paper wall" - a conflict of duty)

This duty somewhat relaxed when at least one of the potentially conflicting duties concerns a past (no longer current) client - then primarily, though not exclusively, an issue of whether there is a risk that firm still retains and might disclose or misuse confidential information concerning prior client (see "duties relative to information", below) (See:   "Solicitor's Acting Against Former Clients", 73 ALJ 176 (March 1999)

This duty is also somewhat relaxed for company directors having multiple directorships - no breach unless actual conflict arises - mere potential of conflict of duty usually not enough for liability, though companies should be fully informed by each director as to directorships in other companies.

2.      NO CONFLICT OF INTERESTS - DO NOT PUT YOURSELF IN A POSITION WHERE YOUR PERSONAL INTERESTS CONFLICT WITH THOSE OF THE PERSON TO WHOM YOU OWE THE DUTY

even a potential perversion of the fiduciary's judgment and conduct (by self-interest) is enough to breach this duty and give rise to remedies:

                                                  i.      Rationale for this prime duty:

(1)   preclude fiduciary from being swayed (consciously or subconsciously) in judgments and actions by considerations of personal interest - fiduciary must subordinate personal interests,

(2)   preclude fiduciary from misusing position for personal advantage

Unioll International Pty Ltd v Deloitte Touche Tohmatsu and Corrs (1997) 17 WAR 98 (affirmed SC FC) ("national" law firm - partner in Perth advised client, the plaintiff Unioil, on potential investment in UH group of companies - partner in Sydney office had information as to financial distress of UFI group because was acting for regular client BSC to provide emergency finance to UFI group - even though Sydney partner resigned from that particular BSC project to try and avoid a conflict of duty. Perth partner still had irreconcilable conflict of interest - there was a real danger that Perth partner was consciously or subconsciously compromised in acting for Unioil because would want to deal with the matter in a way least embarrassing to the Sydney office and its long term client BSC - firm liable to client for equitable damages of approximately $745,000)

Esanda Finance Corporation Ltd v Alvaro (1998) (unreportel SC WA) (Alvaro, a client of a law firm, tells the firm that he is considering filing personal bankruptcy while owing the firm $10,000 in legal fees for representation by firm in pending litigation - firm evidences concern for self interest by advising Alvaro: (i) that it can no longer act on his behalf unless back fees are paid and large litigation retainer is deposited with firm; and (ii) to settle litigation and pay the legal fees owed to firm with firm's encouragement, Alvaro's claim is settled for $7,500 no evidence that that was not a reasonable settlement, but judge of court hearing the client's lawsuit still reports firm to Legal Practitioners Complaint Committee because concerned "whether the interests of the firm may have influenced the way in which (Alvaro's) affairs were handled, to the disadvantage of... (Alvaro)", i.e., a breach of fiduciary duty and conflict of interest the firm arguably placing its own interests above those of its I client - once firm became pre-occupied with self-interest, should have insisted that client get independent advice as to suitability of settlement - note: outcome of complaint not reported so perhaps Committee did not find firm's conduct improper or impose any sanctions.)

                                                ii.      prior disclosure of potential conflict of interest will not prevent breach if conflict eventuates (i.e., if fiduciary actually puts its    interests above those of person to whom duty is owed)

Grantwell Pty Ltd v Franks (1993) 61 SASR 390 (SA SC FC) (only   escape breach if person to whom duty is owed gives prior fully informed consent to potential conflicts fiduciary does not actually give its own interests priority)

Kott Gunning case (West Australian - March 13, 1419 (senior partner "censured" by Legal Practitioners Disciplinary Tribunal for conflict of duty - attorney representing Penny Easton while another partner in firm representing former WA Premier Brian Burke before Royal Commission - while potential conflict was disclosed to Penny Easton, the conflict not just potential - Penny Easton's interests not given priority when she was advised to make certain admissions that would make testimony! Brian Burke unnecessary in her litigation - firm did not want to cross-examine own client.)

3.      NO SECRET PROFITS (OR RECEIPT OF BRIBES OR SECRET COMMISSIONS) 

                                                  i.      Prohibited even if in making this profit no harm is done to the person to whom the duty is owed:

a)     proof of a secret fee or commission to the fiduciary from a third party raises an IRREBUTABLE PRESUMPTION that it was given for a corrupt motive and that it influenced the fiduciary to the detriment of the person to whom the duty was owed,

b)     proof of any type of secret profit, even in a side transaction, raises an IRREBUTABLE PRESUMPTION that it has caused damage to the person to whom the duty was owed, at least to the extent of the amount of the secret profit

Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 (secret commission to an agent - conclusive               presumption that judgment perverted and loss caused to principal)

                                                 ii.      Fiduciary must hold any secret profits in trust for the person to whom the duty is owed (constructive trust, accounting for profits, and tracing remedies - see below) even if that person cannot prove they suffered any loss but prior fully informed consent of person to whom duty is owed validates profit (if not a "bribe") and avoids breach of duty (i.e. profit is not "secret")

Boardman v Phipps [1967] 2 AC 46 (solicitor – client company)

4.     DUTIES RELATIVE TO INFORMATION

                                                  i.      Keep secret "confidential information" learned about person to whom duty is owed (and do not use such information for own purposes, per next duty, below)

"confidential information" means non-public information supplied to the fiduciary by the person to whom duty is owed with an express restriction as to its use; and/or information supplied by, or learned about, the person to whom the duty is owed which, because of its very nature, has an implied restriction as to its use:

(1)   to some extent, this duty can survive beyond the life of the fiduciary relationship (e.g., duty is still owed to a former client as to confidential information you learned about them while they were your client)

(2)   this duty is particularly onerous in firms of professional that have a large client base, because clients often seek adverse or even adversarial interests among themselves and/or with former clients of the firm - conflict can arise between this duty and duty to reveal to client all material information you possess on a matter (see below)

(3)   large firms of professionals who have clients or former clients with potentially conflicting interests often seek to isolate information and avoid breach of this duty by establishing internal policies and procedures known "paper walls" or "Chinese walls"

Newman (as trustee for the estate of Little John) v Philips Fox (a firm) (1999) 21 WAR 309; [1999] WASC 171 (a small law firm dissolves and several partners and staff to work for Phillips Fox, a much larger firm – former client of the "dissolved" small firm seeks to enjoin (prohibits) Phillips Fox from representing third party in a dispute that third party has with the former client - lawyers and staff from dissolved firm clearly have had access to confidential information about former client - Phillips Fox offers to construct a "paper wall" to the extent that lawyers with j confidential information will not work on the dispute between third party and former client; will not discuss the dispute with other Phillips Fox lawyers;   and, those lawyers might even be moved into a separate building during the pendency of the dispute - court finds "paper wall" inadequate, particularly because there is no attend to isolate non-legal personnel, and enjoins {prohibits} Phillips Fox from representing third party, despite that third party being a long-time client)

Under the latest cases in Western Australia (such as Newman) and the UK:

-         there is a rebuttable presumption that confidential information will still leak through "paper walls" (ie. that information known to any partner of a firm, perhaps even information known by any employee the firm, will become known by all the other partners)

-         however, there is no immutable principle of law that a "paper wall" will never work to avoid a breach duty of confidentiality (or perhaps, though very unlikely, even avoid a conflict of interest or conflict of duty)

-         but latest courts in UK and Western Australia adopt a very strict test:   if ANY RISK, above a mere theoretical or fanciful risk, that confidential information of former or current client will be disclosed or misused, firm must be enjoined from acting for adverse party

-         the test from the Newman case and in the latest UK cases is significantly stricter than the standard used in prior cases of "real and sensible danger" or "appreciable risk" of disclosure or misuse of confidential information"

Note: That slightly "easier" standard perhaps still dominant in courts in most other Australian jurisdictions, in the USA, and in other common law countries outside of the UK

-         The Newman court left door open for future courts to find a more formal "paper wall" within large firms effective to avoid breach of duty of confidentiality to former client. IF there is:

o        a physical separation of persons with  confidential information from rest of firm;

o        an educational programme for employees as to former employees as to proper procedures;

o        a procedure in place that must be followed should someone believe it is justified to breach the "wall"; and,

o        a disciplinary sanction imposed by firm when "wall" is improperly breached.

NOTE: NOT AT ALL CLEAR THAT EVEN A STRICT FORMAL "PAPER WALL" MEETING ALL THESE REQUIREMENTS WILL AVOID A BREACH OF DUTY WHEN SAME FIRM HAS ADVERSE CURRENT CLIENTS, BECAUSE THEN NOT ONLY AN ISSUE OF KEEPING INFORMATION CONFIDENTIAL BUT ALSO AN ALMOST CERTAIN CONFLICT OF INTEREST / DUTY

                                                 ii.      No misuse or "usurpation" (taking for yourself) of confidential information or  opportunity that is available to the person to whom the duty is owed, even if that person can not prove they suffered any loss.

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97 (falling out between two brothers who were running a large "family" company - shareholders and directors are the two brothers and their sister - sister and one brother, who collectively own 57% of shares, use information they gain as directors of the company to direct business opportunity to another company solely owned by that brother and sister - breach of fiduciary duties because innocent brother was not fully informed so deemed no prior consent to usurpation - accounting for profits ordered, as well option of minority brother to force buy- out of his shares at court ordered valuation)

Tuite v Exelby [1992] 93 ATC 4293 (QLD SC) ffoiml directors using confidential information obtained in thj position to solicit customers and employee of companj whom duty was owed)

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (cinema leases offered to company but company not in a financial position buy into the leases - directors of company buy into leases in their private capacity and later resign directorships - new directors sue old directors, on behalf the company, for breach of fiduciary duties - can be deemed an improper usurpation of opportunity even if person to whom duty is owed not in a position to take advantage of the opportunity)

                                               iii.      Full disclosure of material information to person to whom duty is owed (but see possible exceptions in Note 1 and Note 2,below

Australian Breeders Co-operative Society Ltd v Jones (1997) 26 ACSR 26 (FCA FC) (the defendant accountant withheld from client, the promoter of a new horse breeding syndicate, information as to large profits being made by another client selling horses to the syndicate - prior consent of promoter to accountant "not being involve with prices" not avoid breach of fiduciary duties because accountant was involved with choosing a valuer for the horses, and accountant knew of extra-ordinarily large profits being made on sale of horses to the syndicate-accountant so involved with new business that might, deemed a "promoter" and so owed fiduciary duty to reveal all relevant information)

Bristol and West Building Society v May May & Merrimans (a firm) [1996] 2 All ER 801 (did not disclose all relevant information to one client because had a client with opposing interests - breach of duty on supply of information as well as a conflict of duty - see facts, above under "conflict of duty")

NOTE 1:   duty of full disclosure somewhat relaxed in two situations:

- a person holding multiple disclosed directorships;

- in very large "national" firms, each partner does not necessarily have to disclose information held by all other partners.

Unioil International Pty Ltd v Deloitte Touche Tohmatsu  and Corrs (1997) 17 WAR 98 (affirmed SC FC) (in large  professional firms with more than one office and located in various States, the presumption that the knowledge of one  partner is to be regarded as the knowledge of his or her partners is rebutable - in this situation, neither client expectation nor public policy dictate that a firm must necessarily owe a duty to its clients to reveal, to each client, and use for each client's benefit, any knowledge possessed by every one of the firm's partners or staff - no breach of duty relating to disclosure of information) (but did find liability and awarded damages for conflict of interest, see above)

NOTE 2:   all cases cited above in this "full disclosure" section contain a potential conflict of interest, or a conflict of duty when fiduciary duties owed to more than one person - some inconsistency and indecisiveness in cases as to whether a full duty of disclosure exists totally independent of potential conflict of interest/duty or potential secret profit (i.e., whether duty of full disclosure is truly an independent fiduciary duty or only ancillary as a potential defence to claim of breach of those other fiduciary duties)

5.     NO UNDUE INFLUENCE - DO NOT OVERBORNE THE WILL OF THE WEAKER PARTY IN A FIDUCIARY RELATIONSHIP

essentially the same as in vitiating factor:

a.      there is a rebutable presumption of "undue influence" if there is a "manifestly unfair" contract between persons having a special position of influence (often a fiduciary position):

                                                              i.      held to be "manifestly unfair" if potential risk to weaker party far outweighs his or her potential gain from the transaction.