Chapter 4 – The attenuation of directors’ statutory duties ...satusworldwide.com/backup/4. Chapter 4 formerly 3 (28102016).docx · Web viewIn this Chapter, the question whether

[I.] CHAPTER 3 4 – THE ATTENUATION OF DIRECTORS’ STATUTORY DUTIES BY

RATIFICATION OR AUTHORISATION

Temporary table of contents

Contents

I. Chapter 4 – The attenuation of directors’ statutory duties by ratification or authorisation ........................................................................................................................1II. Introduction ..................................................................................................................2I. How does prospective authorisation of a breach of statutory duty differ from retrospective ratification? ....................................................................................................2II. Attenuation of directors’ statutory duties by authorisation .........................................3

A. Nature of director’s duties .......................................................................................4B. Codification of directors’ duties ..............................................................................5C. Effect of codification of directors’ duties ................................................................6

III. Can ratification attenuate statutory duties? ..............................................................6IV. Can prospective authorisation attenuate statutory duties? .......................................7

D. What considerations may be relevant to attenuation of statutory duties arising from prospective authorisation? ......................................................................................9

1 Whether the resolution could be effective to prospectively authorise the conduct of the directors .............................................................................................102 The statutory duties and their interpretation ......................................................113 Solvency of the company ...................................................................................134 Public enforcement of breaches of statutory duty .............................................135 Whether the attenuation of a statutory duty would amount to oppressive conduct pursuant to section 232 of the Corporations Act? ........................................14

V. Doctrinal issues concerning attenuation of duties .....................................................17VI. Policy arguments in favour and against an attenuated duty approach ...................22VII. Prejudice to stakeholders .......................................................................................25VIII. Conclusion .............................................................................................................28I. Chapter 3 – The attenuation of directors’ statutory duties by ratification or authorisation ........................................................................................................................1II. Introduction ..................................................................................................................2III. The continuing relevance of the doctrine to companies ..........................................2

A. Applications for leave to commence proceedings pursuant to section 237 .............41 The relevance of a ratification resolution to an application for leave .................52 Does section 237 have any effect on applications commenced under section 232?8

B. Director’s liability and the quantum of damages ...................................................10I. How does prospective authorisation of a breach of statutory duty differ from retrospective ratification? ..................................................................................................11II. Attenuation of directors’ statutory duties by authorisation .......................................12

C. Nature of director’s duties .....................................................................................13

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Michael Robson, 10/28/16,

Formerly chapter 3 at 27-10-2016

D. Codification of directors’ duties ............................................................................14E. Effect of codification of directors’ duties ..............................................................15

III. Can ratification attenuate statutory duties? ............................................................15IV. Can prospective authorisation attenuate statutory duties? .....................................16

F. What considerations may be relevant to attenuation of statutory duties arising from prospective authorisation? ....................................................................................18

1 Whether the resolution could be effective to prospectively authorise the conduct of the directors .............................................................................................192 The statutory duties and their interpretation ......................................................203 Solvency of the company ...................................................................................224 Public enforcement of breaches of statutory duty .............................................225 Whether the attenuation of a statutory duty would amount to oppressive conduct pursuant to section 232 of the Corporations Act? ........................................23

V. Prejudice to stakeholders ...........................................................................................26VI. Conclusion .............................................................................................................29

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I.[II.] INTRODUCTION

In this Chapter, the question whether statutory duties may be attenuated by retrospective

ratification or prospective authorisation is addressed. This question is systematically

addressed as a means to consider the prejudice to stakeholders arising from the

attenuation of directors’ duties which would otherwise give rise to a breach of those

duties.

In this Chapter, firstly, the continuing relevance of the doctrine of ratification to

companies incorporated under the Corporations Act is considered as a preliminary

discussion for the purpose of describing the essence of the differences between

retrospective ratification and prospective authorisation of a breach of statutory duty and

setting out how ratification and authorisation may arise. As a part of this discussion, the

legislative context is considered first to establish the context of the Australian

corporations law before a consideration of the different legal issues which arise for

consideration of the attenuation of fiduciary and statutory duties.

This Chapter concludes by considering whether retrospective ratification and prospective

authorisation can attenuate a director’s statutory duty and the prejudice to stakeholders

which arises from any attenuation of statutory duties.

[III.] THE CONTINUING RELEVANCE OF THE DOCTRINE TO COMPANIES

Following the comprehensive codification of the fiduciary duties of directors under the

former Corporations Law, the effect of the doctrine of ratification was significantly

curtailed, however, the combined impact of this legislative reform together with the

introduction of the statutory derivative action from 13 March 2000 has not resulted in the

doctrine of ratification being irrelevant to companies incorporated under the Corporations

Act. This section thus considers the continuing relevance of the doctrine of ratification to

companies incorporated under the Corporations Act (and hence its importance in the

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When?


Moved to doc 222 for integration into Chapter 2, section on intersection of corporate property with ratification

context of prejudice to stakeholders) before commencing a discussion concerning the

attenuation of statutory duties and the prejudice to stakeholders.

By reason that the fiduciary duties of directors are included within the statutory duties

established under sections 181, 182 and 183 of the Corporations Act (as separate from

any other codified common law duties), and since it is not possible for the shareholders in

general meeting to ratify a breach of a statutory duty (discussed in detail below in section

III) it will not be possible for a majority of shareholders in general meeting to exonerate a

director from liability to the company for a breach of their statutory duties.

Notwithstanding that a majority of shareholders may not exonerate a director, in relation

to the statutory derivative action,1 the doctrine of ratification continues to be relevant in

Australia to:

[(i)] an application for leave to commence proceedings;2

[(ii)] liability of the directors;3 and

[(iii)] the quantum of damages in relation to proceedings commenced under section

236(1) of the Corporations Act.4

Each of these matters is considered in greater detail in the following section. Before

proceeding to consider each of these matters, it is important to note that the courts play a

limited role in corporate disputes. A court will not consider an internal management

decision taken by the board of directors since this would create a situation where the

judiciary were exercising judgements which the directors undertook in the context of the

business judgement rule.5 This is recognition of the fact that the directors of a company

are uniquely placed to consider all of the risks and benefits inherent in any business

decision taken by the board of directors.

[A.] Applications for leave to commence proceedings pursuant to section 237

1 Corporations Act 2001 (Cth) s 236(1)2 Corporations Act 2001 (Cth) s 2373 Corporations Act 2001 (Cth) ss 1317S; 13184 Corporations Act 2001 (Cth) s 239.5 See, eg, Zephyr Holdings Pty Ltd v Jack Chia (Australia) Ltd (1988) 14 ACLR 30 at 37 per Brooking J.

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A shareholder does not have an inherent statutory right to commence or intervene in

proceedings on behalf of a company or intervene in proceedings. Pursuant to section

237(2) of the Corporations Act, the Court must grant a shareholder leave if the Court is

satisfied of the 5 enumerated matters in that section. The Court’s jurisdiction to grant

leave is grounded upon the same principle on which a beneficiary of a trust could always

have commenced proceedings in the old Court of Chancery against the trustee to be

allowed to use his or her name to recover the trust property.6

In a circumstance where a majority of shareholders in general meeting have approved a

ratification resolution or authorised the directors to engage in particular conduct, section

239 of the Corporations Act ensures that the shareholders’ ratification or approval does

not prevent the conduct from being within the scope of a derivative action brought by a

shareholder.7

Pursuant to section 239(2) of the Corporations Act, if a majority of the shareholders of a

company ratify or approve the conduct of a director, the Court has a discretion to take

into account the ratification or approval in deciding what order or judgment to make in

proceedings brought or intervened in with leave under section 237 or in relation to an

application for leave under section 237. The discretionary nature of the Court’s powers

to take into account a ratification resolution is significant because it prevents directors

from obtaining a release from liability from the company other than with the sanction of

the Court. This accordingly means that the introduction of the statutory derivative action

has been largely effective to reduce the role of the doctrine of ratification, however the

Courts are permitted to consider the ratification or approval as a part of the exercise of

the discretion.

Pursuant to section 239(2) of the Corporations Act, in exercising its discretion the Court

must have regard to:

6 Bl and Gy International Co. Ltd v Hypec Electronics Pty Ltd; Colin Anthony Mead v David Patrick Watson and Ors. [2001] NSWSC 705 at [70] per Einstein J.7 See Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52.

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[(a)] how well-informed about the conduct the members were when deciding whether to

ratify or approve the conduct; and

[(b)] whether the members who ratified or approved the conduct were acting for proper

purposes.

[1] The relevance of a ratification resolution to an application for leave

The principle upon which a ratification or approval resolution is relevant to leave being

granted pursuant to section 237 of the Corporations Act is enunciated by section 239(2)

which establishes what matters the court must have regard to in relation to an application

for leave to commence or intervene in proceedings.

Section 239(2) in Part 2F.1A of the former Corporations Law commenced on 13 March

2000 following the enactment of the Corporate Law Economic Reform Program Act

1999 (Cth). The Explanatory Memorandum to the Corporate Law Economic Reform

Program Bill 1998 at paragraph 6.8 on page 24 which concerned the proposed

introduction of section 239(2), explained the principle as follows:

Proposed subsection 239(2) will provide that the Court may take into account a

ratification or approval of conduct in deciding what order or judgment (including as to

damages) to make. However, the provision will make it clear that the Court may only

have regard to ratification if it is satisfied that the ratification was effected by the

company’s fully informed independent members. (emphasis added)

The Explanatory Memorandum indicates that the intention of the Commonwealth

parliament in introducing section 239(2) was to ensure that if the Court exercised its

discretion to take a ratification or approval resolution into account in relation to an

application for leave under section 237, the Court must be satisfied that the shareholders

which approved the resolution were both fully informed and were independent

shareholders from the affected director(s).

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The Explanatory Memorandum explained the reason for the introduction of Part 2F.1A

into the Corporations Law was as a result of the practical and legal difficulties faced by

litigants arising from the limited exceptions to the rule in Foss v Harbottle.8 The 3 main

difficulties associated with the common law action were explained as follows:

[1.] the effect of ratification of the impugned conduct by the general meeting of

shareholders (if effective, the purported ratification by a majority of shareholders

could deny the company as a whole, and hence minority shareholders, any right of

action against the directors);

[2.] the lack of access to company funds by shareholders to finance the proceedings

(where a shareholder seeks to enforce a right on behalf of a company, they are

likely to be disinclined to risk having costs awarded against them in a case which

will ultimately benefit the company as a whole, not just individual shareholders);

and

[3.] the strict criteria which need to be established before a Court may grant leave.9

The Explanatory Memorandum also explained that there would be appropriate checks

and balances to prevent abuse of the statutory derivative action to ensure that vexatious

proceedings were not commenced and that company funds are not expended

unnecessarily.10 It is not apparent from the Explanatory Memorandum that the principle

supporting the introduction of section 239(2) is contrary to the objective of preventing

vexatious litigation against companies.

Notwithstanding that section 239(2) of the Corporations Act has been unamended since

its introduction in 2000, the principle upon which section 239(2) was enacted has not

resulted in this section being interpreted by the Courts in accordance with the

‘independent shareholders’ requirement. This may be because the cases which have

considered section 239(2) have not been required to consider whether a ratification

resolution was approved by an independent majority of shareholders.11

8 (1843) 2 Hare 461.9 Para 6.15 on page 19.10 Para 6.16 on page 19.11 See especially, William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448; Massey & Anor v Wales & Ors; Massey & Anor v Cooney & Anor [2003] NSWCA 212;

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The failure of the section to use the words ‘independent’ in relation to shareholders

supports an interpretation that there is no requirement that a ratification resolution be

approved by independent shareholders. Since it is a requirement of statutory

interpretation pursuant to section 15AA of the Acts Interpretation Act 1901 (Cth) that in

interpreting a provision of an Act, the interpretation that would best achieve the purpose

or object of the Act (whether or not that purpose or object is expressly stated in the Act)

is to be preferred to each other interpretation.12 A Court may consider extrinsic material

where a provision is ambiguous or obscure,13 however, on the face of section 239(2),

there is nothing ambiguous about the word ‘independent’ being omitted from the section.

If the parliament intended the meaning of ‘members’ to be ‘independent members’ the

word ‘independent’ could have been inserted into the proposed section 239(2). The

wording of the section is consistent with the general law because there is no requirement

for an independent majority of shareholders to approve a ratification resolution. A

further significant difficulty with the reading the word ‘independent’ into section 239(2)

is that the word ‘member’ or ‘members’ is used extensively throughout the Corporations

Act and the word ‘member’ pursuant to section 9 of the Corporations Act has a restrictive

meaning.

However, there is no clear underlying principle enunciated by the Explanatory

Memorandum as to why:

there ought to be any relevance of a ratification resolution to a shareholder

commencing proceedings pursuant to section 236 of the Corporations Act; or

the Court should take into consideration the fact that a ratification resolution was

approved by a majority of shareholders.

The strongest argument for taking into account a ratification resolution of any practical

significance is that if the shareholder was unable to obtain any substantial damages as a

Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52; Ehsman v Nutectime International [2006] NSWSC 887.12 Acts Interpretation Act 1901 (Cth) s 15AB.13 Acts Interpretation Act 1901 (Cth) s 15AB(1)(b)(i).

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result of the ratification resolution because of the effect of the ratification resolution, then

the granting of leave to commence proceedings would be otiose and only result in the

parties and the Court devoting unnecessary resources to the resolution of the dispute.

This problem no doubt could be dealt with by the plaintiff shareholder providing security

for the defendant company’s costs of defending the proceedings.

At the time of the commencement of section 239(2) of the Corporations Law, the law in

Australia with respect to the doctrine of ratification was in a more uncertain state.

However, since that time, it is now clear that the shareholders in general meeting cannot

ratify a breach of statutory duty (discussed below) and since the fiduciary duties of

directors are included within the statutory duties pursuant to sections 180, 181, 182 and

183 of the Corporations Act, the Court would be unable to deny a shareholder leave to

commence proceedings with respect to a breach of a director’s statutory duties on the

basis of a ratification resolution be approved by the shareholders since that resolution

could not be legally effective to relieve a director of liability to the company.

[2] Does section 237 have any effect on applications commenced under section 232?

It should be recognised that there is no equivalent provision in Part 2F.1 of the

Corporations Act (Oppressive conduct of affairs) to section 239 contained in Part 2F.1A

(Proceedings on behalf of a company by members and others) which requires a court to

take into account specific matters following the approval of a ratification resolution.

In circumstances where there is no equivalent provision in a Part of a statute, a relevant

question for the purposes of statutory interpretation would be whether Part 2F.1 of the

Corporations Act established a code for the commencement of proceedings with respect

to oppressive conduct within the meaning of section 232 of the Corporations Act. If that

is the case, there would be little doubt that a ratification resolution is not relevant to the

commencement of proceedings (although it is conceivable that the quantum of damages

is effected by a valid ratification resolution).

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Further, there is also authority which indicates that section 232 was not affected by the

introduction of Part 2F.1A.14 In light of the foregoing discussion concerning sections 232

and 239, it is clear the considerations applicable under section 239(2) are different to

those under section 232 with respect to statutory oppressive conduct, notwithstanding that

a court may grant an order to a shareholder under section 233 to commence a derivative

action. The primary difference in the consideration under section 23215 being that the

relevant conduct of a director is contrary to the interests of the members as a whole or

oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or

members whether in that capacity or in any other capacity. Accordingly, the approval of

a resolution by the shareholders in general meeting would not relieve a director of

liability to a shareholder affected by the director’s conduct.

If the Court refuses to exercise its discretion to grant leave, any appeal in respect of the

exercise of the discretion would need to satisfy the requirements in House v The King.16

This is therefore a significant legal difficulty faced by a shareholder when leave is

refused by the Court and accordingly the consequence is to prejudice the right of a

shareholder to commence or intervene in proceedings.

PropositionIt is a proposition advanced by this thesis that:

[(i)] there is no clear principle upon which there ought to be any relevance of a

ratification resolution to a shareholder commencing a derivative action;

[(ii)] there is no clear principle why a court should take into consideration as a part of its

discretion for the grant of leave for a shareholder to commence derivative

proceedings the fact that a ratification resolution was approved by a majority of

14 Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97 at [139]-[140] (Spigelman CJ); Short v Crawley (No. 30) [2007] NSWSC 1322 at [177] (White J).15 The predecessor section was section 260 of the Corporations Law which was subsequently renumbered as section 246AA of the Corporations Law.16 (1936) 55 CLR 499 at 505.

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shareholders; and

[(iii)] there is uncertainty as to whether a court may grant leave to a shareholder to

commence a derivative action where there has been a prospective authorisation of

a breach of statutory duty.

[B.] Director’s liability and the quantum of damages

In connection with a ratification resolution, sections 1317S17 and 1318 of the

Corporations Act are relevant to the question of the extent of liability to be imposed upon

a director by reason that it is relevant to determine whether a director acted improperly18

or dishonestly.19

Section 1317JA of the former Corporations Law (now section 1317S of the Corporations

Act) was considered in Forge v Australian Securities & Investments Commission.20 The

Court held that section 1317JA supports the proposition that contraventions of the civil

penalty provisions (such as the statutory duties imposed upon directors) cannot be ratified

by shareholders. The only relief available to avoid or reduce liability is that for which the

legislature provided.

A director’s honest breach of their statutory duties is not a bar to a liability being imposed

under a civil penalty provision. Pursuant to section 1317S(2)(b) of the Corporations Act,

the Court must also have regard to all the circumstances of the case to determine whether

the person ought fairly to be excused from the contravention, in whole or in part. It will

be recalled that under the general law there is no requirement in Australia for a

ratification resolution to be approved by an independent majority of shareholders and

accordingly, a director (and their fellow directors and any associates of the directors) may

vote as shareholders to ratify a breach of duty.

17 Formerly section 1317JA of the Corporations Law.18 See ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373. See also ASIC v Adler and 4 Ors [2002] NSWSC 483 at 173 per Santow J. See generally Harris, J, ‘Relief from liability for company directors: Recent Developments and their implications’, (2008) 21(1) University of Western Sydney Law Review.19 See generally Schmierer and Anor v Taouk [2004] NSWSC 345.20 [2004] NSWCA 448.

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In Australia, there is no authority on the question of whether subject to the ratification

resolution being approved by a non-independent majority of shareholders, what weight

should be attributed to the ratification resolution being approved. In light of the general

law, it is very likely that a court would disregard which of the shareholders voted to

approve a ratification resolution in exercising its discretion to relieve a director from the

liability to the company.


[(i)] a court in exercising its discretion is not required to consider whether a

ratification resolution was approved as a result of (a) a shareholder voting to

approve their own breach of fiduciary and/or statutory duties as a director and (b)

fellow directors and associates of the director voting to approve the ratification

resolution; and

[(ii)] no weight will be attributed to the fact that a ratification resolution was

approved as a result of (a) a shareholder voting to approve their own breach of

fiduciary and/or statutory duties as a director and (b) fellow directors and

associates of the director voting to approve the ratification resolution.

[I.] HOW DOES PROSPECTIVE AUTHORISATION OF A BREACH OF STATUTORY DUTY

DIFFER FROM RETROSPECTIVE RATIFICATION?

The jurisprudence and doctrinal issues relevant to the doctrine of ratification are common

to both prospective authorisation and retrospective ratification of a breach of statutory

duty. It is appropriate at this juncture therefore to consider the relevant differences

between a prospective authorisation and retrospective ratification for companies

incorporated under the Corporations Act.

Prior to the directors embarking upon conduct which may be in breach of statutory duties,

the directors may seek prospective authorisation from the shareholders in general

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meeting.21 The same requirements, limitations and restrictions which apply to

retrospective ratification apply to prospective authorisation,22 accordingly, not every

proposed breach of statutory duty is capable of prospective authorisation.23

The practical effect of the prospective authorisation is therefore to allow the directors to

engage in conduct on behalf of the company which would otherwise attract personal

liability for any loss or damage sustained by the company which resulted from the

conduct. If the prospective authorisation is not granted, the directors can therefore

conduct themselves in the knowledge that if they proceed with the contemplated

transaction that they may be personally liable for any loss or damage sustained by the

company.

If the directors and their associates form a majority of the shareholders, it is to the

advantage of the directors to seek prospective authorisation (as distinct from retrospective

ratification) since the directors may not later be able to form a majority at a future general

meeting of the shareholders to approve a ratification resolution.

II. ATTENUATION OF DIRECTORS’ STATUTORY DUTIES BY AUTHORISATION

The High Court in Angas Law Services Pty Ltd (in liq) v Carabelas24 left open the

possibility that the acquiescence of shareholders to a course of conduct by a director of a

company incorporated under the Corporations Act might affect the practical content of a

director’s statutory duties.25 It follows that authorisation potentially extinguishes the

company’s cause of action in certain circumstances.

21 See especially Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.22 Pascoe Ltd (in liq) v Peter Charles Lucas [1998] SASC 7134; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; Bamford v Bamford [1970] Ch 212.23 T Cockburn, L Wiseman, Disclosure Obligations in Business Relationships (Federation Press, 1996), 222.24 (2005) 226 CLR 507.25 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507, [32] (Gleeson CJ and Heydon J, Gummow, Kirby and Hayne JJ agreeing).

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define generally in the thesis in an earlier chapter

In Angas Law Services Pty Ltd (in liq) v Carabelas,26 in the context of statutory duties, it

was stated in obiter that ‘[i]n a particular case, ... [the shareholders] acquiescence in a

course of conduct might affect the practical content of those duties. It might, for example,

be relevant to a question of impropriety.’27 The High Court thereby left open the question

as to whether statutory duties owed by directors could be attenuated, including by the

conduct of the shareholders.

Before considering the attenuation of statutory duties as a result of authorisation, it is

instructive at this point to briefly consider the (i) legal nature of directors’ duties and (ii)

the legal implications of a duty arising from statute.

A.[C.] Nature of director’s duties

It is sufficient at this juncture to note the following 4 summary points which illuminate

the nature of director’s duties:

1. It is trite law that a director is in a fiduciary relationship with the company and

that those duties do not arise from contract.

2. There is some uncertainty about whether a director's duty of care is only a

common law and statutory duty or is also an equitable duty; and, if it is equitable,

whether the duty is also a fiduciary duty.28

3. A breach of a statutory duty will result in a breach of duty to the company both

under statute and under the general law.

4. Where a director’s duty was made an offence under the Corporations Act, this

could result in the imposition of a civil or criminal penalty, depending upon the

nature of the duty and the director’s conduct.

26 [2005] HCA 23.27 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23 at [32] (Gleeson CJ and Heydon J, Gummow, Kirby and Hayne JJ agreeing).28 Daniels v Anderson (1995) 37 NSWLR 438 at 505 (common law duty of care); Permanent Building Society v Wheeler (1994) 11 WAR 187 (equitable and common law duty); Heydon, J, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in S Degeling and J Edelman (eds), Equity in Commercial Law, (2005, Lawbook Co, Sydney); Heath, W, ‘The Director's “Fiduciary” Duty of Care and Skill: a Misnomer’ (2007) 25 C & S LJ 370. See generally Irving, M, The Contract of Employment (LexisNexis Butterworths, 2012), [7.25].

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B.[D.] Codification of directors’ duties

The codification of directors’ duties did not replace the general law duties of directors

and it resulted in directors having wider duties to the company. This is a consequence of

(i) section 185 of the Corporations Act, (ii) the broader wording used in the Corporations

Act when the co-existing fiduciary duty was codified and (iii) the creation of additional

duties which did not have an equivalent fiduciary duty in the Corporations Act or other

enactment of the Commonwealth.29

The codification of directors’ duties brought about statutory remedies, which were in

addition to the remedies available in equity for a breach of a director’s fiduciary duty. A

director may be personally liable for a breach of statutory duty.

The principal remedies for a breach of statutory duty are:

(i) civil penalties under section 1317E;

(ii) pecuniary penalties under section 1317G;

(iii) compensation under section 1317H; and

(iv) disqualification under section 206.

The codification of the duty of care did not result in a higher standard, rather it has been

held that the standards imposed by the statutory duty are essentially the same as the

standards imposed upon directors under the common law.30

C.[E.] Effect of codification of directors’ duties

Generally, where directors’ duties have been codified, it will not be possible for the

shareholders to prospectively approve or ratify the conduct of the directors to cure a

29 For example, directors are required to ensure that the companies complies with its tax obligations under Division 269 of Schedule 1 to the Taxation Administration Act 1953 (Cth).30 Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171.

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breach of the statutory duties by the directors.31 The question which arises for

consideration is whether a director’s statutory duties can be attenuated by authorisation or

ratification and to what extent will that attenuation is permissible.

In Macleod v The Queen32 which concern the alleged consent of a sole shareholder to a

breach of section 173 of the Crimes Act 1900 (NSW) it was stated that ‘[t]The self-

interested 'consent' of the shareholder, given in furtherance of a crime committed against

the company, cannot be said to represent the consent of the company.’33

In Australian Securities and Investments Commission v Maxwell & Ors,34 the obiter

statements in Angas Law Services referred to at the start of this Section of the Chapter

were relied upon and Justice Brereton extended the statement to include any question of

whether directors acted with a reasonable degree of care and diligence, and whether they

made improper use of their position.35

III. CAN RATIFICATION ATTENUATE STATUTORY DUTIES?

In Angas Law Services Pty Ltd (in liq) v Carabelas,36 Gleeson CJ and Heydon J held that

so far as liability based on breach of the statutory duties in Pt 2D.1 of the Corporations

Act is concerned, disclosure and ratification by the members cannot relieve a director of a

liability and that the shareholders cannot release directors from the statutory duties

imposed on directors by sections 180(1), 182(1) and 184(2). The same decision was

earlier reached in Miller v Miller,37 Forge v Australian Securities and Investments

31 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; Forge & Ors v Australian Securities & Investments Commission [2004] NSWCA 448; Miller v Miller (1995) 16 ACSR 73 cf Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737.32 (2003) 214 CLR 230.33 (2003) 214 CLR 230 at 240.34 [2006] NSWSC 1052.35 Australian Securities and Investments Commission v Maxwell & Ors [2006] NSWSC 1052, [103].36 [2005] HCA 23.37 (1995) 16 ACSR 73.

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Commission38 and Australian Securities and Investments Commission v Australian

Investors Forum Pty Ltd (No 2).39

In Forge v Australian Securities and Investments Commission,40 the court stated that civil

penalty proceedings to enforce breaches of directors’ duties involve public rights (noting

that when ASIC brings civil penalty proceedings a purpose can be to have the defendant

director disqualified from managing corporations). Consequently, the Court stated that

shareholders cannot remove the declaration by the Court of contravention of a civil

penalty proceeding by ratifying the original acts of the director.

In Miller v Miller,41 it was considered by Santow J that,

ratification cannot cure a breach of statutory duty, more especially one imposing criminal

liability. The most it can do is remove from the scope of technical dishonesty such

actions as issuing shares for a purpose which is not a proper one, in the sense of not being

for the benefit of the company as a whole.42

It can be seen from the above cases that different considerations apply to statutory duties

as distinct from fiduciary duties because of the public enforcement element of a breach of

statutory duties. This analysis is relevant to the further question of whether prospective

authorisation may be effective to attenuate statutory duties.

IV. CAN PROSPECTIVE AUTHORISATION ATTENUATE STATUTORY DUTIES?

There is legal uncertainty as to whether prospective authorisation may be given by the

shareholders in general meeting which would have the effect of attenuating a particular

statutory duty of the company’s directors. This legal issue was left open by the High

38 [2004] NSWCA 448.39 [2005] NSWSC 267.40 [2004] NSWCA 448.41 (1995) 16 ACSR 73.42 Miller v Miller (1995) 16 ACSR 73, 89 (Santow J). See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 July 2015) ‘Ratification of action in breach of other fiduciary duties’ [8.385].

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Court in Angas Law Services Pty Ltd (in liq) v Carabelas43 and the question has not been

judicially considered in Australia.

The basis of the legal question arises from the doctrine of attenuation of fiduciary duties.

In the context of attenuation of fiduciary duties, pursuant to the doctrine of attenuation of

fiduciary duties, the fiduciary duties owed by directors may be narrowed by the

unanimous agreement of the shareholders (including through the operation of the

Duomatic principle44) and the shareholders’ acquiescence to a course of conduct can

affect the practical content of a director’s fiduciary duties.45

The authorities in Australia indicate that the shareholders in general meeting have the

power to authorise a proposed course of conduct,46 however, the High Court in Angas

Law Services did not find it necessary to make an authoritative statement about all the

legal considerations which may be relevant to the question of whether prospective

authorisation is effective to attenuate the statutory duties established under the

Corporations Act. This issue is considered below.

The attenuation of a director’s statutory duties may arise under the company’s

constitution, or by the exercise of the powers of a majority of the shareholders in general

meeting. In relation to all companies, the limits to which a director’s statutory duties

may be attenuated is subject atleast to the following matters:

(i) section 191 of the Corporations Act (Material personal interest--director's duty to

disclose);

(ii) corporate governance regulation established by the Corporations Act (addressed

in Chapter 5);

(iii) the operation of the Duomatic principle (addressed in Chapter 2);

43 [2005] HCA 23.44 Re Duomatic Ltd [1969] 2 Ch 365.45 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507. See generally Japan Abrasive Materials Pty Ltd & Ors v Australian Fused Materials Pty Ltd (ACN 009 415 025) & Ors [1998] WASC 60; Grand Enterprises Pty Ltd v Aurium Resources Limited [2009] FCA 513; Western Areas Exploration Pty Ltd v Streeter (No. 3) [2009] WASC 213; Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2005] WASCA 144; Barkley v Barkley Brown [2009] NSWSC 76.46 See especially Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.

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Can this explain the lawfulness of a management buyout?

(iv) whether the director has modified statutory duties pursuant to sections 18 and 187

of the Corporations Act because the person is a director of a wholly owned

subsidiary;

(v) the exemption limitations pursuant to section 199A of the Corporations Act

(Indemnification and exemption of officer or auditor);

(vi) the prohibition against fraud on the minority; and

(vii) the prohibition against oppressive conduct under Part 2F.1 of the Corporations

Act (Oppressive conduct of affairs).

D.[F.] What considerations may be relevant to attenuation of statutory duties arising from prospective authorisation?

Notwithstanding that there is no legal authority on the question of the considerations

which may be relevant to the attenuation of a particular statutory duty established by the

Corporations Act arising from a constitutional provision or a prospective authorisation

resolution (or other conduct of the shareholders), the law relevant to the doctrine does not

exist in a vacuum and accordingly, it is possible to determine from existing authorities

which concern the doctrine of ratification and the Corporations Act the likely issues

which would arise for consideration by a court.

Depending upon the facts of a particular case, the considerations which may be relevant

to the legal question of attenuation of statutory duties arising from prospective

authorisation include:

(i) as a threshold question whether the terms of the resolution could be effective to

prospectively authorise the conduct of the directors;

(ii) the statutory duties established by the Corporations Act and their interpretation;

(iii) the solvency of the company;

(iv) the principle of public policy which supports the enforcement of breaches of

statutory duty; and

(v) whether the attenuation of a statutory duty would amount to oppressive conduct

within the meaning of section 232 of the Corporations Act.

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Each of these matters is considered in detail below.

1 Whether the resolution could be effective to prospectively authorise the conduct of the directors

As previously stated in section I of this Chapter, the same requirements, limitations and

restrictions which apply to retrospective ratification apply to prospective authorisation,47

accordingly, not every proposed breach of statutory duty is capable of prospective

authorisation.48

There is therefore a threshold question whether all of the requirements for a valid

ratification resolution have been satisfied. As to those legal requirements and the types

of conduct which cannot be ratified,49 which relevantly include whether there has been a

fraud on the minority, each of these matters were addressed in Chapter 2. There is also a

separate legal obligation of disclosure by the directors under section 191 of the

Corporations Act.

47 Pascoe Ltd (in liq) v Peter Charles Lucas [1998] SASC 7134; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; Bamford v Bamford [1970] Ch 212.48 T Cockburn, L Wiseman, Disclosure Obligations in Business Relationships (Federation Press, 1996), 222.49 The scope of the doctrine of ratification is limited to protect minority shareholders in the following ways: (i) a ratification must be of a lawful act, (ii) where any contract amounts to a fraud or constructive fraud, on account of its being opposed to some positive law, or public policy, it is void and incapable of ratification, (iii) where an act is beyond the power of the principal, it cannot be ratified, (iv) where the act is void ab initio the maxim quod ab initio non valet, in tractu temporis non convalescit applies and accordingly the act is not capable of ratification, (v) an act beyond the purposes of the company for which it was created under the relevant statute is not ratifiable, (vi) acts which are ultra vires are not ratifiable (which in respect of companies incorporated under the Corporations Act would seem to now be limited to acts which are illegal following the abolition of the doctrine of ultra vires), (vii) an act beyond the scope of the purpose for which the power existed (an abuse of a power) is not ratifiable, (viii) a ratification will not be valid where the ratification would constitute a fraud on the minority, (ix) the shareholders in general meeting cannot ratify a transaction where the ratification would constitute a misappropriation of company resources or an appropriation to the majority of the shareholders, of property advantages which belong to the company, (x) a transaction cannot be ratified where the ratification was entered into by an insolvent company to the prejudice of creditors, (xi) the shareholders in general meeting cannot ratify a transaction where the ratification defeated a member's personal right, (xii) where the ratification was oppressive, the ratification will be invalid, (xiii) where the majority in general meeting acted for the same improper purpose as directors the ratification will be invalid, and (xiv) where ratification would constitute bad faith, the ratification will be invalid.

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2 The statutory duties and their interpretation

The statutory duties established by sections 180-184 of the Corporations Act are of

particular interest in this Chapter, however, it is also relevant to consider the modified

statutory duties of directors of wholly owned subsidiaries under sections 186 and 187 of

the Corporations Act, the position of nominee directors and directors of competing

companies.

The doctrine of ratification does not require that the directors acted honestly and in good

faith in the best interests of the company, which is inconsistent with the duty of loyalty of

a director to the company. There is however a relevant requirement for acting in the best

interests of the company arising from the duties established by sections 181 and 182 of

the Corporations Act. It will therefore be necessary to consider any alleged breaches of

statutory duty.

Directors of wholly owned subsidiaries in Australia

Pursuant to section 187 of the Corporations Act, a director of a wholly owned subsidiary

is taken to act in good faith in the best interests of the subsidiary if:

(a) the constitution of the subsidiary expressly authorises the director to act in the

best interests of the holding company; and

(b) the director acts in good faith in the best interests of the holding company; and

(c) the subsidiary is not insolvent at the time the director acts and does not become

insolvent because of the director's act.

The effect of section 187 of the Corporations Act does effect the operation of sections

181(1)(a) and 184(1) however it does not modify the effect of sections 181(1)(b) or

182(1)(a) of the Corporations Act.50

50 Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251 at [190] per Hammerschlag J.

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Directors of wholly owned Australian subsidiaries therefore are subject to modified

statutory duties provided that there is compliance section 187 of the Corporations Act.

Accordingly, it will be relevant to determine whether a director of a wholly owned

subsidiary is subject to a particular statutory duty since that director may not be in breach

of a statutory duty.51

Directors of wholly owned foreign subsidiaries

Pursuant to section 186 of the Corporations Act, sections 180 to 184 do not apply to an

act or omission by a director of a foreign company unless the act or omission occurred in

connection with:

(a) the foreign company carrying on business in this jurisdiction; or

(b) an act that the foreign company does, or proposes to do, in this jurisdiction; or

(c) a decision by the foreign company whether or not to do, or refrain from doing, an

act in this jurisdiction.

For the purposes of considering the position of directors of wholly owned subsidiaries,

the interaction between sections 186 and 187 of the Corporations Act indicates that these

directors are not subject to the duties established by sections 180-184 of the Corporations

Act. Accordingly, the question does not arise whether prospective authorisation may be

required for any conduct of these directors.

The interpretation of statutory duties

The obiter statements in Angas Law Services with respect to the interpretation of

‘improper’ and separately academic commentary52 suggest that a constitutional provision

which seeks to modify the meaning of certain conduct, such as ‘improper’ conduct, could

be effective to modify the interpretation of the meaning of sections 182 and 183 of the

Corporations Act.

51 There would be a separate question whether the conduct of the director was a breach of a fiduciary duty owed to the company.52 See Ford, Austin & Ramsay’s Principles of Corporate Law (at 25 July 2015) ‘Nominee directors: attenuation of duty by constitution’ [9.440] .

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At a more general level, there could therefore be provisions of a company’s constitution

or the terms of an authorisation resolution which seek to modify the interpretation of a

statutory duty which, subject to the other relevant legal considerations discussed in this

section F, could be effective to attenuate a director’s statutory duty.53

3 Solvency of the company

Under the law in Australia, an authorisation resolution is not void only by reason that a

company later becomes insolvent pursuant to section 95A of the Corporations Act. There

will be a relevant connection between an authorisation resolution and insolvency where,

for example there has been a breach of section 588G of the Corporations Act if the

authorisation resolution related to the incurrence of a debt.

Accordingly, unless there is a relevant connection between an authorisation resolution

and solvency, it will not therefore be a relevant consideration to consider the later

insolvency of a company to determine whether a statutory duty (separate from a breach of

section 588G) was attenuated.

4 Public enforcement of breaches of statutory duty

As was set out above, a significant factor considered by the Courts in determining

whether a ratification resolution could be effective to attenuate a statutory duty was the

public enforcement element of a breach of statutory duty. On one interpretation, an

underlying reason for this is that the Courts are unwilling to recognise that the

shareholders in general meeting had the authority to modify the effect of the statutory

duties imposed by the Corporations Act because those provisions were civil penalty

provisions and/or imposed criminal liability and there was the possibility that a person

could be disqualified from acting as a director in the future. The decision of the

parliament to codify the duties of directors and impose penalties for the breaches of those

statutory duties accordingly gave effect to the protection of stakeholders of the company

53 See, for example, Levin v Clark [1962] NSWR 686 where the company’s constitution, coupled with the terms of a sale and mortgage, was held to constituted an attenuation of the fiduciary duty of the directors which was sufficient to permit the directors to act primarily in the interests of the mortgagee and thereby did not require the directors to act for the benefit of the company as a whole.

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and the enforcement of public rights by ASIC. Such an interpretation is also supportable

on the basis that a ratification resolution seeks to relieve a director of a liability for the

breach of a statutory duty, which is a matter relevant to a question of whether a director

should be relieved from liability in whole or in part under sections 1317S and/or 1318 of

the Corporations Act.

With this possible interpretation in mind, it is likely that a court would approach the

question of whether prospective authorisation could attenuate a statutory duty as a

question independent of what is the effect of the attenuation of the statutory duty.

Based on the authority of Angas Law Services and the authorities relied upon by the High

Court in that case and the discussion above, there would not seem to be a question

whether the effect of the statutory duties is modified by reason of an authorisation

resolution, the question will only be whether there is some legal basis to say that a

statutory duty was attenuated because of (for example), the director was subject to a

modified statutory duty arising from the person being a director of a subsidiary, or the

interpretation of the statutory duty is modified by reason of the terms of an authorisation

resolution or a provision of the company’s constitution.

5 Whether the attenuation of a statutory duty would amount to oppressive conduct pursuant to section 232 of the Corporations Act?

In Chapter [2], it was discussed that a breach of a director’s fiduciary duties to the

company may be ratified or prospectively authorised. Further, as discussed above, there

are also cases which indicate that fiduciary duties may be attenuated.54 These cases did

not address the question of whether a statutory duty could be attenuated where the

attenuation of the duty amounts to oppressive conduct pursuant to section 232 of the

Corporations Act. There is no authority on this specific question, however there are

relevant legal principles and authority which indicates that a court would not recognise

the attenuation of a statutory duty in respect of proceedings pursuant to section 232 of the

Corporations Act.54 See eg. Levin v Clark [1962] NSWR 686.

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As was discussed above, the considerations applicable under section 239(2) are different

to those under section 232. This accordingly permits a court to focus attention on

whether the relevant conduct is contrary to the interests of the members as a whole or

oppressive to, unfairly prejudicial to, or unfairly discriminatory against shareholders.

It will be relevant to consider whether the directors and/or their associates voted, for

example, to modify a provision of the constitution or to authorise the conduct of a

director.55 Where a director has derived an advantage from their own wrong, a court may

be reluctant to recognise the attenuation of a statutory duty, notwithstanding that a

shareholder has a right to exercise their vote in their own interests because the mere act of

voting to attenuate the statutory duty is oppressive conduct within the meaning of section

232 of the Corporations Act.

A factor which would also be relevant is whether any constitutional amendment or

authorisation resolution was approved by the shareholders in general meeting

notwithstanding the votes of the director(s) and/or their associates.

In HNA Irish Nominee Ltd v Kinghorn (No 2)56 it was held that two shareholders could

not rely on their control of the general meeting to ratify conduct in breach of their

director’s duties,57 however, the ordinary shareholders can ratify a decision taken by the

directors, provided the decision taken by the ordinary shareholders is not itself oppressive

within the meaning of section 232 of the Corporations Act.58

In relation to oppressive conduct, HNA Irish Nominee Ltd v Kinghorn (No 2)59 is a

significant development in relation to the lawfulness of a ratification resolution and the

limitations on the operation of the doctrine of ratification in Australia. The Court held

55 See especially HNA Irish Nominee v Kinghorn (No 2) [2012] FCA 228 where the directors used their voting power to approve a ratification resolution.56 [2012] FCA 228.57 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, [601] (Emmett J).58 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, [659] (Emmett J).59 [2012] FCA 228.

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that the approval by the major shareholders of a ratification resolution was oppressive

pursuant to section 232 of the Corporations Act, ergo oppressive conduct is independent

of the doctrine of ratification. The obiter statements in Angas Law Services did not

consider the possibility that conduct which seeks to give rise to the attenuation of a

statutory duty may be oppressive conduct under section 232 in the sense of HNA Irish

Nominee Ltd.60

The ratio decidendi of HNA Irish Nominee Ltd61 at least includes the following

propositions:

(i) that an action of directors is in breach of fiduciary duty will be relevant to

whether there has been unfairness in the context of oppression;62 and

(ii) directors which prefer their own interests over those of another group of

shareholders is capable of constituting oppression and unfair discrimination

within the meaning of section 232 of the Corporations Act.63

The reasoning in HNA Irish Nominee Ltd64 leaves open the legal possibility that where

there is a decision taken by the shareholders in general meeting, provided that the

resolution which authorises the future conduct of directors or amends the provision of a

constitution is not contrary to section 232 of the Corporations Act, the decision of the

shareholders could be effective to attenuate a statutory duty.

Whether in fact the express or implied conduct of the shareholders will result in the

attenuation of a statutory duty will depend upon the facts of a particular case because of

the possibility of a director being subject to modified statutory duties and the

interpretation of the content of a statutory duty which may be dependent upon a unique

factual matrix. At the current time, no authorities have followed HNA Irish Nominee in

60 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228.61 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228.62 see Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd [2013] NSWSC 235 citing with authority Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228; Re Cumberland Holdings Ltd (1976) 1 ACLR 361; Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539.63 See HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, [665] citing with authority Reid v Bagot Well Pastoral Co Pty Ltd (1993) 12 ACSR 197, 205-7.64 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228.

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relation to statutory oppressive conduct within the meaning of section 232 of the

Corporations Act.

PropositionIt is a proposition advanced by this thesis that a constitutional provision, a resolution for

the prospective authorisation of specified conduct or other conduct of the shareholders

giving rise to the operation of the Duomatic principle could be legally effective to

attenuate a particular statutory duty of a company director.

[V.] PREJUDICE TO STAKEHOLDERS

It is a conclusion of this thesis that a constitutional provision, a resolution for the

prospective authorisation of specified conduct or other conduct of the shareholders giving

rise to the operation of the Duomatic principle could be legally effective to attenuate a

particular statutory duty of a company director.

If the High Court’s obiter statements in Angas Law Services are correct that different

considerations do apply with respect to prospective authorisation of a breach of statutory

duty as distinct from retrospective ratification of the same breach of duty, with the result

that the director’s conduct was not a breach of statutory duty, whether because the duty

had been attenuated or the company’s shareholders authorised a specific breach of duty,

this would introduce further uncertainty into the operation of the doctrine of ratification

because:

[(i)] different outcomes would emerge for directors who have breached their duties

because they were involved in authorising (not ratifying) their own breach;

[(ii)] it is unclear what principle(s) indicate that an ‘organised’ breach of duty is lawfully

acceptable, given that it is the director(s) (and possibly their associates) approving

their own (or related parties) future conduct by modifying the content of their own

duties to the company;

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[(iii)] arising from the current state of the law in Australia, it is unclear in what

circumstances the shareholders in general meeting could approve a resolution

which would have the legal effect of attenuating a particular statutory duty; and

[(iv)] arising from the current state of the law in Australia, it is unclear whether a court

may consider the authorisation of a breach of statutory duty by the shareholders in

general meeting to be oppressive, unfairly prejudicial or unfairly discriminatory


If a director’s statutory duties can be attenuated by prospective authorisation, then there is

a self-evident prejudice to the company because the legal effect of the attenuation of

statutory duty is to regularise the director’s conduct which may have given rise to a

financial benefit to the director and/or their associates.

The company’s stakeholders including minority shareholders, unsecured creditors and

employees may suffer prejudice as a result of the changed director’s duties. This arises

because the conduct of the director is not considered to be a breach of statutory duty and

thereby, there is no cause of action arising from the conduct, which but for the

attenuation of statutory duty, would otherwise have been a breach of statutory duty and

actionable by the company, or by a shareholder on behalf of the company pursuant to

section 236 of the Corporations Act.

The possible attenuation of a director’s statutory duties established by the Corporations

Act highlights the tension between the application of the following principles:

[(i)] a person shall not derive advantage from their own wrong;65

[(ii)] a director must act in the best interests of and avoid conflicts of interest to the

company;

[(iii)] the right of a shareholder to vote in their own interests provided that the conduct is

not fraudulent, a fraud on the minority, oppressive conduct66 or to expropriate the

property of the company; and

65 See especially Meyers v Casey (1913) 17 CLR 90 at 124 per Isaacs J); Cadman v. Horner [1810] EngR 494.66 Corporations Act 2001 (Cth) s 232.

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[(iv)] a shareholder does not owe any fiduciary duties to the company, or to any other

shareholder.

The stakeholders of a company, in particular the shareholders, are subject to prejudice

where there is an attenuation of a particular statutory duty because primarily the

company’s right to commence proceedings does not materialise by reason of the

prospective authorisation resolution, since the legal consequence of the prospective

authorisation resolution is for the director to avoid a potential cause of action.

In light of the fact that a prospective authorisation resolution would be relevant to

whether a court may exercise its discretion to grant relief to a director from a liability

owed to the company arising from a breach of the director’s duties pursuant to section

1317S and 1318 of the Corporations Act, the company together with the shareholders are

prejudiced as a result of the attenuation of a particular statutory duty because the Court is

unable to consider whether the director should be relieved of all or a part of a liability

because the liability did not arise.

The existence of prejudice to the company’s stakeholders arising from the attenuation of

a director’s statutory duties and the legal uncertainty created by the different

consideration relevant to prospective authorisation indicates the need for reform to the

Corporations Act to address the problems which arise from the operation of the doctrine

of ratification.


[(i)] under current Australian law, it is unclear whether different principles may apply to

a prospective authorisation of a breach of statutory duty and accordingly, there is

uncertainty in the operation of the doctrine of ratification with respect to

prospective authorisation;

[(ii)] if there are differences in principle between prospective authorisation and

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retrospective ratification, this raises additional issues as to how the best interests

of the company are achieved by the underlying legal principles of (i) the

prevention of fraud on the minority and (ii) oppressive conduct within the

meaning of section 232 of the Corporations Act; and

[(iii)] the existence of prejudice to the company’s stakeholders arising from the

attenuation of a director’s statutory duties and the legal uncertainty created by the

different consideration relevant to prospective authorisation indicates the need for

reform to the Corporations Act to address the problems which arise from the

operation of the doctrine of ratification.

[VI.] DOCTRINAL ISSUES CONCERNING ATTENUATION OF DUTIES

Judicial reasoning concerning directors’ duties may be considered to fall into one of the

following three approaches; (i) the absolutist approach, (ii) the corporate primacy

approach, and (iii) the attenuated duty approach.67 The attenuated duty approach

emerged in the 20th century in Australia, New Zealand and in the early 21st century in the

United Kingdom exemplified respectively by Levin v Clark,68 Berlei Hestia (NZ) Ltd v

Fernyhough69 and Re Southern Counties Fresh Foods Ltd; Cobden Investments Ltd v

RWM Langport Ltd.70 Each of the Australian and New Zealand cases concerned nominee

directors and the case in the United Kingdom concerned a joint venture company.

Accordingly, the law has recognised the limited attenuation of director’s statutory duties

in certain circumstances and this is to be distinguished from a more general principle of

law applying to all directors of companies.

Separate from the cases concerning nominee directors and joint venture companies,

semble, the decisions in Forge,71 Miller,72 Maxwell,73 Angas Law Services74 and

67 For a detailed discussion on these approaches see Ahern D, Nominee directors’ duty to promote the success of the company: Commercial pragmatism and legal orthodoxy (2011) 127 LQR January.68 69 [1980] 2 NZLR 150.70 [2008] EWHC 2810 (Ch).71 72 73 74

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Moved from Ch 4 (doctrinal issues with ratification) on 28/10/16

Macleod75 suggests that the attenuation of a director’s statutory duties is not generally

possible for the following reasons:

1. the comprehensive statement of the duties of directors established by the

Corporations Act operates as a code in addition to general law duties;

2. the codification of directors’ duties broadened the general law duties and

increased duties imposed upon directors;

3. the codification of directors’ duties from the general law duties creates a

minimum standard of conduct of directors by which the parliament intended to

apply to all companies incorporated under the Corporations Act;

4. the existence of an offence for a breach of a director’s duty to which a penalty

applies indicates that the parliament intended to make individual directors

responsible for their conduct and to deter directors from conduct which would be

in breach of a particular duty;

5. the determination that the shareholders cannot ratify a breach of statutory duty

suggests that the same reasoning would support a conclusion that the shareholders

cannot attenuate a statutory duty;

6. the attenuation of a statutory duty would allow a director to avoid the obligation

of showing that they acted honestly under section 1317S and 1318 where the

Court has the power to relieve a director of the consequences of a breach of duty

and such an outcome appears inconsistent with the purpose of the scheme of civil

penalty provisions under the Corporations Act;76

7. the existence of the defence to a breach of a statutory duty established by section

180(2) of the Corporations Act indicates that the engagement of directors in

commercial decisions is a factor relevant to a question of whether there has been a

breach of duty under section 180(1) and thereby suggests that the parliament did

not intend that the duty created by section 180(1) ought to be attenuated. This

may also indicate that the absence of a statutory defence to a breach of statutory

duty that the statutory duty cannot be attenuated;

8. there is no express statement in the Corporations Act which indicates that the

parliament intended that the statutory duties could be attenuated; and75 76 Acts Interpretation Act s 15A

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9. the above reasons, together with the principles of statutory construction suggest

that the overall scheme of the Corporations Act does not support a view that the

statutory duties would impliedly be permitted to be attenuated.

The obiter statements by Gleeson CJ and Heydon J in Angas Law Services77 suggest in

respect of the attenuation of statutory duties that an exception may apply in respect of the

practical content of a particular duty although no basis was suggested for such a

principle. The example cited in Angas Law Services78 was on a question of impropriety

and how the factual question of impropriety may be addressed in certain circumstances.

There are no reported cases of the attenuation of statutory duties in relation to

incorporated associations, strata companies or trade unions from which any principles

have arisen which suggest that the attenuation of statutory duties is permissible under the

Corporations Act.

Directors’ duties developed under the general law independent of the law of contract.

Contract may play a role in defining the relationship between parties and the scope of the

fiduciary duties,79 however that principle of law is applied in quite different

circumstances from the fiduciary relationship of director and company.

The doctrinal question is how a contract such as the company’s constitution or a

shareholders’ agreement could affect the content of a fiduciary or statutory duty? As

discussed below, it is not evident from the current law in Australia what is the doctrinal

basis for the attenuation of directors’ duties.

There can be a breach of contract without the conduct giving rise to a breach of duty,

whereas the attenuation of duties approach adopted in Australian jurisprudence seems to

suggest that the content of the fiduciary and statutory duties are dependent in some way

on the constitution and/or the shareholders agreement. This is said to arise from what

may be considered to be the scope of the phrase ‘best interests of the corporation’ under 77 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23 at [32] per Gleeson CJ and Heydon J78 79 See Australian Securities and Investments Commission (ASIC) v Citigroup Global Markets Australia Pty Limited [2007] FCA 963

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sections 180(2)(d) and 181(1) of the Corporations Act and the word ‘improperly’ under

sections 182 and 183 of the Corporations Act.80

A key question is whether the attenuated duty approach is consistent with the view that

the company (and indirectly the shareholders) is the sole beneficiary of the duties owed

by the directors. This idea appears to be incorrect in principle and in practice since there

are cases where the Australian Securities & Investments Commission has sought to

enforce the law on behalf of shareholders and creditors which indicates there is a

dimension to enforcement of the law in favour of a wider group of stakeholders where

there is a breach of director’s duties. This follows from the Australian Securities &

Investments Commission’s role in enforcing corporate law and protecting the public.

It is also the case that under Australian law, employees and unsecured creditors may

benefit from the prohibition against insolvent trading. A liquidator is empowered to

commence proceedings against a director for insolvent trading81 which would directly

benefit employees and creditors. Creditors may also be able commence proceedings

against a director where there has been insolvent trading.82 This further shows that the

company (and the shareholders) is not the sole beneficiary of the duties of directors.

Under the Taxation Administration Act 1953, the directors are required to cause the

company to comply with obligations which include the remittance of PAYG amounts to

the Commissioner of Taxation and pay moneys to employee superannuation funds.83

These obligations on directors are directly beneficial for employees, however there are

indirect benefits to other stakeholders of the company and generally the public.

It is a proposition advanced by this thesis that the public obtain a benefit from statutory

directors’ duties in the following ways:

80 The point was left open by the High Court in Angas Law Services and the doctrinal basis upon which the attenuation is said to arise has never been addressed in Australia.81 Corporations Act 2001 (Cth) ss 588M.82 Corporations Act 2001 (Cth) ss 588M, 588R-588U.83 Taxation Administration Act 1953 (Cth) Sch 1 s 269-15(1).

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(i) the possible adverse effect of the company’s business activities on local residents

may be constrained by directors’ duties;

(ii) customers benefit from the company’s goods and services supplied; and

(iii) society as a whole benefits from good corporate governance and taxes paid by the

company.

As discussed above, given that there are a wide range of stakeholders which gain a

benefit from statutory directors’ duties, the legal principle that the shareholders may

attenuate the duties of directors (i) by unanimous agreement pursuant to a shareholders’

agreement or (ii) pursuant to the Duomatic principle or (iii) generally through the

constitution, is contrary to the Australian law which seeks to protect the interests of a

company’s stakeholders, including the public.

The current Australian law seeks to protect the legal rights of stakeholders and this has

the effect of reducing the prejudice to stakeholders of the operation of the attenuation of

duties. This argument does not suggest that the directors owe direct duties to

stakeholders, or indeed proposes a change to the Corporations Act to give effect to duties

owed to stakeholders. It is however a proposition advanced by this thesis that the

doctrinal basis for the attenuation of directors’ duties is unclear and the application of the

doctrine of attenuation of duties is inconsistent with modern principles of corporate

governance which are discussed in Chapter 5.

This thesis will now consider the policy arguments in favour and against the adoption of

the attenuated duty approach.

V. POLICY ARGUMENTS IN FAVOUR AND AGAINST AN ATTENUATED DUTY

APPROACH

There are substantial policy reasons in support of the attenuated duty approach which has

been adopted in Australia in respect of nominee directors and these policy reasons are

summarised as follows:

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Moved from Ch 4 (doctrinal issues with ratification) on 28/10/16

Robson & Hayes Legal, 10/28/16,

The chapter is very long. The policy arguments could be put into Chapter 6 as an introductory step/argument for reworking the principles of ratification. This part is 795 words.

(i) The appointment of nominee directors is common in commercial practice and

because of the prevalence of the use of nominee directors, the law should

recognise the circumstances as being distinct from other companies and ‘bend’ to

commercial practice;84

(ii) The attenuated duty approach recognises that the nominee director may have a

duty to their appointer through an agreement, which may arise from a contract of

employment;85

(iii) The common law and general law remains flexible and under development. The

law is thereby able to be molded to suit the particular circumstances;

(iv) The shareholders’ unanimous agreement protects the minority shareholders from

the actions of the majority since there is no prejudice to any shareholder in these

circumstances;

(v) The shareholders can fashion the terms of the company’s constitution, or a

shareholders’ agreement in a flexible way to suit the circumstances and the needs

of the company. This allows the directors to act in the best interests of the

company with narrowed duties; and

(vi) There must still be compliance with the Corporations Act, and the constitution of

the company and thus the company and the shareholders continue to benefit from

the usual legal protections.

There are also substantial reasons why the attenuated duty approach may have a negative

effect, even in respect of companies which have nominee directors:

(i) The fiduciary and statutory duties of directors arose as a result of the need for

protection of the company and the shareholders from the conduct of directors

because they are fiduciaries. The attenuation of director’s duties is permissive of

narrowing the protections afforded to the beneficiaries of the fiduciary and

statutory duties and this may be of particular relevance in relation to management

buyouts;

84 See Ahern D, Nominee directors’ duty to promote the success of the company: Commercial pragmatism and legal orthodoxy [check citation].85 See Ahern D [above N]

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(ii) The ongoing development of corporate governance regulation is supportive of the

idea that the interests of other stakeholders including employees, creditors,

customers and the public should also be considered. This is recognised by the

imposition of duties on directors against insolvent trading,86 under tax legislation

to ensure that the company complies with its statutory obligations87 and

environmental legislation to ensure the environment is protected for current and

future generations.88 The allowance of the attenuation of directors’ duties

suggests that the primary beneficiaries of the duties are the company and

consequently the shareholders. The scope of statutory directors’ duties may be

construed to be for the public benefit which incorporates the benefit to

stakeholders;

(iii) The attenuation of duties raises the possibility of a private benefit being given to a

director or one of their associates which outweighs the benefit to the company

and/or the shareholders and other stakeholders;

(iv) There is no duty on the shareholders to act in the best interests of the company

and this is permissive of shareholders attenuating the duties of directors where the

attenuation would not be in the best interests of the company;

(v) There is no duty on the shareholders to consider the interests of other

stakeholders. This raises the possibility of the shareholders making a choice of

favouring their private interests over the interests of stakeholders;

(vi) The best interests of the company has been judicially considered to be limited to

the current shareholders.89 The attenuation of duties does not therefore protect

future shareholders. The current shareholders can make a choice between the

need for protective regulation (as the primary source of rights, duties and

obligations) and the right to freedom to contract based on what they believe is in

the best interests of the company at that time. Those choices may adversely affect

future shareholders; and

(vii) Nominee directors are motivated to act in the interests of their appointer. It may

therefore be a paradox to thereby allow the attenuation of nominee director’s 86 87 88 89

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duties, the very duties which would protect the company from the conduct of the

nominee director and the nominee director would not be in breach of their duties.

The policy arguments against the adoption of the attenuated duty approach all indicate

there is prejudice to the stakeholders of a company and in this respect it is argued that the

negative consequences to stakeholders outweighs the benefits. It is a proposition

advanced by this thesis that the current law in Australia should be amended to remedy the

apparent prejudice to stakeholders, even though there may be substantial arguments in

favour of the attenuated duty approach.

For the above reasons and the reasons discussed in in Section [xx] of Chapter 3, it is a

proposition of this thesis that the attenuation of statutory duties should not be permitted.

VI. PREJUDICE TO STAKEHOLDERS

It is a conclusion of this thesis that a constitutional provision, a resolution for the

prospective authorisation of specified conduct or other conduct of the shareholders giving

rise to the operation of the Duomatic principle could be legally effective to attenuate a

particular statutory duty of a company director.

If the High Court’s obiter statements in Angas Law Services are correct that different

considerations do apply with respect to prospective authorisation of a breach of statutory

duty as distinct from retrospective ratification of the same breach of duty, with the result

that the director’s conduct was not a breach of statutory duty, whether because the duty

had been attenuated or the company’s shareholders authorised a specific breach of duty,

this would introduce further uncertainty into the operation of the doctrine of ratification

because:

(i) different outcomes would emerge for directors who have breached their duties

because they were involved in authorising (not ratifying) their own breach;

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(ii) it is unclear what principle(s) indicate that an ‘organised’ breach of duty is

lawfully acceptable, given that it is the director(s) (and possibly their associates)

approving their own (or related parties) future conduct by modifying the content

of their own duties to the company;

(iii) arising from the current state of the law in Australia, it is unclear in what

circumstances the shareholders in general meeting could approve a resolution

which would have the legal effect of attenuating a particular statutory duty; and

(iv) arising from the current state of the law in Australia, it is unclear whether a court

may consider the authorisation of a breach of statutory duty by the shareholders in

general meeting to be oppressive, unfairly prejudicial or unfairly discriminatory


If a director’s statutory duties can be attenuated by prospective authorisation, then there is

a self-evident prejudice to the company because the legal effect of the attenuation of

statutory duty is to regularise the director’s conduct which may have given rise to a

financial benefit to the director and/or their associates.

The company’s stakeholders including minority shareholders, unsecured creditors and

employees may suffer prejudice as a result of the changed director’s duties. This arises

because the conduct of the director is not considered to be a breach of statutory duty and

thereby, there is no cause of action arising from the conduct, which but for the

attenuation of statutory duty, would otherwise have been a breach of statutory duty and

actionable by the company, or by a shareholder on behalf of the company pursuant to

section 236 of the Corporations Act.

The possible attenuation of a director’s statutory duties established by the Corporations

Act highlights the tension between the application of the following principles:

(i) a director must act in the best interests of and avoid conflicts of interest to the

company;

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(ii) no conflict of interest arises for a director since (with limited exceptions on the

principles explained in Peter’s American Delicacy Co Ltd v Heath90) there are no

fiduciary duties owed by a director to a shareholder and a shareholder does not

owe any fiduciary duties to the company, or to any other shareholder;

(iii) corporate property must be used for corporate purposes;

(iv) a person shall not derive advantage from their own wrong;91

(v) a director who is a shareholder may, subject to certain limited exceptions (referred

to in point (vi) below), vote at a meeting of shareholders to prospectively

authorise or to retrospectively ratify their own breach of fiduciary and/or statutory

duties;

(vi) the right of a shareholder to vote in their own interests provided that the conduct

is not unlawful (including because of fraud, an abuse of power or a breach or

threatened breach of the Corporations Act or a breach of a director’s duties), a

fraud on the minority, oppressive conduct92 or to expropriate the property of the

companya director must act in the best interests of and avoid conflicts of interest

to the company;

[(v)] the right of a shareholder to vote in their own interests provided that the conduct is

not fraudulent, a fraud on the minority, oppressive conduct93 or to expropriate the

property of the company; and

(vii) equity follows the law;94 and

(viii) good corporate governance principlesa shareholder does not owe any fiduciary

duties to the company, or to any other shareholder.

The stakeholders of a company, in particular the shareholders, are subject to prejudice

where there is an attenuation of a particular statutory duty because primarily the

company’s right to commence proceedings does not materialise by reason of the

90 [1939] HCA 2.91 See especially Meyers v Casey (1913) 17 CLR 90 at 124 per Isaacs J); Cadman v. Horner [1810] EngR 494.92 Corporations Act 2001 (Cth) s 232. Statutory oppression is particular to companies incorporated under the Corporations Act.93 Corporations Act 2001 (Cth) s 232.94 See generally Miller v Miller (1995) 16 ACSR 73.

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prospective authorisation resolution, since the legal consequence of the prospective

authorisation resolution is for the director to avoid a potential cause of action.

In light of the fact that a prospective authorisation resolution would be relevant to

whether a court may exercise its discretion to grant relief to a director from a liability

owed to the company arising from a breach of the director’s duties pursuant to section

1317S and 1318 of the Corporations Act, the company together with the shareholders are

prejudiced as a result of the attenuation of a particular statutory duty because the Court is

unable to consider whether the director should be relieved of all or a part of a liability

because the liability did not arise.

The existence of prejudice to the company’s stakeholders arising from the attenuation of

a director’s statutory duties and the legal uncertainty created by the different

consideration relevant to prospective authorisation indicates the need for reform to the

Corporations Act to address the problems which arise from the operation of the doctrine

of ratification.


(i) under current Australian law, it is unclear whether different principles may apply

to a prospective authorisation of a breach of statutory duty and accordingly, there

is uncertainty in the operation of the doctrine of ratification with respect to

prospective authorisation;

(ii) if there are differences in principle between prospective authorisation and

retrospective ratification, this raises additional issues as to how the best interests

of the company are achieved by the underlying legal principles of (i) the

prevention of fraud on the minority and (ii) oppressive conduct within the

meaning of section 232 of the Corporations Act; and

(iii) the existence of prejudice to the company’s stakeholders arising from the

attenuation of a director’s statutory duties and the legal uncertainty created by the

different consideration relevant to prospective authorisation indicates the need for

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reform to the Corporations Act to address the problems which arise from the

operation of the doctrine of ratification.

VII. CONCLUSION

The importance of the doctrine of ratification significantly reduced in Australia after the

introduction of the statutory derivative action from 13 March 2000, however, the doctrine

continues to be of relevance to companies incorporated under the Corporations Act in

relation to applications for leave to commence proceedings pursuant to section 237,

liabilities of the directors for breaches of duty and the quantum of damages pursuant to

sections 1317S and 1318 in relation to proceedings commenced under section 236(1) of

the Corporations Act.

The High Court in Angas Law Services95 resolved the question of whether retrospective

ratification of a breach of statutory duty is legally effective in the negative. It is clear

however from the current state of the law in Australia that the law concerning the

attenuation of statutory duties arising from prospective authorisation either by a

constitutional provision or the shareholders (whether as a result of the approval of a

resolution by the shareholders in general meeting or as a result of the conduct of the

shareholders) remains under development.

The factors or considerations which may be relevant to a question of whether prospective

authorisation is effective to attenuate a particular director’s statutory duty remains

unclear because the question has not arisen for judicial consideration in Australia. There

remains the possibility therefore that in certain circumstances, a constitutional provision,

approval of a resolution of the shareholders in general meeting, or other conduct of the

shareholders could be legally effective to attenuate a particular statutory duty of a

director.95 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.

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consider further

The possible recognition of the attenuation of a particular statutory duty is inconsistent

with the protection of the legal rights of a company’s stakeholders and accordingly, this

could operate to prejudice all or some stakeholders of a company. This issue is addressed

in Chapter 4 in greater detail as a part of an analysis of the policy arguments.

In Chapter 4 the theory of the corporation applied by the doctrine of ratification is

discussed and the doctrinal issues and the policy arguments which give rise to questions

about the prejudice to stakeholders are addressed as a part of the question of assessing

whether there should be law reform to the Corporations Act for the purpose of reforming

the operation of the doctrine of ratification.

. Further, there is no known doctrinal basis for the attenuation of statutory duties and the

policy arguments favour the prohibition of the attenuation of directors’ duties as a means

to reduce, or avoid prejudice to stakeholders.

This thesis will now consider the significance of the regulation of corporate governance

and the importance of the role of shareholders in the context of ratification and

authorisation which provides a different perspective on the prejudice to stakeholders.

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Chapter 4 – The attenuation of directors’ statutory duties ...satusworldwide.com/backup/4. Chapter 4 formerly 3 (28102016).docx · Web viewIn this Chapter, the question whether