Director’s Duty of Care
Major Assignment: Directors’ Duties Case Part A: Whether the directors are in breach of their duties of care, skill and diligence Issue1: who owes the duty? According to S 9, the person who is appointed to be a director or the person who is appointed to be an alternate director and is acting in that capacity, is a director of the company. (S9) As we can see from the case, Peter Pansy, Fred Fuchsia and Marie Gold are directors of the company, and Alison Astor who is appointed to fill a casual vacancy on the Board is also a director; therefore, they all owe duties.
As the executive directors appointed a skilled person to manage the Australian wide floral delivery service on the internet, the pointed person is also a director. In a word, all of them are the directors, who owe the duty of care. Issue2: Who is the duty owed to? In this case, generally the directors are owed duties to the company as a whole. The company can sue those directors for remedies and enforce breaches of duties. The company also owned duties to individual shareholders. Issue3: what are the duties?
The director’s duties can arise from both statutory and general law; except remedies, there is no significant difference between the sources of duty. ( Hanrahan, P. , Ramsay, I. & Stapledon, G. Commercial Applications of Company Law, Edition 12, 10-200) In order to implement their duties, directors must guide and monitor the management of the company; the well-known AWA case developed a series of detailed applied standards. (Daniels v AWA (1995) 13 ACLC 614) The executive appointed by directors committed a misleading and deceptive conduct, false statement when disclosing the financial status of the project.
As s190 states that if directors delegate a power under s198D, the directors are responsible for the exercise of the power by the delegate. The executive, as a director of the company, was given powers by other directors and must wield the powers to manage the daily activities in the company. However, the delegation is not appropriate; because the delegate had special skills in floral design but “had no experience in internet marketing or sales”, there is o reasonable ground to believe this delegate will perform the project properly. Since the delegate is negligent in disclosing the monthly management report, the directors had breached their duties by without making proper and reasonable enquiries to the costs figures in order to estimate whether the report offer a true and fair view of the profit and loss. (ASIC v Loiterton (2004) 50 ACSR 693) In conclusion, the directors of Lily Ltd are in breach of their duties of care, skill and diligence.
In the accident caused by the negligence of Dan Daisy, the directors did not insure the company against traffic accident, which leads to Lily Ltd economic losses. According to minimum standards, directors are in breach of duty by failing to enquire or ignore of risks. Lily Ltd rendered floral delivery service, a reasonable person who has a basic understanding of this kind of business will realize that Lily Ltd runs a high risk of traffic accidents and taking out insurance is the effective measure to minimize the dangers of driving.
In this circumstance, a reasonable person with the same responsibilities as the directors would buy an insurance to protect the company from economic losses. However, the directors Peter, Fred and Marie ignored the great risk and failed to make an agreement on insurance policy, they had breached their duties of care. It is a serious issue that a major client of Lily Ltd always paid bills behind time , which may cause the rupture of cash chain and have adverse impacts on company’s development.
As the minimum standards regulated, directors must constantly monitor the financial performance and ensure liquidity. The directors breached their duties since they did not become familiar with the business of the company so that they could form a sound judgment about whether the cash chain was being properly run (Sheahan v Verco (2001) 19 ACLC 814) and they did not take reasonable steps to estimate properly adverse development. (ASIC v Rich (No 2) (2003) 21 ACLC 672) Alison Astor was appointed to fill a casual vacancy on the Board, but he did not attend board meetings.
As one of the minimum standards of care, skill, diligence proposed by the NSW court of Appeal stated, the directors need to contribute a certain time and effort to the company and attend board meetings regularly. As we can see from this case, Alison Astor did not exercise the required degree of diligence by failing to attend board meetings, so he had breached his duty of care. Part 2: Whether the directors are in breach of their duty to avoid insolvent trading. ISSUE #1 Who owns the duties?
Directors including de facto directors and shadow directors are the only persons who have the duty to prevent insolvent trading. (textbook219) According to Section 588G, the director of the company that incurs a debt and is insolvent or becomes insolvent by the debt should have reasonable grounds for suspecting that the company is insolvent or becomes insolvent. ( 588G) As mentioned in the Part A, all of the directors mentioned above own the duties. ISSUE #2 To whom In this case, the directors are owed duties to the company as a whole and also creditors.
ISSUE #3 What are the duties? * When does a company incur a debt? Beside the deemed debts, there are other types of debt that are related to S588G. (text) A specific amount and incurring voluntarily by the company are two of principles for the other types of debt. As the floral delivery service project which Lily Ltd invested heavily on was running a significant loss, there should be a debt for Lily Ltd because the specific amount can be calculated, and that is voluntarily incurred by the company. * When is a company insolvent?
A company must be insolvent or becomes insolvent when it is not able to pay all its debts and becomes due for payment. (S588G S95 A) When a company applies for winding up and it is proved that the company will be insolvent in one year, or a company failed to keep financial records that are required in S286, the company is presumed to be insolvent. (S588 E(4)) It is reasonable to think that Lily Ltd may not be able to pay all the debts since it made a significant loss. Peter also concludes that Lily Ltd is insolvent. What are reasonable grounds for suspecting insolvency? The director of ordinary competence who has basic understanding of financial status judges whether there are reasonable grounds for suspecting the insolvency of the company. (text) The director should have a positive feeling of actual apprehension that the company is insolent. (text) The executive knows the significant loss, however she “front end loaded” the sales figures and misstated certain costs figures. (text) She did not have a positive feeling of actual apprehension of the insolvency. What must the director be aware of? Based on S 588G, the director or a reasonable person in a similar position should be aware of the grounds of suspecting the insolvency of the company. () None of the directors were aware that the company becomes insolvent. Even Marie ordered a sophisticated satellite telecommunications system without thinking about the significant loss of the company. In the case of ASIC V Plymin (2003), the non-executive director cannot skip his obligation simply because he did not know about the debts.
It was his ability to take reasonable steps to prevent a company from insolvent. ISSUE #4 what are defences from liability? If a person was responsible for the information which related to the company insolvency that provided and took the responsibility, the person who relayed on the information and did expected that the company will be insolvent no matter the debt incurred or not had a defence. (S 588) It is a defence if the director was absent of managing the company because of illness and other good reasons when the debt was incurred. S 588) Since the executive front end loaded the sales figures and misstated certain costs figures, there is no excuse for other director to argue that there is a defence for them because they donot know anything but relying on the information that the executive provided. In the case Southern Cross Interiors Pty Ltd, Mrs Clark was still liable for insolvent trading although she relied on her husband, and spent most of the time in the kitchen. Alison did not attend board meetings, however he was also liable for insolvent trading because his absence is not illness or other good reasons.
Statewide Tobacco Services v Morley (1990) shows that although Mrs Morley was absent from management, she was liable for insolvent trading. In Deputy Commissioner of Taxation v Clark, the excuse Mrs Clark made that absence of management was not a good reason, therefore she was liable for insolvent trading. Part 3: In either case, who are the directors liable to? 1. Directors in the case of breach of duty of care, skill and diligence (1) Own duties to the company as a whole. Generally, directors owe their duties to the company as a whole rather than to individual shareholder, creditor or others. (?
P208~209) As indicated in the case of Greenhalg v Arderne Cinemas Ltd  Ch286, the directors’ conduct should be liable to the company and comply with the company’s interest. Although in this case, the proportion of votes of minority shareholders was decreased, the voting right remains the same regarding to the company as a whole. That is to say, the conduct complied with the primary interest of the company. The directors of Lily Ltd should be liable to the company according to the following acts. The executive misstated the figure of cost and hided the financial problem to the company and other creditors.
The directors have not even buy an insurance which lead to the damage of the company’s property. Additionally, they did not appoint appropriate person to be the executive and director, which indirectly brought loss to the following operation. All these conducts are not in accordance with the interest of the company as a whole, therefore, the directors should be liable to the company. (2) Own duties to an individual shareholder. As explained above, directors own duties to the company in terms of duties of care, skill and diligence.
However, in some situations, the duties can also be owned to an individual shareholder. This is reflected in the case of Brunninghausen and Glavanics. In the case, one of the directors Brunninghausen hided the commercial information to the other director Glavanics, from which obtained substantial economic advantage. Consequently, the court held that because of the fiduciary relationship between the two directors Brunninghausen owed duties to Glavanics. The situation of Lily Ltd is fairly similar to that in the case mentioned above. In Lily Ltd’s scenario, Lily Ltd was facing the financial problem of slow payment.
After informed that little debt from Flora Ltd will be recovered, Peter did not notify other directors and eventually result in insolvency of the company. What’s more, Peter hiding the important information about the unrecoverable debt, in which situation Marie made the purchasing decision that lead to insolvency. Therefore, Peter as a director is liable to other individual shareholders. 2. Directors in the case of breach of duty to avoid insolvent trading own duties to the creditors. When a company is facing insolvency or near to insolvency, the directors owe a duty to creditor.
As illustrated in the case of Kinsela v Russell Pty Ltd (in liq) (1986) 4 NSWLR 722, where the company made a lease with other company before insolvency, threatening the creditors’ interest. Lily Ltd’s case is highly similar to the case above. The directors of Lily Ltd ordered the costly telecommunication system, provided that the financial situation of the company is consistently dissatisfactory and finally leading to the insolvency. This is responsible to the creditors. Therefore, in this situation, the directors should liable to the creditors of the company. Bibliography: ——————————————- [ 1 ]. Hanrahan, P. , Ramsay, I. & Stapledon, G. Commercial Applications of Company Law, Edition 12, 10-200 [ 2 ]. Daniels v AWA (1995) 13 ACLC 614 [ 3 ]. ASIC v Loiterton (2004) 50 ACSR 693 [ 4 ]. Sheahan v Verco (2001) 19 ACLC 814 [ 5 ]. ASIC v Rich (No 2) (2003) 21 ACLC 672 [ 6 ]. ASIC V Plymin (2003) [ 7 ]. Southern Cross Interiors Pty Ltd [ 8 ]. Statewide Tobacco Services v Morley (1990) [ 9 ]. Deputy Commissioner of Taxation v Clark [ 10 ]. Brunninghausen and Glavanics [ 11 ]. Kinsela v Russell Pty Ltd (in liq) (1986) 4 NSWLR 722