chapter 5 – the attenuation of directors’ statutory duties ...satusworldwide.com/backup/5....

I. CHAPTER 5 – THE ATTENUATION OF DIRECTORS’ STATUTORY DUTIES BY

RATIFICATION OR AUTHORISATION

Temporary table of contents

Contents

I. Chapter 5 – 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?....................................................................................................3II. The nature of statutory duties and the effect of codification.......................................4III. Can a ratification resolution attenuate statutory duties?..........................................7IV. Can prospective authorisation attenuate statutory duties?.......................................8

A. Attenuation by the company’s constitution...........................................................10B. Attenuation by the formal and informal approval of shareholders........................11C. Attenuation by shareholder acquiescence..............................................................12D. Summary of the existing law.................................................................................12E. Analysis of the existing law...................................................................................13F. What considerations may be relevant to attenuation of statutory duties arising from prospective authorisation?....................................................................................14

1 Whether the terms of the resolution could be effective to prospectively authorise the conduct of the directors?......................................................................152 Whether the attenuation of a statutory duty would amount to ratification of conduct which cannot be ratified?.............................................................................153 The statutory duties and their interpretation......................................................164 Whether the duty sought to be attenuated was a criminal offence....................185 Solvency of the company...................................................................................196 Public enforcement of breaches of statutory duty.............................................19

V. Legal issues concerning attenuation of statutory duties............................................21VI. Policy arguments in favour and against an attenuated duty approach...................26VII. Prejudice to companies and their stakeholders......................................................29VIII. Conclusion.............................................................................................................31

of 33

II. INTRODUCTION

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

ratification or prospective authorisation is addressed to provide a separate criterion for

assessing whether the doctrine of ratification remains relevant and appropriate to

companies incorporated under the Corporations Act.

The case law concerning attenuation of statutory duties arises principally in respect of

‘nominee’ directors and joint venture style companies and is exemplified by Levin v

Clark.1 The issue was only partly resolved by the High Court in Angas Law Services2

with respect to ratification and there is limited other authority in Australia considering the

legal issues, including in respect of incorporated associations, strata companies and trade

unions. Accordingly, there remain doctrinal and policy issues which have not been

addressed in Australia, including by the academic literature.

The analysis provided in this Chapter considering the attenuation of statutory duties is

principally focused upon statutory interpretation in the context of the codification of

directors’ duties under the Corporations Act and the associated criminal offences. If

there is legal uncertainty in whether a particular statutory duty may be attenuated, then

this suggests that there should be law reform to the doctrine of ratification.

As a part of the consideration of the attenuation of statutory duties, this Chapter considers

the prejudice to stakeholders which arises from the attenuation of statutory duties which

would otherwise give rise to a breach of those duties. If there is prejudice to stakeholders

arising from the attenuation of statutory duties, this may suggest that there should be law

reform in Australia because the legal and financial benefits of allowing attenuation of

duties as a matter of public policy may outweigh the effect of the prejudice.

1 [1962] NSWR 686.2 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.

of 33

Following on from the discussion concerning attenuation of directors’ statutory duties,

this Chapter addresses the legal issues concerning the attenuation of directors’ duties. An

important question is how a company’s constitution or shareholders’ agreement could

affect the content of a director’s duties, especially given that fiduciary duties of directors

developed independently of contract law. It is further questioned whether the company is

the sole beneficiary of duties owed to it by the directors in light of the duty against

insolvent trading and the statutory duties imposed upon directors by the Taxation

Administration Act 1953 (Cth). If there is no doctrinal basis in support of the attenuation

of statutory duties, then this suggests that there should be law reform to the doctrine of

ratification in Australia.

This Chapter concludes by considering the policy arguments in favour and against the

adoption of an attenuated duty approach. Whilst the Australian and international case

law has responded to the unique issues which arise from joint venture companies and the

prevalence of directors whom are nominees of particular shareholders, the continued

development of the common law and the general law is questioned in the context of the

doctrine of ratification. Where the policy arguments suggest that there may be prejudice

to stakeholders of the company, this may suggest that there should be law reform in

Australia.

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. It will be recalled from Chapter 4 that it is

necessary to conceptually distinguish between prospective authorisation and retrospective

ratification because firstly authorisation concerns the exercise of powers by the

shareholders and never the board of directors and secondly in the case of authorisation,

of 33

there may be no corporate property in existence at the time of the granting of the

authorisation.

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

duties to the company, the directors may seek prospective authorisation from the

shareholders in general meeting.3 The same requirements, limitations and restrictions

which apply to retrospective ratification apply to prospective authorisation,4 accordingly,

not every proposed breach of statutory duty is capable of prospective authorisation.5

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 resolution for prospective authorisation is not approved, the directors can

therefore conduct themselves in the knowledge that if they proceed with, for example, 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 at that time (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. THE NATURE OF STATUTORY DUTIES AND THE EFFECT OF CODIFICATION

3 See especially Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.4 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 212.5 T Cockburn, L Wiseman, Disclosure Obligations in Business Relationships (Federation Press, 1996), 222.

of 33

The High Court in Angas Law Services6 raised the possibility that the acquiescence of

shareholders to a course of conduct by a director might attenuate a director’s statutory

duties.7

In Angas Law Services,8 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.’9 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. It follows that prospective authorisation potentially protects company

directors from liability to a company for loss and damage in certain circumstances

however this conclusion should be doubted for the reasons discussed below.

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.

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;10

6 (2005) 226 CLR 507.7 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).8 [2005] HCA 23.9 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).10 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].

of 33

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; and

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.

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.

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.11

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.12

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

shareholders to prospectively approve or retrospectively ratify the conduct of the

11 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).12 Re HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171.

of 33

directors to cure a breach of the statutory duties by the directors.13 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 be permissible.

In Macleod v The Queen14 which concerned 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.’15

In Australian Securities and Investments Commission v Maxwell & Ors,16 the obiter

statements in Angas Law Services referred to earlier in this 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.17

III. CAN A RATIFICATION RESOLUTION ATTENUATE STATUTORY DUTIES?

In Angas Law Services,18 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 conclusion was earlier reached in Miller v

Miller,19 Forge v Australian Securities and Investments Commission20 and Australian

Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2).21

13 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 737.14 (2003) 214 CLR 230.15 (2003) 214 CLR 230 at 240.16 [2006] NSWSC 1052.17 Australian Securities and Investments Commission v Maxwell & Ors [2006] NSWSC 1052, [103].18 [2005] HCA 23.19 (1995) 16 ACSR 73.20 [2004] NSWCA 448.21 [2005] NSWSC 267.

of 33

In Forge v Australian Securities and Investments Commission,22 the Court stated that civil

penalty proceedings to enforce breaches of directors’ duties involve public rights.23

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,24 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.25

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

as distinct from fiduciary duties because a breach of a statutory duty may be a criminal

offence and by reason of the public enforcement element of a breach of statutory duties.

This analysis that a breach of statutory duty cannot be ratified by the shareholders in

general meeting 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 would have the effect

of attenuating a particular statutory duty of the company’s directors. As discussed above

in this Chapter, the legal question whether the shareholders in general meeting could

prospectively authorise a breach of statutory duty was left open by the High Court in

Angas Law Services.26 22 [2004] NSWCA 448.23 It is noteable that when ASIC brings civil penalty proceedings a purpose can be to have the defendant director disqualified from managing corporations24 (1995) 16 ACSR 73.25 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].26 [2005] HCA 23. See also In the matter of Toppro Pty Ltd [2016] NSWSC 1399.

of 33

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

doctrine, the fiduciary duties owed by directors may be narrowed in 4 ways, firstly by the

company’s constitution, secondly by the shareholders in general meeting, thirdly by the

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

Duomatic principle27) and fourthly by the shareholders’ acquiescence to a course of

conduct by the directors.28 Each of these possibilities is discussed below. Before

considering each of these possibilities, in relation to all companies governed by the

Corporations Act, the limits to which a director’s statutory duties may be attenuated by

prospective authorisation is subject at least to the following matters:

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

disclose);

(ii) the operation of the Duomatic principle (addressed in Chapter 3);

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

in Chapter 7);

(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 sections 199A and 199C 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).

27 Re Duomatic Ltd [1969] 2 Ch 365.28 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; Guinness Plc v Saunders & Anor [1990] 2 AC 663.

of 33

Each of the above Corporations Act matters which intersect with a director’s duties under

the general law places a relevant restriction on the nature and scope of the attenuation of

a director’s duties by the constitution since equity follows the law.29

A. Attenuation by the company’s constitution

Under the general law, a company has a right to the unbiased views and advice of all its

directors.30 Further, in consequence of the fiduciary position which a director holds,

unless the company’s constitution otherwise provides, a director may not enter into a

contract with the company.31 A company’s constitution can therefore alter the general

rule by attenuating the duties of a director either expressly or impliedly.32 It was held in

Guinness Plc v Saunders & Anor33 that equity has no power to relax its own strict rule

further than and inconsistently with the express relaxation contained in the company’s

constitution.

If the company’s constitution attenuates a director’s duties, then provided that the

director complied with the terms of the constitutional provision,34 it will be unnecessary

for the shareholders in general meeting to either prospectively authorise, or to ratify the

conduct.35

A particular constitutional provision which attenuates a duty of the directors may be

overtaken by the operation of a new or amended statutory provision which expressly or

29 Delehunt v Carmody [1986] HCA 67. See also Sexton v Horton [1926] HCA 25; Lavin v Toppi [2015] HCA 4.30 R v Byrnes [1995] HCA 1; Woolworths Ltd v Kelly (1991) 22 NSWLR 189 citing with authority Benson v Heathorn (1842) 1 Y & C CC 326 at 341-342; 62 ER 909 at 916, per Knight-Bruce V-C and Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558 at 567-568 per Hatherley LC (CA).31 Aberdeen Railway Co v Blaikie Bros (1954) 1 Macq 461.32 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 citing with authority Imperial Mercantile Credit Association (Liquidators) v J Coleman (1873) LR 6 HL 189 at 205 per Lord Cairns (on appeal to theHouse of Lords); Toms v Cinema Trust Co Ltd [1915] WN 29.33 [1990] 2 AC 663.34 In MacPherson & Anor v European Strategic Bureau Ltd [1999] 2 BCLC 203 it was held that there was no requirement of formal disclosure because that would not have increased the knowledge of the other directors.35 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 208 per Samuels JA; Re Automotive and General Industries Ltd (1975) VR 454.

of 33

impliedly prohibits or makes conditional the attenuation of one or more directors’

duties.36 An example of such a pre-condition arose in Centofanti v Eekimitor Pty Ltd37

where there was a duty of disclosure to the board of directors in relation to a director’s

conflict of interest.

Whilst a particular duty of the directors may be attenuated, the same conduct of the

directors may be in breach of a different fiduciary or statutory duty and accordingly the

directors will remain liable to the company for any loss and damage as a result of their

conduct.38

B. Attenuation by the formal and informal approval of shareholders

With respect to the powers of the shareholders in general meeting, the authorities in

Australia indicate that the shareholders in general meeting have the power to authorise a

proposed course of conduct with respect to a breach of fiduciary duty by a director.39 The

High Court however in Angas Law Services40 did not find it necessary to make an

authoritative statement about the legal considerations which may be relevant to the

question of whether prospective authorisation would be effective to attenuate the

statutory duties established under the Corporations Act. This issue is analysed below.

In companies with a small number of shareholders there will be the possibility of

obtaining the unanimous formal agreement of the shareholders. Further, the operation of

the Duomatic principle will be effective to allow the attenuation of a director’s duties

even where a formal meeting of the shareholders has not been convened in compliance

with the Corporations Act or the company’s constitution since there is no obligation

under the doctrine of ratification that a resolution be approved by the shareholders in

general meeting.

36 See, eg, Centofanti v Eekimitor Pty Ltd (1995) 65 SASR 31 where section 228 of the Companies (South Australia) Code required disclosure of a director’s conflict of interest to the board of directors.37 (1995) 65 SASR 3138 See, eg, Groeneveld Australia Pty Ltd v Nolten (No 3) [2010] VSC 533.39 See especially Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.40 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.

of 33

The issues which arise in relation to the attenuation of statutory duties by unanimous

agreement of the shareholders are the same as the issues which were considered in

relation to the attenuation of duties by the shareholders in general meeting.

C. Attenuation by shareholder acquiescence

One legal basis for the attenuation of fiduciary duties arises in trust law. If a beneficiary

of a trust positively adopts a breach of trust, or if the beneficiary has knowledge of a

breach of trust but does not take steps to cause the trustee to remedy the breach, the

trustee may succeed in defending a breach of trust claim because of the acquiescence of

the beneficiary to the breach.41

A second basis for the attenuation of fiduciary duties in trust law arises in circumstances

where because of the instigation, consent or concurrence in a breach of trust by a

beneficiary, the conduct of the beneficiary may be characterised as unconscionable

behaviour or more generally, the beneficiary lacks clean hands.42

There will be circumstances where the shareholders engage in conduct which for all

intents and purposes will be equated with their approval. In such circumstances a court

may classify the conduct as acquiescence by the shareholders, however, there may also

be cases where such conduct results in an estoppel.

D. Summary of the existing law

Accordingly, the possibility of the attenuation of statutory duties will depend at least

upon the nature and scope of a particular statutory duty, whether the company is a public

company and whether the statutory duties concern a director of a wholly owned

subsidiary.

41 See eg. Life Association of Scotland v Siddal (1861) 3 De GF & J 58; NationalTrustees Co of Australasia Ltd v General Finance Co of Australasia [1905] AC 373; Bela v Beehag (1984) 3 BPR 9402.42 Cory v Gertcken (1816) 2 Madd 40; Public Trustee v Larkham (1999) 21 WAR 295; Allan v Rea Brothers Trustees Ltd [2002] EWCA Civ 85.

of 33

E. Analysis of the existing law

There is a distinction without a difference in allowing the prospective authorisation of

conduct by the authority of a constitutional provision as being different from the formal

or informal authority of the shareholders.

One reason for this is because upon incorporation of a company, the original shareholders

could approve the contents of the company’s constitution and thereafter, provided that

those persons have atleast 25% of the issued voting shares of the company, the new

shareholders will be unable to amend the terms of the constitution to remove a

constitutional provision which has the effect of attenuating the duties of the directors of

the company.

The second reason is that whilst there is a difference in the size of the majority required

to amend a company constitution when compared to obtaining the approval of the

members in general meeting, the outcome remains the same for the directors once a

resolution is approved since their conduct has been prospectively authorised.

Therefore, the principal differences between obtaining shareholder approval for a course

of conduct prospectively under the constitution, or the shareholders in general meeting is

a question of the timing of the granting of the authority and the size of the majority

required to obtain the approval.

A third reason is there is a requirement for the shareholders to prospectively authorise a

specific transaction or conduct by the directors.43 There may be no such requirement

under a constitutional provision because there may be a broad attenuation of the

directors’ duties. As previously, the outcome remains the same for the directors

following the approval by the shareholders.

43

of 33

The cases which consider the attenuation of a director’s duties under a constitutional

provision do not also consider the law in connection with the shareholder approval of a

prospective breach of fiduciary or statutory duty. This is readily explainable on the basis

that if compliance with a constitutional provision is the basis of a defence to a breach of

duty by a director, then it is unlikely in the same factual matrix that the shareholders

separately prospectively authorised the conduct of the directors and there are no reported

cases in Australia which have raised this type of problem. In the event that there was

such a factual matrix, there is sufficient law which a court could rely upon without

resorting to a first principles examination of the state of the law concerning the

attenuation of directors’ duties.

PropositionIt is a proposition advanced by this thesis that for the purposes of the attenuation of duties

by prospective authorisation, there is no sound principle enunciated by the courts

underlying the difference between (i) prospective authorisation for a breach of statutory

duty pursuant to a constitutional provision and (ii) the formal or informal assent of the

shareholders which prospectively authorises a breach of duty.

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

Notwithstanding that there is no authoritative 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 of ratification 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.

of 33

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) whether the attenuation of a statutory duty would amount to the ratification of

conduct which cannot be ratified?;

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

(iv) whether the duty sought to be attenuated was a criminal offence;

(v) the solvency of the company; and

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

statutory duty.

Each of these matters is considered in detail below.

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

It will always be a threshold question whether a shareholders’ resolution on its proper

construction seeks to prospectively authorise the specific conduct of the directors.

Typical interpretation issues which could arise for consideration in this context include;

(i) whether the resolution may be conditional and those conditions never satisfied, (ii)

whether the directors’ conduct was consistent with and/or carried out in the manner

prescribed by the resolution and (iii) whether the effect of the resolution only limits the

company from suing the directors in the future because the resolution operates only to

release the directors.

2 Whether the attenuation of a statutory duty would amount to ratification of conduct which cannot be ratified?

of 33

As previously stated in this Chapter, the same requirements, limitations and restrictions

which apply to retrospective ratification apply to prospective authorisation,44 accordingly,

not every proposed breach of statutory duty is capable of prospective authorisation.45

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

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

of conduct which cannot be ratified,46 which relevantly include whether there has been a

fraud on the minority, each of these matters were addressed in Chapter 2.

3 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.

44 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 212.45 T Cockburn, L Wiseman, Disclosure Obligations in Business Relationships (Federation Press, 1996), 222.46 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.

of 33

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.

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.

Section 187 of the Corporations Act does modify the effect of sections 181(1)(a) and

184(1) because of the changed requirements as to when a director is taken to act in good

faith in the best interests of the subsidiary company.47 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

first to determine whether a director of a wholly owned subsidiary is subject to a

particular statutory duty since that director may not capable of breaching that particular

statutory duty.48

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:

47 See generally 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.48 There would be a separate question whether the conduct of the director was a breach of a fiduciary duty owed to the company.

of 33

(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 foreign

subsidiaries, the interaction between sections 186 and 187 of the Corporations Act

indicates that these directors are not likely to be subject to the duties established by

sections 180-184 of the Corporations Act. Accordingly, the question does will not

generally arise whether prospective authorisation may be required for any conduct of

these directors.

The interpretation of statutory duties

The obiter statements in Angas Law Services49 with respect to the interpretation of

‘improper’ and separately academic commentary on nominee directors50 suggests that a

constitutional provision which seeks to modify the meaning of certain conduct, such as

‘improper’ conduct, could be effective to either modify the scope of the interpretation of

the meaning of sections 182 and 183 of the Corporations Act or the conduct which may

be in breach of those statutory duties.

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 or

scope of a statutory duty which, subject to the other relevant legal considerations

discussed in this Chapter, could be effective to attenuate a director’s statutory duty.51

4 Whether the duty sought to be attenuated was a criminal offence

49 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.50 See Ford, Austin & Ramsay’s Principles of Corporate Law (at 25 July 2015) ‘Nominee directors: attenuation of duty by constitution’ [9.440] .51 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.

of 33

As discussed previously in this Chapter, different public policy considerations arise in the

context of breaches of statutory duties which are criminal offences. It should also be

recognised that conduct which is illegal is not ratifiable and accordingly, there is no

sound basis for an interpretation that a company constitution or the shareholders in

general meeting could prospectively authorise the proposed illegal conduct of the

directors.

5 Solvency of the company

In the context of pre-insolvency situations and insolvent companies, on the authority of

Kinsella,52 The Bell Group53 and Qintex,54 the powers of the shareholders are restricted

because creditors gain rights in these circumstances and accordingly, corporate

insolvency laws operate independently of the doctrine of ratification. The question

whether a constitutional provision or prospective authorisation resolution could be valid

would be a threshold question in these circumstances.

For solvent companies, under the law in Australia, an authorisation resolution is not a

voidable transaction within the meaning of section 588FE of the Corporations Act only

by reason that a company later becomes insolvent because of the effect of section 95A of

the Corporations Act. There will however 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 was attenuated.

6 Public enforcement of breaches of statutory duty

52 Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722.53 Westpac Banking Corporation v The Bell Group Ltd (in liq) [No 3] [2012] WASCA 157.54 ANZ Executors & Trustee Company Limited v Qintex Australia Limited (Receivers and Managers appointed) [1991] 2 Qd R 360.

of 33

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

and the enforcement of public rights by ASIC for the protection of the public. 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, the question of whether prospective authorisation could attenuate a statutory duty

should not be conflated with the question of what is the effect of the attenuation of the

statutory duty.

Based on the authority of Angas Law Services55 and the discussion above, there would not

seem to be a question whether the effect of the statutory duties is modified by reason of a

prospective 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 (or scope) of the statutory duty is modified by reason of

the terms of an authorisation resolution or a provision contained in the company’s

constitution.

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

of 33

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

factual matrix.

PropositionIt is a proposition advanced by this thesis that under the current Australian law, 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.

In the following section, the legal issues which concern the possibility of the attenuation

of statutory duties is considered and for the reasons explained, it is argued that the

Australian law prohibits the attenuation of statutory duties enacted under the

Corporations Act.

V. LEGAL ISSUES CONCERNING ATTENUATION OF STATUTORY 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.56 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,57 Berlei Hestia (NZ) Ltd v

Fernyhough58 and Re Southern Counties Fresh Foods Ltd; Cobden Investments Ltd v

RWM Langport Ltd.59 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.

56 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.57 [1962] NSWR 686.58 [1980] 2 NZLR 150.59 [2008] EWHC 2810 (Ch).

of 33

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

semble, the decisions in Forge,60 Miller,61 Maxwell62 and Macleod63 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 statutory code in addition to general law duties;

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

increased the 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 (but noting the

special position of directors of subsidiary companies);

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 circumvent sections 1317S and 1318

where the Court has the discretionary 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;64

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

60 Forge & Ors v Australian Securities & Investments Commission [2004] NSWCA 448.61 Miller v Miller (1995) 16 ACSR 73.62 Australian Securities and Investments Commission v Maxwell & Ors [2006] NSWSC 1052.63 Macleod v The Queen (2003) 214 CLR 230.64 Acts Interpretation Act s 15A

of 33

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; and

9. the above reasons, together with the principles of statutory interpretation 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 Services65 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 Services66 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.

By reason that no court has explained why there may be different principles applicable to

prospective authorisation, the legal basis for the attenuation of statutory duties is unclear

and the obiter statements in Angas Law Services67 do not indicate why the reasoning in

Forge,68 Miller,69 Maxwell70 and MacLeod71 supports a conclusion that the attenuation of

statutory duties by prospective authorisation is permissible in Australia for companies

governed by the Corporations Act. It would be a surprising result that prospective

authorisation could attenuate a statutory duty, especially given that the High Court in

65 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23 at [32] per Gleeson CJ and Heydon J66 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.67 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.68 Forge & Ors v Australian Securities & Investments Commission [2004] NSWCA 448.69 Miller v Miller (1995) 16 ACSR 73.70 Australian Securities and Investments Commission v Maxwell & Ors [2006] NSWSC 1052.71 Macleod v The Queen (2003) 214 CLR 230.

of 33

Angas Law Services72 firstly determined that a ratification resolution could not attenuate a

statutory duty, secondly because the cases of Miller73 and MacLeod74 were considered

and no doubt was raised or has since been raised as to the reasoning in those cases and

thirdly, none of the other judgments given by Gummow, Hayne or Kirby JJ made any

reference to the obiter statements of Gleeson CJ and Heydon J.

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,75 however that principle of law is applied in quite different

circumstances from the fiduciary relationship of director and company. The legal

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 legal 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

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

sections 182 and 183 of the Corporations Act.76

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. There are cases where the Australian Securities & Investments

Commission has sought to enforce the law on behalf of shareholders and creditors which

72 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.73 Miller v Miller (1995) 16 ACSR 73.74 Macleod v The Queen (2003) 214 CLR 230.75 See Australian Securities and Investments Commission (ASIC) v Citigroup Global Markets Australia Pty Limited [2007] FCA 96376 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.

of 33

indicates there is a dimension to enforcement of the law in favour of a company’s

stakeholders where there is a breach of a director’s duty.77 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 trading78 and this is intended to

directly benefit the company’s employees and creditors. Creditors with the consent of the

liquidator are also able commence proceedings against a director where there has been

insolvent trading.79 This further shows that the company is not the sole beneficiary of the

duties of directors.

Under the Taxation Administration Act 1953 (Cth), 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.80

These personal legal obligations upon directors are directly beneficial for employees,

however there are indirect benefits to other stakeholders of the company and generally

the public.

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

directors’ duties in the following ways:

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

may be constrained by compliance with directors’ duties;

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

(iii) the payment by the company of taxes and duties to State or Territory governments

and the Commonwealth Government.

77 78 Corporations Act 2001 (Cth) ss 588M.79 Corporations Act 2001 (Cth) ss 588M, 588R-588U.80 Taxation Administration Act 1953 (Cth) Sch 1 s 269-15(1).

of 33

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

benefit from the codification of directors’ duties, the legal principle that the shareholders

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

shareholders’ agreement (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.

This thesis argues that the current Australian law seeks to reduce the prejudice to

stakeholders by prohibiting the attenuation of statutory duties contrary to the obiter

statements in Angas Law Services.81 This argument however 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.

PropositionIt is a proposition advanced by this thesis that the legal 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 7.

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

the attenuated duty approach.

VI. POLICY ARGUMENTS IN FAVOUR AND AGAINST AN ATTENUATED DUTY

APPROACH

Notwithstanding the argument presented above with respect to the prohibition under the

law in Australia for the attenuation of statutory duties, 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 below.

81 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.

of 33

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.82 The attenuated duty approach also recognises that the nominee director may

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

employment.83

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 as

agreed either by a minimum of 75% of all of the shareholders. Further, the shareholders’

unanimous agreement protects the minority shareholders from the actions of the majority

since there is no minority and thereby prejudice to any shareholder in these

circumstances;

The common law and general law remains flexible and under development. The law is

thereby able to be molded to suit the particular circumstances.

Finally, 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 and this is discussed

below.

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

82 See Ahern D, Nominee directors’ duty to promote the success of the company: Commercial pragmatism and legal orthodoxy [check citation].83 See Ahern D [above N]

of 33

protections afforded to the beneficiary company of the fiduciary and statutory duties and

this may be of particular relevance in relation to management buyouts which are lawful in

Australia.

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,84 under tax legislation to ensure that the company

complies with its statutory obligations85 and State, Territory and Commonwealth

environmental legislation to ensure the environment is protected for current and future

generations.86 The allowance of the attenuation of directors’ duties suggests that the

primary beneficiary of the duties is the company, but for the reasons explained above,

this should be doubted. The scope of statutory directors’ duties should be construed to be

for the benefit of the company’s stakeholders and the public.

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. The giving of a private benefit was discussed in

Chapter 6 in the context of the prejudice which arises from the right of a shareholder to

vote in their own interests and on the same reasoning, prejudice would arise from to the

attenuation of a statutory duty to the company’s stakeholders.

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. Further, 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.

84 Corporations Act 2001 (Cth) s 588G.85 Taxation Administration Act 1953 (Cth) Sch 1 s 269-15.86 See, eg, Environment Protection and Biodiversity Conservation Act 1999 (Cth).

of 33

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

current shareholders.87 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, powers, 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.

Finally, 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 duties, the

very duties which would protect the company from the conduct of the nominee director.

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

is prejudice to the company and to its stakeholders and in this respect this thesis argues

that the negative consequences to companies and their stakeholders outweighs the

benefits of adopting an attenuated duties approach.

PropositionFor the above reasons, it is a proposition advanced by this thesis that if there is a lawful

basis for the attenuation of duties by prospective authorisation, on public policy grounds,

attenuation of statutory duties should not be permitted.

VII. PREJUDICE TO COMPANIES AND THEIR STAKEHOLDERS

It is a conclusion of this thesis that under the current Australian law, 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 Services88 are correct that different

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

87 88 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.

of 33

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 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 a non-ratifiable wrong.

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 for the loss or damage 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 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 being sued for a breach of duty for any

of 33

loss or damage to the company. It follows that the director will not have to make an

application to a court under sections 1317S or 1318 of the Corporations Act since the

director does not have any personal liability.

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.

PropositionIt is a proposition advanced by this thesis that:

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

to a prospective authorisation when compared to a retrospective ratification of a

breach of statutory duty and accordingly, there is uncertainty in the operation of

the doctrine of ratification with respect to prospective authorisation; and

(ii) 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.

VIII. CONCLUSION

The High Court in Angas Law Services89 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

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

of 33

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

shareholders) remains under development.

The 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.

Guidance on the possible considerations arise from the cases which have considered

ratification resolutions, but different considerations could apply to prospective

authorisation. There remains the possibility therefore that in certain circumstances, a

constitutional provision, approval of a resolution by the shareholders in general meeting,

or other conduct of the shareholders could be legally effective to attenuate a particular

statutory duty of a director.

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

with the protection of the legal rights of a company and its stakeholders and accordingly,

this could operate to prejudice a company or all or some of the company’s stakeholders.

It was argued in this Chapter that the company is not the sole beneficiary of the duties

owed by the directors to a company. Accordingly, an underlying consideration which

weighs against allowing the attenuation of duties is the prejudice to companies, their

stakeholders and the public since a director will not be liable for any loss or damage to a

company where their duties have been attenuated.

The legal basis for the attenuation of statutory duties is unclear. The obiter statements in

Angas Law Services90 do not indicate why the reasoning in Forge,91 Miller,92 Maxwell93

and MacLeod94 supports a conclusion that the attenuation of statutory duties by

prospective authorisation is permissible.

90 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.91 Forge & Ors v Australian Securities & Investments Commission [2004] NSWCA 448.92 Miller v Miller (1995) 16 ACSR 73.93 Australian Securities and Investments Commission v Maxwell & Ors [2006] NSWSC 1052.94 Macleod v The Queen (2003) 214 CLR 230.

of 33

The policy arguments in favour of the attenuation of duties are substantial, however, the

historical origins of those argument arises in the context of nominee directors. The

arguments set out in this Chapter demonstrate that even in the limited circumstances of

nominee directors, there are substantial arguments against retaining the attenuated duties

approach. Moreover, the policy arguments which favour a more general attenuated duties

approach are more limited than the arguments which are peculiar to nominee directors.

Leaving aside the weak arguments in favour of an attenuated duties approach to all

companies governed by the Corporations Act, there are substantial reasons why this

public policy should be resisted in the law. One of those primary reasons is the prejudice

to companies, their stakeholders and the public.

This thesis will now consider the use of corporate property in the context of ratification.

of 33

chapter 5 – the attenuation of directors’ statutory duties ...satusworldwide.com/backup/5....

Documents