directors' duties

Topics: Corporate governance, Non-executive director, Executive director Pages: 8 (2617 words) Published: April 26, 2014
Case Analysis

The case of ASIC v Adler is very unique as well as complicated since it involved several breach of duties in the Corporations Act 2001. The HIH collapse was caused by very bad corporate governance.

Such breach of duties are, section 9 (director’s duties), section 180 (duty to act with care and diligence), section 181 (duty to act in good faith and for a proper purpose), section 182 (improper use of position), section 182(2) (business judgement rule), section 183 (duty not to improperly use information) and section 260A (financial assistance). All of these contraventions under the Corporations Act 2001 will be discussed in detail below.

Section 9 – Who Is A Director And Their Duties

Under section 9, a director of a company is defined as a person who is appointed to that position such as a director or alternate director, regardless of what name it is given to that position. Section 9 also includes certain people to be directors even though they are not properly appointed. Such people can act as a director even though without proper appointment of director position. This is where they act in the position of a director (which can be also known as de facto director) or the directors are used to act in accordance with the person’s instructions (which also known as a “shadow director”).

Directors’ duties need to be existed in order to protect shareholders from the risks of directors giving harm towards the company. Shareholders basically have risks such as fraud, where the directors took control over the assets belonging to the company by using it for their personal interest, and mismanagement, whereby directors made an incompetent decision with the financial standing of the company.

Furthermore, section 9 also defines the “officer of a corporation”, which basically includes company executives who held senior positions in the board level. Such persons can be identified in certain situations where that person (the executives) makes or joins participation into making decisions in which affects the whole or substantial part of the company’s business activities or, the person who has the authority to affect in a significant way towards the company’s financial standings or, basically the same definition of a “shadow director” where the person are acting towards the instructions given to them to act.

In the case of ASIC v Adler, the court held that Adler, the director of HIH, was also an officer of wholly-owned HIH subsidiary which can be related under the section 9 definition of directors. This applies to Adler even though he was not properly appointed as a director or an officer of the subsidiary. Since he has the role of director, the subsidiary holding company and also a member of HIH investment committee, this has showed that he participated in the decision making of the company’s business in which affected it the whole or substantial part of the business.

As Santow J gave his judgement on this case, he gave a good summary of principles applicable to directors’ duties. Some of it are; a director must continuously kept informed of the activities of the company, they must be familiar with the fundamentals of the business whereby the company is doing.

Section 180 – Duty To Act With Care And Diligence

In the section 180(1), it provides that a director or other officer of a company need to exercise their powers and discharge their duties with a standard of care and diligence in which a reasonable person will do if they were the director or officer of a company due to company’s circumstances (section 180(1)(a)) and occupied the office and had the same responsibilities in the company as the director or officer (section 180(1)(b)).

Executive directors are full time employees of the company who involved in the day-to-day management of the company. They have special responsibilities with their position and have a high knowledge of daily operations of the company. Non-executive directors, on the...
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