1. MODULE 4 DIRECTORS’ DUTIES: FURTHER ASPECTS ADB Private Sector Development Initiative Corporate and Financial Governance Training Solomon Islands Dr Ann Wardrop La Trobe University

2. Acknowledgement These materials were produced by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI). PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, Australian Aid and the New Zealand Aid Programme.

3. Module 4 Outline 3  Objects of the session  Consequences of breach of directors’ duties  Types of remedies  What if wrongdoers are in control of the company?  Actions against directors when company in liquidation  Prohibition and disqualification of directors  Indemnification of directors for breach of duty  Revision on conflicts – case study

4. 1. Objects of the session 4  Explore further aspects of directors’ duties and the consequences of breach.  Refresh participants’ understanding of directors’ duties to facilitate the Group Workshop Assessment.

5. Directors: further aspects 5 Consequences of breach of duty: 1. Remedies for the company against directors  This area of the law is complex, in part because of the mix of statutory duties and equitable duties that apply to directors. What follows is therefore a very general overview of the position.

6. Remedies for the company against director for breach of duty 6  Various remedies for the company available, including:  claiming compensation from the director;  claiming an account of profits from the director;  setting aside a transaction where the other party knows the transaction was entered into in breach of the director’s duty or the Companies Act gives the company a right to set aside the transaction (e.g. for conflicts see s 107 and previous slides on conflicts);  injunction.

7. Remedies for breach of directors’ duties 7  Injunction  The company, a director, or a shareholder of the company can apply to the court for an injunction restraining the company or a director who proposes to contravene the rules of the company or the Act; s 88 Companies Act 2009 (CA)  E.g. managing director proposes to pay company money to her private company in breach of her duty, either of the persons above can apply to the court for an order preventing payment of the money.

8. Remedies for the company against director for breach of duty 8  Account of profit for breach of director’s duty – Emery v Hashimoto [1996] SBCA 7 (Ct of Appeal Solomon Islands)  Directors sold company logging plant and machinery to another company in which they had an interest, effectively for nothing. They put together those assets with a logging licence from elsewhere thereby creating a new logging business and sold the new business at a profit to themselves of US$229,146. Directors had to account to the company for profits of US$175,000 (reduction of 25% payable by them represented the time, energy and skill directors had in putting the transaction together).

9. Remedies for the company against director for breach of duty 9  Damages/compensation remedy;  The directors decide to invest in a business. The sellers make various claims about the profitability of the business. The directors fail to look at the books of the business carefully and the business runs at a loss. The seller of the business is bankrupt and the company has lost $100,000. Breach of directors’ duty of care, diligence and skill – compensation payable.

10. Remedies for the company against director for breach of duty 10  What if the defaulting directors are in control of the company, how can an action be brought against them?  A director of the company or a shareholder or shareholders with 10% of the voting rights of all shareholders entitled to vote on a resolution to amend the rules of the company can: apply to the court to grant that person the right to bring proceedings on behalf of the company or to intervene in proceedings already commenced for the purposes of taking responsibility for the proceedings. (s 89 CA)

11. Remedies for the company against director for breach of duty 11  Examples of the types of situations that could give rise to a successful s 89 action:  Moneys have been misappropriated by a director and there is evidence that the board refuses to bring proceedings against the director for recovery of the moneys.  Directors each own 50% of shares in the company. They are in deadlock about direction of the company, there are grounds to suggest a breach of director’s duties against one director. While alleged defaulting director

12. Remedies for the company against director for breach of duty 12 is not in control in the sense of having 51% of the shares or board votes, as the director is in a position to prevent the company bringing an action, that could be grounds for an order under s 89.  There may be evidence that the alleged wrongdoer has a dominant influence on the board, which suggests control by that wrongdoer.

13. Remedies for the company against director for breach of duty 13  Actions against directors when company in liquidation  Liquidators may bring a court action against directors on behalf of the company for breach of duty.  They can bring such an action by ordinary proceedings OR apply to the court for a remedy under clause 21, Schedule 7 of the Companies (Insolvency and Receivership )Act 2009 (CIR Act).

14. Remedies for the company against director for breach of duty 14  If co in liq, creditors or shareholders can also apply to the Court for an order that a director pays money or compensation to the company for breach under cl 21, Schedule 7 of the CIR Act.  Any order the court makes under cl 21 is discretionary, and so the court may not award full damages that might be payable in ordinary proceedings. The court can adjust the amount payable depending on its view of the culpability of the director.

15. Prohibition and disqualification of directors 15  The following persons are disqualified from being directors under s 82 CA. If the person  is under 18;  is an undischarged bankrupt;  is prohibited from being a director because committed offences set out in ss 76 or 77 of the CA (see later);  is a person against whom an order in custody under the Mental Treatment Act has been made;  does not meet the qualifications set out in the particular company’s rules.

16. Prohibition and disqualification of directors 16  Note, that even though you are not meant to act as a director, if you do you will be treated as a director for the purposes of imposing a duty or an obligation on you: s 82(3).  Prohibition on being director: ss 76 and 77  It’s an offence to act as a director or promoter or to be involved in the management of a company if you are convicted of the offences set out in s 76.  The court may order that a person must not (without the leave of the court) be a director, promoter or in any way involved in the management of a company if the person has been convicted of offences set out in s 77

17. Prohibition and disqualification of directors 17  We are not going to go through all of the offences but generally the offences relate to fraudulent and dishonest behaviour; e.g.  false statements on documents;  fraudulent use or destruction of company property;  falsification of records  carrying on business fraudulently (ie knowingly carrying on business with an intent to defraud creditors, or any person or for a fraudulent purpose)

18. Prohibition and disqualification of directors 18  The model rules provide that a director vacates his or her office of director if they become disqualified from being a director under s 82 (see e.g. model rule 43 for private companies in Schedule 2 CA).

19. Indemnification of directors 19  The question is – can the company indemnify (reimburse compensate, relieve or excuse from liability) a director if he or she is liable to compensate the company for breach of duty or for some other reason?  There is a general prohibition on the company indemnifying a director in s 73.

20. Indemnification of directors 20  However, s 74 allows a company to indemnify a director or buy insurance (except for criminal liability) if:  its rules allow it; or  with the unanimous consent of shareholders under s 50

21. Model rules re indemnity and insurance 21  E.g. Model rules for private company cl 51  Subject to s 73 a company can provide an indemnity or purchase insurance for a director of a company or a related company (except for criminal liability) with the approval of shareholders by ordinary resolution or all shareholders under s 50 of the Act.  BUT no director can vote on a resolution concerning an indemnity or insurance to be provided for the director.

22. Model rules re indemnity and insurance 22  As cl 51 of the private company model rules is expressed to be “subject to section 73”. This suggests that the model rules do not allow indemnification or the purchase of insurance by the company for breaches of directors’ duties or other acts or omissions in their capacity as directors that give.

23. Examples concerning indemnification 23 Unless the model rules allow it or with the approval of all shareholders under s 50:  A director causes loss of $100,000 to the company through breach of duty of skill and care. The company cannot agree to compensate the director for the amount the director has to pay.  Another director of the company (Mary) breaches her duty to the company under the Act and the director (Lily) assists Mary in the breach. The company can’t indemnify Lily or Mary.

24. Examples 24 Fishing Co is a private family company and the model rules in Schedule 2 of the CA apply to it. Jenny is the managing director and dominates the board and shareholders. Jenny is in financial difficulty and fraudulently takes $50,000 from the company bank account. She repays the $50,000. Somehow the fraud is discovered and she is prosecuted by the authorities for theft against the wishes of the shareholders and other directors. She spends $5,000 on lawyers defending herself. She convinces all shareholders to pass a resolution indemnifying her for her legal costs in the criminal trial. Is the indemnity valid?