Exploring the Incorporation of Companies Act 2006 in Australia

This essay explores the incorporation of Companies Act 2006 in Australia and discusses the duties of directors to act in the best interest of the company and shareholders. It also highlights the adequacy of section 172 of the Companies Act 2006 and the ambiguity of its wording.

Running Head: COMPANIES AND SECURITIES LAW
COMPANIES AND SECURITIES LAW
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Author Note

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COMPANIES AND SECURITIES LAW
Introduction
The purpose of this essay is to explore whether Australia should try to incorporate the provisions
of the Companies Act 2006 as provided in section 172 of UK and replace the provisions of
section 181 of the corporations Act 2001. This essay will also discuss the duties of the directors
to act in the best interest of the company and will also highlight the meaning of the term of
acting in the best interest o the company. This essay will consider the duties of the directors to
act in the best of the shareholders of the company and the public. Finally this essay will highlight
the adequacy of the words section 172 of the Companies Act 2006.
Discussion
Interpretation of the Corporations Act 2001 (Cth)
In the notable case Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd. it had been
held by the court that directors of companies are to be treated as the mind and soul of the
company. It was also held in the aforementioned case that the directors can make decisions
related to the operations of the business against the wishes of the shareholders of the company. A
held in the case Imperial Hydropathic Hotel Company Blackpool v Hampsonthe decision of
the directors can be subsided by the resolution of the members of the company, if the directors
have been granted the power to administer the operations of the company. However, it can be
stated that since the powers of the directors are immense, the common law as well as statutory
law imposes man duties on the directors. It can be stated that since the powers granted to
directors of a company are provided by the shareholders, the directors are therefore required to

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act in the best interest of such shareholders1. As opined by2 the directors of company can be held
liable for breaching their duty to the company both through tort as well as contract. In the notable
case Aberdeen Railway Co v Blaikie Bros3it was held that directors of a company owe duties
in equity to the company as such directors share a fiduciary relationship with the company. As
provided in section 181 of the corporations Act, it can be stated that directors are required to act
in the best interest of the company and such duty should be fit for the proper purpose. Thus this
implies that shareholders have the option of challenging the actions of the directors it such
actions are found to be in violation of the statutory and general law provisions of directors’
duties.
There are several remedies available to the shareholders of the company if it is established that
the directors breached the duties imposed on them, even if the company had not suffered an
actual loss due to the breach of directors’ duties The duties of the directors which are imposed by
common law are reinforced by the statutory duties as provided in section 180-184 of the
Corporations act4. However it can be stated that the codification of the directors’ duties are not in
derogation to, but the in addition to the common law duties of the directors. The Corporations
Act 2001 has not only provided a codification of the duties of the directors but also has provided
the government of Australia to enforce the breach of such duties by the Australian Securities and
Investment Commission which had earlier been enforced by the company itself. It had been
explained by the Senate Committee that the basic purpose of the codifying the duties of the
directors in the sections 180-184 was to ensure that the directors act in the best interest of the
1Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to
legislate. Journal of Business Ethics, 121(4), pp.499-526.
2 Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-
250). Gower.
3(1854) 1 Marcq 461
42001 (Cth)

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company and the shareholders of the company(Aph.gov.au 2018). Furthermore, it can be said
that the directors share fiduciary relationship with the company and therefore they ought to act in
the best interest of the company rather than their personal interest or in the interest of the third
parties. Section 181 of the Corporation act has thus clearly provided that the directors of the
companies must act in good faith and for a proper purpose while discharging their duties (Talbot
2015). The company or corporation is generally regarded as the shareholders as a whole. It has
been established in the case Brunninghausen v Glavanics5 that the directors do not have any
fiduciary duties to any individual shareholder. The rationale behind this principle is that a
company can be regarded as a separate legal entity from its owners and its shareholders.
Therefore in this regard it can be said that the directors do not have the obligation to make sure
that each of the shareholders realizes his right as that would expose such directors to a large
number of actions.
However an exception to this rule has been illustrated in the remarkable case Coleman v
Myers6. In this case it was held by the court that the directors owed fiduciary duties to certain
shareholders in addition to the company as the directors shared interpersonal relationships with
such shareholders. Further it had been held that the shareholders had relied on the expert advice
of the directors regarding investment. As provided in section 180 of the Corporations Act 2001
directors are required to discharge their duties with proper diligence and care so as to avoid
liabilities of Equity, Contract and Tort.
Government reviews
5(1996) 14 ACLC 342]
6[1977]

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It can be stated that there have been two parallel enquiries by the PJC and CAMAC to assess
whether the companies should have corporate social responsibility and whether directors are to
take into consideration the interest of the other shareholders n their decision making process.
The first enquiry had been conducted by PJC in relation to the corporate social responsibility of
companies. The PJC like the Senate committee stated that the law related to the duties of
directors as provided in section 172 of the companies act 2006 did not require amendment7.
The second enquiry had been conducted by CAMAC and the enquiry took into consideration the
following points:
 Whether the Corporations Act8should be amended to revise and clarify the extent to
which the directors should consider the interest of the broad range of shareholders while
making decisions about the business
 Whether the Corporations Act should be amended to make it mandatory for the directors
to take into consideration the interest of a specific class of shareholders while making
decisions related to the business.
It can be stated that a positive answer to any of the aforementioned questions would have meant
that the section containing the duties of the directors (section 181) required to be amended
whether by adopting some of the provisions of the Companies Act9 or otherwise.
7Aph.gov.au. (2018). Parliamentary Joint Committee on Corporations and Financial Services – Parliament of
Australia. [online] Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services [Accessed
26 Apr. 2018].
82001 (Cth
92006

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However after analyzing the provisions of the current law and results of the enquiries, CAMAC
reached the conclusion that the Corporations Act 2001 was quite flexible and allows the directors
to consider the interest of the relevant shareholders10.
However, it can be stated that the interpretation of the section 172 of the Companies Act in
regards to assessing the extent to which the directors of companies are required to take in to
consideration the interest of the shareholders differs. Many companies have adopted a code of
corporate social responsibility to ensure that the operations of the company have overall good
impacts on the society. Whereas other companies have made submissions to PJC stating that
such companies have taken a more restrictive interpretation of the companies act11.
The Department of Trade and Industry conducted a recent review concerning the duties of
directors among other things. This review had led to the introduction of section 172 of the
Companies Act containing the duties of the directors12.It is worth noting that prior to the review
conducted by the DTI, the duties of directors of companies had never been codified before.
Although at first glance it may be apparent that the directors’ duties as provided in section 172
are based on the common law, however upon further scrutiny it can be seen that the
aforementioned section has taken a very different approach to section 181 of the Corporations
Act 2001 of Australia. It can be stated that the section 172 of the Companies Act 2006 sets the
standard for the shareholders to act as other reasonable directors. The aforementioned section
focuses on the importance of the interests of the shareholders while considering the long term
10Camac.gov.au. (2018). Corporations and Markets Advisory Committee - Home Pages - Welcome to CAMAC.
[online] Available at: http://www.camac.gov.au/ [Accessed 26 Apr. 2018].
11Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to
legislate. Journal of Business Ethics, 121(4), pp.499-526.
12Gov.uk. (2018). Department of Trade and Industry - GOV.UK. [online] Available at:
https://www.gov.uk/government/organisations/department-of-trade-and-industry [Accessed 26 Apr. 2018].

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interests of the company as well as the importance of acting fairly towards the different
stakeholders of the company. It had been submitted to the PJC by many corporations that section
181 of the Corporations Act should be replaced by similar wording as provided in the section
172 of the Companies Act 2006. However, upon further analysis it had been found out that the
wording of section 172 is ambiguous and is difficult to apply to the practical situations.
Ambiguity of wording of the Companies Act 2006
It has been provided in section 172 of the Companies Act 2006 of the United Kingdom that the
directors of the company are to act in ways, which they consider to be in the best, interest of the
company and likely to promote the success of the company. It can be stated that at first the
words as written in section 172 of the Companies Act 2006 seem to be reasonable and logical,
however upon further inspection the term ‘success’ seems to be ambiguous and creates a lot of
controversy. It can be stated that the word success is uncertain in nature and is such word can
be interpreted in a way, which is different from the traditional duty of directors to act “in the best
interest of the company”. It has been pointed by the Law Society that unlike the phrase “acting in
the best interest of the company” the phrase “promote the success of the company” is not
supported by relevant case law.
The terms ‘For The Benefit of its Members as a Whole’ further add up to the confusion
surrounding the interpretation of this section 172 of the Companies Act 200613. It can be stated
that this term is a deviation from the principle of the common law, which requires directors to act
in the best interest of the company14. To act in the best interest of the corporation had never been
13Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to
legislate. Journal of Business Ethics, 121(4), pp.499-526.
14Barker, R. and Chiu, I.H.Y., 2014. Protecting minority shareholders in blockholder-controlled companies:
evaluating the UK’s enhanced listing regime in comparison with investor protection regimes in New York and Hong
Kong. Capital Markets Law Journal, 10(1), pp.98-132.

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related directly to the interest of the shareholders. In addition to the ambiguity surrounding the
interpretation of this term, the deviation from the traditional wording makes the reader question
the previous case laws.
Further it has been provided in this section the requirement of the directors to ‘Have Regard to
certain’ interest. This can be considered to be a controversial and ambiguous term15. There are
numerous issues that are related to the interpretation of this particular tem. It had been argued by
the ASIC while submitting to the CAMAC that the requirement of directors to “have regard to
certain interest’ entails difficulty in interpretation, as it does not provide any guidelines as to
whose interest should be given priority to.
According to it can be stated that implying this section and giving preference to certain
shareholders’ interests could result in exclusion of requirement of directors to take into
consideration interests of other stakeholders16. This removes the flexibility of interpretation of
section in future.
One of the major concerns that are raised by the interpretation of the section 172 of the
Companies Act is that it gives more opportunity to the shareholders to challenge and attack the
decisions of the directors made in the interest of the company17. However, it can be mentioned
that courts have generally been reluctant to overrule the decision of the directors in respect of
15Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.
16Reid, W. and Myddelton, D.R., 2017. The meaning of company accounts. Routledge.
17Haldane, A., 2015, May. Who owns a company?. In Speech, University of Edinburgh Corporate Finance
Conference, May 22nd.

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managing companies. The rationale behind this is judges are of the opinion that directors of
companies have more expertise and knowledge about managing corporations than the judges.
However, even though this section makes reviewing of directors’ duties easy, in reality enforcing
a breach of director’s duty is much harder due to the way section 172 has been formulated.
Conclusion
Thus to conclude it can be said that, section 181 of the Corporations Act must not be amended to
incorporate the wordings of section 172 of the Companies Act 2006. directors are given the
responsibility of guarding and protecting the money of the shareholders. Therefore the duties of
the directors have evolved to protect the interests of the shareholders. Further it can be stated that
the flexibility of the duties of the directors as provided in section 181 of the corporations is one
of the greatest strengths of the aforementioned section. Section 181 mandates the directors to
make their decisions in the best interest of the company. However the directors are given the
freedom to evaluate what interests should be taken into consideration. It can be stated that the
flexibility of the duties of the directors is essential for the company to evolve and live up to the
expectations of the community. Adopting the provisions section 172 of the Companies Act 2006
of the United Kingdom cannot be ideal as the wordings of the aforementioned section are
ambiguous and difficult to apply in the jurisdiction of Australia. Further the interpretation of the
section 172 entails multiple problems and controversies.

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Bibliography
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate
Governance (pp. 169-250). Gower.
Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives
about the need to legislate. Journal of Business Ethics, 121(4), pp.499-526.
Talbot, L., 2015. Critical company law. Routledge.
Reid, W. and Myddelton, D.R., 2017. The meaning of company accounts. Routledge.
Haldane, A., 2015, May. Who owns a company?. In Speech, University of Edinburgh Corporate
Finance Conference, May 22nd.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury
Publishing.
Corporations Act 2001 (Cth)
Companies Act 2006 (UK)
Companies Act 1986 (UK)
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Imperial Hydropathic Hotel Company Blackpool v Hampson (1883) 23 Ch D 1
Aberdeen Railway Co v Blaikie Bros (1854) 1 Marcq 461
Brunninghausen v Glavanics (1996) 14 ACLC 342]

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Coleman v Myers [1977]
Senate Committees
Aph.gov.au. (2018). Senate Committees – Parliament of Australia. [online] Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate [Accessed 26 Apr. 2018].
Corporations and Markets Advisory Committee
Camac.gov.au. (2018). Corporations and Markets Advisory Committee - Home Pages - Welcome
to CAMAC. [online] Available at: http://www.camac.gov.au/ [Accessed 26 Apr. 2018].
Parliamentary Joint Committee on Corporations and Financial Services
Aph.gov.au. (2018). Parliamentary Joint Committee on Corporations and Financial Services –
Parliament of Australia. [online] Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial
_Services [Accessed 26 Apr. 2018].
Barker, R. and Chiu, I.H.Y., 2014. Protecting minority shareholders in blockholder-controlled
companies: evaluating the UK’s enhanced listing regime in comparison with investor protection
regimes in New York and Hong Kong. Capital Markets Law Journal, 10(1), pp.98-132.
Department of Trade and Industry
Gov.uk. (2018). Department of Trade and Industry - GOV.UK. [online] Available at:
https://www.gov.uk/government/organisations/department-of-trade-and-industry [Accessed 26
Apr. 2018].