Directors' Duties and Responsibilities

This assignment delves into the crucial duties and responsibilities that directors of corporations bear under Australian law. It explores various legal frameworks, including the Corporations Act 2001, and examines concepts such as the duty of care, diligence, loyalty, and good faith. The analysis draws upon scholarly articles, legal texts, and practical examples to provide a comprehensive understanding of directors' obligations and potential liabilities.

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Vrisakis v Australian Securities Commission [1993] 9 WAR 395 Analysis of Case

Corporation Law 2018
Introduction
Directors’ duty is a term which is amongst the leading provisions covered under the Corporations
Act, 2001 (Cth). This is the act which has to be followed by all of the companies in Australia as
this legislation is applicable in the Commonwealth of Australia (Latimer, 2012). Through this
act, the directors and the other officers of the company are given certain duties and
responsibilities. As a result of these duties and responsibilities, the directors have to carry on
their duties and make use of the powers in a manner which highlights care, diligence and is in
good faith of the company. The key director duties are covered under Part 2D.1 of this act, but
there are other duties also, which are covered under other parts of this act; for instance, to not
indulge in insolvent trading (Cassidy, 2006). There have been a number of cases were the
directors and the key officers of the company have been held accountable for breaching their
duties, and this was true even before the Corporations Act came into force. One of such cases is
Vrisakis v Australian Securities Commission [1993] 9 WAR 395, in which the breach of duty
took place under the Companies (Western Australia) Code (Austlii, 1993).
What happened?
In this case, Vrisakis was a leading and well known corporate solicitor. As a part of the rescue
package of Rothwells Limited, he had accepted an appointment to the board of the company. At
this time, he acted on behalf of both the company, and Laurie Connell who was the principal of
the company. An agreement had been attained between the parties interested in this transaction
in a mutual manner and this was in form of a package, which covered the NCSC and the
Government of the Western Australia. Along with this was covered the business plan for the
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company. A claim was brought by Australian Securities Commission against Vrisakis where it
was alleged that Vrisakis had failed in exercising the requisite degree of diligence and care as he
had failed in taking the require steps for making certain that the proper effect had been given to
the terms covered under the business plan and in the management restructuring. The particulars,
i.e., the details of the plan were provided by Australian Securities Commission to show that the
said business plan had not been implemented by Virsakis. However, the Australian Securities
Commission denied providing the details on what should have been done by Vrisakis in this
situation. At the very first instance, Vrisakis had been convicted; however, an appeal was made
from this decision before the Full Court of the Supreme Court of Western Australia (Gibson,
2003).
Duties in question
Before Corporations Act, 2001 came into being, a number of other statutes covered the director
duties and one of these is the Corporations Act, 1989. Section 232 of the Corporations Act, 1989
provides the duty and liability for the officers of the company. Subsection 1 of this section
provides that directors, executive officers, and secretary of the company are included in the
definition of officers. Under subsection 2 it is provided that the officers of the company have o
act in an honest manner at all times when they discharge their duties and when they make use of
their powers bestowed upon them through the office which the hold. Further, subsection 4
provides that this discharge of duty and use of powers has to be done in a manner of care and
diligence as is done by a prudent person holding a similar position in the company and as they
would exercise in the situations faced by the company (Federal Register of Legislation, 1998).
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Similar provisions are covered under the 2001 act, the duty of care and diligence as a civil
obligation is covered under section 180 of this act. Under subsection 1 of this section, it is
provided that the directors and the key officers of the company have to make use of their powers
and discharge their duties in a manner which reflects diligence and care (Federal Register of
Legislation, 2018). Again, this has to be done in a manner as would be done by a reasonable
person holding the same office as the director, with same powers and facing the same
circumstances as the director of the company (CCH Australia, 2011). Section 181 reflects the
requirements of honesty where it is stated that the directors of the company have to exercise their
powers and discharge their duties for proper purpose, in good faith and in the best interest of the
company (Paolini, 2014).
Decision given by Court
This case had the decision being given by Justice Ipp on behalf of the Full Wester Australian
Supreme Court where the conviction against Vrisakis had been overturned for the reasons of his
failure in exercising the requisite care in their attempts to rescue the collapsed company which
was the merchant banking company. As a non-executive director, the judges expected Vrisakis to
attend the responsibilities imposed on him in a suitable fashion. This was due to the fact that
Vrisakis was an experienced person in the commercial matters, where he was also the holder of
specialized skill, ability and knowledge which was required for influencing the affairs of the
company, which had been conducted previously in a manner which had been regarded as entirely
inappropriate by majority. Justice Ipp had the expectations from Vrisakis to adopt an intense
evaluation of the company affairs in comparison to the matter in which the other would have
done so. Even with this, Ipp J was ready to excuse Vrisakis from any of the liability as not doing
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the same would discourage the entrepreneurship which had been expected from a person who
held the post of non-executive director as was held by Vrisakis (Baxt, 2005).
This ruling had been made regarding the rescue package of the company which had been pursued
by Vrisakis, where the company had to bear major financial loss, when he held the post of
chairman in the company. As per one of the judges, the mere fact that the director had
participated in a conduct which was accompanied by a foreseeable risk of harm towards the
interests of the company, would not mean that the director has failed in exercising the degree of
care and diligence necessarily in discharging the duties held by them. The direction and the
management of the companies cover undertaking of the decisions and also embarking on the acts
which could promise a lot of things, but which at the same time are covered with the risk of
other. This is a common parlance in the lifecycle of commerce and industry and risk is an
integral part of the industry and of any business. Undoubtedly, the legislation had no intention
through the provisions related to duty of diligence and care, to dampen the business enterprise or
to penalize the unsuccessful entrepreneurial activities which were legitimate (Campbell, 2007).
As a result of this, the very question regarding the director having exercised a reasonable degree
of diligence and care could only be answered through the balancing of the foreseeable risk of
harm, as against the possible benefits which could have been expected in a reasonable manner
for accruing to the company from the conduct which was in question (OECD Publishing, 1998).
The court also stated that a non-executive director possessing a higher experience and significant
skill set had to be judged as per the higher standards (Flint, 1997). Due to these reasons, Vrisakis
was successfully able to appeal against his conviction for breaching the duty of care and
diligence, as had been covered under the erstwhile Corporations Act, 1989’s section 232(4). The
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allegations against Vrisakis for his failure in taking the reasonable steps for making certain that
the effect had been given to the terms which were covered under the business plan and also the
management restructure, which had been covered under the paper which Vrisakis had prepared
and which had been adopted by the resolution of directors of the company, during the meeting
which took place back in 1987, were proved to be false. Ipp J emphasised that the intention of
section 229(2), which came before 1989 Act under 232(4) and which is now present under 2001
Act under section 180(1) never aims at bringing down the business (Baron, 1995).
As a result of the facts of this case, the court allowed the appeal to succeed and found that the
verdict of not guilty had to be given regarding all counts save for the first one and the first count
had to be set aside. The appeal regarding costs and penalty was not deemed as important factors
to be dealt with in the given situation (Austlii, 1993).
Relevance of the Case
This case is a representative of the directors not being expected to be perfect. However, it does
depict that the judges can carry varied views over the extent which is required to be followed by
the directors and in them being made answerable where the things do not go well. This case
shows that the legislation, particularly the one presently covered under section 180(1) of the
Corporations Act, 2001, did not attempt to dampen the business enterprises or to penalize them
for the commercial activities which proved to be unsuccessful (Baxt, 2007). This case also
highlights that the formation of the director duties benefit the shareholders at the most and is the
test of negligence, where the irrationality of any decision is tested, thus conforming with the
traditional principles of gross negligence (Whincop, 1996).
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This case is quite important in the history of Australia, particularly in context of Corporations
Act. This case has been used as a reference point by number of cases and also contributed in the
current version of Corporations Act having the business judgment rule under section 180(2).
Through this case, the way was made open for the directors making risky decision which have
the possibility of resulting in gains. Also, this case is a timely reminder that the legislations do
not stop the directors or management from making risky decisions and allow them to make
careful and calculated risky ventures. This case was used as a reference point by Justice Edelman
in the case of Australian Securities and Investments Commission v Cassimatis (No 8) [2016]
FCA 1023, where they stated that based on the Vrisakis case, three factors had to be considered
for considering whether or not the provisions of section 180(1) had been breached or not. In this
regard, the first factor is of harm; followed by the factor of balancing; and the last factor of
interpretation with reference to the terms of the section which has to be taken as a whole, in its
entirety (Lewis Holdway Lawyers, 2017).
Conclusion
Thus, in the preceding parts, a successful summary of the case of Vrisakis v Australian Securities
Commission was presented, where it was highlighted that the legislations have been created in a
manner where the freedom is given to the management and the directors, along with the key
officers of the company, to undertake risky ventures. This case emphasizes on the directors to
take risky ventures only after carefully considering the entire venture. And when this is done,
they would be properly protected by the legislation and would be safeguarded from the breach of
director duties. This case saw the claim against Vrisakis being made for breaching the duty of
care and diligence, which is a common duty in all of the Corporations Act drawn in the nation.
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Further, this case is deemed as the reason, along with other reasons, for business judgment rule
being included in the present Corporations Act. The significance or relevance of this case is also
because it acts as guidance to the present cases in deciding upon the contravention of the director
duties, as was established through the case of Australian Securities and Investments Commission
v Cassimatis.
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References
Austlii. (1993) Vrisakis v Australian Securities Commission [1993] WASC 438 (6 August 1993).
[Online] Austlii. Available from: http://www.austlii.edu.au/au/cases/wa/WASC/1993/438.pdf
[Accessed on: 12/01/18]
Baron, P.D. (1995) The Application Of Rousseau's Theory Of Social Contract To Corporate
Governance. [Online] Federal Register of Legislation. Available from:
https://eprints.utas.edu.au/19016/1/whole_BaronPaulaDiane1995_thesis.pdf [Accessed on:
12/01/18]
Baxt, B. (2005) Early Warner. [Online] Australian Institute of Company Directors. Available
from: http://www.companydirectors.com.au/director-resource-centre/publications/company-
director-magazine/2000-to-2009-back-editions/2007/october/early-warner [Accessed on:
12/01/18]
Baxt, R. (2005) Duties and Responsibilities of Directors and Officers. 18th ed. Sydney, NSW:
AICD.
Campbell, C. (2007) International Liability of Corporate Directors [2007] I. Salzburg: Yorkhill
Law Publishing.
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
CCH Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations
Act 2001, ASIC Act 2001, related regulations. Sydney, NSW: CCH Australia.
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Federal Register of Legislation. (1998) Corporations Law. [Online] Federal Register of
Legislation. Available from:
https://www.legislation.gov.au/Details/C2004C03078/Html/Volume_1 [Accessed on: 12/01/18]
Federal Register of Legislation. (2018) Corporations Act 2001. [Online] Federal Register of
Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed
on: 12/01/18]
Flint, G. (1997) Non-Executive Directors’ General Law Duty of Care and Delegation of Duty:
But do we need a Common Law Duty of Care?. Bond Law Review, 9(2), pp. 198- 2015.
Gibson, G. (2003) Law for Directors. NSW: Federation Press.
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia
Limited.
Lewis Holdway Lawyers. (2017) Directors Duties: Duty of Care and Diligence. [Online] Lewis
Holdway Lawyers. Available from: http://www.lewisholdway.com.au/directors-duties-duty-of-
care/ [Accessed on: 12/01/18
OECD Publishing. (1998) OECD Economic Surveys: Australia 1998. Paris: OECD Publishing.
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts,
United States: Edward Elgar.
Whincop, M.J. (1996) A Theoretical and Policy Critique of the Modern Reformulation of
Directors' Duties of Care. Australian Journal of Corporate Law, 6(72).
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