Directors' Duties: Should Australia Adopt UK's Section 172 of Companies Act 2006?

This article discusses whether Australia should adopt UK's section 172 of Companies Act 2006 in relation to directors' duties. It analyzes the provisions of section 172 and section 181 of the Corporation Act 2001 (Cth) and argues that the provisions of section 181 should not be changed.

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Directors’ duties are guidelines which are imposed through law on the directors with
respect to the way in which they carry out their operations. Where most of the directors’ duties
have been derived through common law provisions they are now a part of most of the corporate
legislations around the world. These duties have the primary purpose if ensuring that the
directors do not misuse the powers provided to them and ensure honesty, integrity, diligence,
care and bona fide intentions towards working for the company. According to Talbot (2015, P
21) section 172 of the Companies Act 2006 (CA 2006) belonging to the UK is significantly
controversial provision which has been incorporated into the law for companies in the country.
Through the adoption of this section the legislation is able to incorporate within it the concepts of
shareholders value along with a number of non-exhaustive factors which have to be taken into
consideration by the directors in order to promote the success of the company. The question
which is at issue in relation to this paper is that whether Australia through its Corporation Act
2001 (Cth) (CA 2001) should also adopt the provisions of section 172 in the light of section 181
which imposes similar duties of the directors.
As stated by Gullifer and Payne (2015, p 394) s.172 of the CA 2006 is a compromise
between pluralistic stakeholders’ approach which makes the directors take into consideration
stakeholders through law while taking decisions and the shareholder primary approach which
emphasizes on concerns of the market and subjects the shareholders to self regulation. The
section is simply in relation to the duty of the directors to ensure and pursue the success of the
organization. The wording of the section provides that the actions of the directors of an
organization have to be in good faith, which would probably promote companies success for the
interest of all its members. In relation to doing so the directors are to take into consideration the
probable effects of a decision in the long run, employee’s interest who are working for the

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company, fostering the relationship of the organization with the customers and suppliers, the
impact which the operations of the company have on the environment, maintaining high
reputation and dealing fairly between the members of the company. It has been argued by Du
Plessis, Hargovan, and Harris (2018, p 113) that when the provisions of the section are examined
closely they simply reflect modern business practices and existing legal provisions which are
applied in general to corporations all over the world. Further the author goes on to state that that
the mere purpose of implementing such duties on the directors of a company is only to reinstate
the practical reality they are subjected to.
The examination of the wordings of the section depicts that it requires the directors to
take into consideration the interest of the stakeholders when such interest is in compliance with
the interest of the shareholders (Collison et al., 2014, p 423). It has been pointed out by Michael
that the section represents a shift from “permission to obligation” with the demonstration of old
common law provided by the case of Hutton v West Cork Railway in providing permission to the
directors to consider interest of the stakeholders albeit when they actions are primarily for the
company’s interest. The clear overriding obligation provided under the provisions of s.172 is
that of acting in the company interest and while complying with such obligations the directors
must take into consideration the other non-exhaustive factors. It has been argued by Flower that
the section does not provide any individual value to the interest of the stakeholders which is
actually present under pluralist approach. The test under this section ensures that the primacies of
the shareholders over the stakeholders strongly prevail and thus it depicts the presence of the
narrow view of CSR proposed by Friedman. Most of the cases which have interpreted the section
have a view that it is not a part of the CA 2006 which the parliament wants to address through
litigation such as the case of R (on the application of People & Planet) v HM Treasury [2009]

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EWHC 3020. In addition it has been argued by Guillifer that there is an inherent problem with
the provisions of s.172 in relation to the weighting of the factors, the need for objectivity, a right
which has no remedy and judicial reluctance in business decision making. The principles of the
section are contrary to those which had been provided by Steinberg (2018, p 323) which states
that “A business that is accountable to all is actually accountable to none”.
On the other hand Australia like that of the UK had taken the review in relation to
corporate governance as in initiative to address the corporate governance crisis in the wake of the
Enron case (Deegan and Shelly, 2014, p 11). The country published two reports in 2006 in
relation to Corporate Social Responsibility which signified that it has strongly rejected the
‘Enlightened Shareholder Value’ approach and argues based on an approach which laid emphasis
on “soft law” (Ferran and Ho, 2014, p 78). The primary section which has some resemblance to
s.172 in Australia is s.181 of the CA 2001. The section provided that it is the duty of the
directors to act in good faith and for a proper purpose. As stated by Stephens (2017, p 121) in
order to find out that whether the directors duties in Australia or more precisely the provisions of
section 181 of the CA have to be amended it is primarily required to understand the
contemporary directors duties which are present through general statute and law. In Australia the
powers of the directors are very wide and not limited to a shareholder approach. The courts have
widely interpreted the powers of the directors to manage a company. In the case of Howard
Smith Ltd v Ampol Petroleum Ltd it had been confirmed by the court that that the law provides
powers to the directors to make a decision which is not in compliance to the wish of the
shareholders. In the same way it has been stated by the court in the case of Imperial Hydropathic
Hotel Company Blackpool v Hampson that a decision of the directors cannot be overridden by a
resolution of the members where they have been granted the powers to manage the affairs of the

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company. However this does not signify that the decision of the directors cannot be challenged.
This is done in Australia through the imposition of section 180- 184 of the CA 2001. The duties
which are provided in section 181 contemporarily focuses on company interest. There have been
various calls in relation to amendment of the statutory duties in order to clarify the extent to
which the directors can take into consideration stakeholders’ interest or activities under CSR. In
the case of Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17 it
had been stated by the court that the director would be liable to have contravened the provisions
of the duty off the have not taken into consideration profit maximization.
According to Stout and Blair (2017, p 312) there have been no appellate decisions in
Australia in relation to the degree to which the directors can consider stakeholder interest.
However in the case of Woolworths v Kelly it had been held by the court that a company may be
generous with those who are related to it, however the company must only do so while ensuring
that it is pursuing its own interest. It has been argued by Bottomley (2016, p 221) that section
181 of the CA 2001 does not provide for the obligations of the directors to the other
stakeholders. On the other hand Flower (2015, p 117) states that one of the biggest advantages of
the section is the flexibility which is provided through it. Where the provisions of section 181 of
the CA 2001 are replaced with the provisions of s.172 of the CA 2006 it is going to have
negative impact on the Australian community. For instance companies may restrain from
selecting Australia as a place of incorporation. In addition it has been argued by Segerlund
(2016, p 98) that the provisions of taking into consideration the interest of the shareholders may
negatively impact investor’s confidence. The Australian investors currently known that their
money is directed towards pursuing their own benefit and if this is changed the confidence of the
shareholders would be affected. In addition the provisions of s.172 also do not specifically

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operate to ensure stakeholder interest as discussed above thus its inclusion is not worth. It has
been further argued by Ferran that the duties which have been imposed via s.172 may prevent
talented people from acting as directors. In the same way the application of the section may lead
to a perception that litigation can be easily initiated against the directors for every decision they
make and subsequently make the growth of business stagnant. The availability of insurance may
also be reduced where the provisions of this section have been incorporated in the Australian
system (Clarke, 2014, p 763).
From the above discussion it can be stated that the provisions of section 181 of the CA
2001 must not be changed in the light of the similar wording which have been provided through
s.172 of the CA 2006. It is the duty of the directors to safeguard the money of the shareholders.
Thus the duties of directors have evolved for the purpose of taking into consideration their
interest. It is a requirement of the directors under section 181 of the CA 2001 to act in the
company’s best interest. Where there is not much mentioned in relation to other stakeholders of
the company it cannot be stated that the directors cannot take into consideration their interest.
The operations of the company are not in a vacuum. For the company to be successful in the long
term the interest of the stakeholders have to be taken into account by the directors. Those
directors who are not able to adequately manage the breach can be said to be in contravention of
due diligence duty under section 180. Even where there are several examples in Australia where
the companies only indulged in profit maximizing overlooking the interest of the stakeholders
when the negative repercussions in relation to such companies are analyzed it can be stated that
the actions were not in the best interest of the company. Disregarding the relevant interest of the
stakeholders would not only lead to an adverse reaction from the community but also regulatory
interventions, litigations and government inquiries.

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Where there has been criticism for section 181 of the CA 2001 that it does not provide
for the obligations of the directors to the other stakeholders, one of the biggest advantages of the
section is the flexibility which is provided through it. All decision which the directors make has
to be in company’s best interest. How and what is to be done is upon the reasoning of the
directors who posses expertise and knowledge to make decisions. It is important the flexibility us
provided to directors duties so that they can adopt with value changes and community
expectations. On the other hand even where clear guideline is set out by the provisions of s.171
of the CA 2006 it is subjected to significant problems such as weighting of the factors, the need
for objectivity, a right which has no remedy and judicial reluctance in business decision making.
In addition the section has many phrases and concepts which have not been tested by the court
and are unclear. In addition bureaucracy to decision making with very little benefit is provided
through the prescribed interest which the directors have to consider. To make it worst the
accountability of the directors in relation to the company is clouded by the prescribed interest list
which provides a threat to the enforceability of the duty. The CA 2001 may be an easy target but
it is not the correct place where the interest of other stakeholders should be taken into
consideration by the businesses. Thus the notion that the provisions of section 181 of the CA
should not be altered is supported by strong reasons and should be rightly resisted.

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