Duties to a wider range of stakeholders

There are ominous signs that directors may owe duties to employees in some particular situations.

For the last 30 years there has been ever-increasing pressure on company directors. While the duties expected of directors have widened, attempts have been made to introduce safety nets to prevent directors from being held liable in unreasonable circumstances. One development has been the recognition by courts, whether justifiably or not depending on one's point of view, that duties of directors are owed to a wider and wider ranger of stakeholders. Traditionally the view has been that directors owe duties to the members of the company and only to the members of the company (taken as a corporate group as it were). No duties were said to be owed to others. Since the High Court decision in Walker v Wimborne in the 1970s that particular proposal is no longer good law - the directors are now said to owe duties to creditors in particular situations. Over the last few years there have been suggestions that the directors may owe duties to individual shareholders (as a result of the Glavanics decision) a decision of the New South Wales court of Appeal only last year (Brunninghausen v Glavanics (1999) 17 ACLC 1247). As a result of the new Employee Entitlements legislation which has been enacted just recently there is now a real danger that directors will owe duties to employees in particular situations.

The question of whether directors owe duties to these different stakeholders is made easier to answer by virtue of a specific provisions of the Corporations Law (the Law) which has not been the subject of statutory interpretation on many occasions. It is section 1324 of the Law. That section provides that: (1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute: (a) a contravention of this Law ... the court may, on the application of [ASIC], or of a person whose interests have been, or are or would be affected by the conduct, grant an injunction. ... The section goes on to provide in section 1324(10) that the court may in such a case, in addition to granting an injunction or in substitution for such an order, "order that [the relevant person] pay damages to any other person". The person who is the subject of these particular actions is arguably a director (because he or she contravened a provision of the Law) or some other officer. A contravention of the Law would include a breach of any of the duties said to be owed by directors. These duties range from the duty to act with care and diligence, the duty to act in good faith, the duty to avoid insolvent trading and now, as a result of the recently enacted Employee Entitlements legislation, a duty not to engage in transactions that may leave employees without adequate payment for their services.

Who can rely on section 1324? As we have seen from the language of the section set out above the remedy appears to be available to any person "whose interests have been, are or would be affected by the conduct". The courts have over the years gradually increased the range of persons who may use this particular provision. There has been a range of cases culminating in the decision of Einfeld J in Airpeak Pty Ltd & Ors v Jetstream Aircraft Ltd & Ors ((1997) 15 ACLC 715) suggesting that the section should be read widely. That decision was a decision of the Federal Court. There have been some Victorian decisions as well which have adopted a favourable reading of the section and now, in a most recent case, Vanmarc Holdings Pty Ltd & Anor v P W Jess & Associates Pty Ltd ((2000) 34 ACSR 222), Mandie J in the Victorian Supreme Court suggested that the section might be available to a unit holder in a trust. The facts of the case are taken from the Butterworths Company Law Reports. The first plaintiff, Vanmarc Holdings Pty Ltd (Vanmarc), was a unit holder in a trust which, by its trustee, the first defendant, carried on an accounting business. Vanmarc was also a unit holder in another trust which, by its trustee, the second defendant, acted as a service trust to the first trust. The second plaintiff, one Clopsch, was the owner of shares in both trusts. She was a principal of the former trust and a director of the latter trust and an employee of both trusts. The third and fourth defendants were also directors, employees and shareholders of the two trustee defendants. The plaintiffs claimed broad and unspecified breaches of duties of trustees and breaches of fiduciary duties. They sought to bring a derivative action (under the rule in Foss v Harbottle) on behalf of the trustee companies against their directors and also to claim relief under section 246AA of the Law which provides a remedy in oppression.

In passing, however, the plaintiffs contended that they could bring a claim also pursuant to section 1324 of the Law against the relevant directors. They argued that section 1324 of the Law gave standing to any person whose interests were affected by conduct of directors in contravention of the Law not only to seek an injunction but also to seek damages. They relied on Allen v Atalay ((1993) 11 ACSR 753) (a decision of Justice Hayne of the Victorian Supreme Court now a member of the High Court of Australia). Justice Mandie in considering the various matters before him ruled that the proposition was certainly arguable, but it was unnecessary for him to consider it. What I would suggest is that Justice Mandie, had he been forced to decide the case on section 1324, may well have given that particular provision a wide reading. In the result in this particular case the judge ordered that the pleadings should be redrawn in order to allow the action to proceed. Certainly an action in oppression based on section 246AA of the Law would be permissible, but other pleadings had to be changed. But, having struck out the relevant pleadings, the judge gave general leave to amend the statement of claim.

What this case suggests is that certain stakeholders in a company (whether they be shareholders, creditors or employees in appropriate cases) may successfully bring proceedings against individuals who have breached their duties. Of course, they have to establish that there has been a breach of duty (a statutory duty that is, in order to rely on section 1324). But, with the increase in the range of duties owed by directors to companies as a result of legislation such as the Employee Entitlements legislation (linked as it is to insolvent trading), that opportunity may be far easier to rely on than has been the case in the past. The decision in Vanmarc is just another example of the willingness on the part of our courts to read some of these statutory provisions widely and to be generous in permitting shareholders to pursue claims when they are appropriately pleaded. Time will tell whether shareholders will actually succeed on the facts in particular cases in appropriate litigation.

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