A high mark for alternate directors Law Reporter

What duties do alternate directors have? - it seems much the same as the real McCoy

With the pace of modern commerce becoming more frenetic it is not unusual for companies to appoint alternate directors or make arrangements for alternate directors to participate in the affairs of companies. The role of such alternate directors has not been the subject of a great deal of attention in court cases nor has there been much in the way of statutory attention to the role of alternate directors, although in the 2000 reforms of the Corporations Law (as it then was) specific provisions were included to permit the appointment of alternate directors (see now section 190 of the Corporations Act). In a recent decision of the Western Australian Supreme Court the role of alternate directors was considered in a context which may on the surface appear a little unusual, but which nevertheless illustrative of the fact that these persons do occupy very similar positions to that of a real director. We take the facts of the decision in Australian Securities and Investments Commission v Doyle & Anor ((2001) 38 ACSR 606) from the Butterworths Company Law Reports.

D was appointed initially as an alternate director to M of Ascot Mining NL (A). He was later appointed as a director of that company in his own right. He was also appointed as a director of another company (D Partners Pty Ltd) – which we will call DCP. He was a substantial shareholder in DCP owning 50 percent of the shares in that company. From the middle of 1996 A was considering the acquisition of interests in a mining project in Chile. DCP was engaged by A to provide consulting services and to assist A to raise capital in relation to its potential Chinese interest. Following shareholder resolutions being passed in September 1996, on 16 October 1996 A issued 8 million partly paid shares and the same number of options, in order to raise $400,000 as working capital. DCP was to receive half of those shares and half of the options. The next day, the Australian Securities Commission (ASC) wrote to A, expressing concerns about the placement and advised, in particular, that there appeared to be a breach of the Australian Stock Exchange (ASX) Listing Rules. Following an exchange of correspondence, in November 1996 the ASC commenced proceedings seeking to restrain the company proceeding with the acquisition and to set aside resolutions passed at the extraordinary general meeting (EGM).

Later in November 1996, and on behalf of DCT, D demanded repayment of the sum of $400,000 on account of the apparent breach of the listing rule caused by the allotment of shares. D sent that demand to S. On the same day a meeting of the directors of A was held, which was attended by D, S and another director, M. At that meeting, the directors purported to pass several resolutions. First, the directors resolved to cancel the allotment of shares. Second, they resolved that the secretary draw a bank cheque payable to DCP for $400,000 to be held, pending advice from the ASX. It seemed that the relevant amount could have been considered as a prospective return of capital. On 22 November 1996, there was another directors meeting, attended by S and D. At this meeting, it was resolved that D be appointed as director in his own right. The company's annual general meeting was held on 22 November 1996. At this meeting a series of resolutions were dealt with. Later that day, at a further directors meeting, attended by S, D and M there was another resolution passed, confirming the company's decision the previous day to return funds to DCP.

The Australian Securities and Investments Commission (ASIC) commenced proceedings against D and S. Its case against D was put on several bases. First it alleged that he had contravened Corporations Law section 232A, for being present and voting on matters in which he had a material personal interest. ASIC eventually abandoned its claim for relief in respect of this contravention. Second, ASIC alleged he breached his duty (Corporations Law section 232(6) – see now section 184(2) of the Corporations Act) as a director not to make improper use of his position to gain an advantage for himself or to cause detriment to the company. ASIC's case against S was that he was knowingly concerned with D's breach of his duties and, alternatively, failed to exercise his duty of care and diligence in protecting the company's share capital. In the relevant proceedings Justice Roberts-Smith considered to what extent certain general rules which applied to company directors applied to alternate directors. If the alternate had a personal or material interest in the matter that was being considered at a meeting of the board of the company of which he was the alternate director he had to consider whether this fact disqualified the alternate from being present and voting in relation to the matter even though the actual director (in this case M) had no disqualifying interest. In the judge's view the law was clear.

The alternate director, by virtue of his or her position as a director (whether alternate or not) was equally subject to the operation of section 232A of the Corporations Law and he found that the earlier decision of the New South Wales Supreme Court in Anaray Pty Ltd v Sydney Futures Exchange Ltd ((1988) 6 ACLC 271) supported that particular view. The court held that when D was attending as M's alternate he possessed "all the rights, powers, duties and responsibilities of a director. He was in the same legal position as any other director: Androvin Pty Ltd v Figliomeni ((1994) 14 WAR 11 at p 25). A disqualifying interest personal to a director will not disqualify that director's alternate although it seems it may do so if the alternate director is acting as the appointer's agent." When D had attended the meeting of directors and voted in favour of the resolution he used his position as a director (or an alternate director prior to him becoming a director) of the relevant company. In the judge's view, whilst D's purpose in voting for the relevant agreements was clearly not to cause any harm to the company, nevertheless he was intending that the allottee of the relevant shares would benefit. In the judge's view that meant that D was in breach of former section 232(6) of the Corporations Law.

He applied the decision of the High Court in Chew v R ((1992) 173 CLR 626) in reaching its conclusion that breach had occurred. The fact that he was merely an alternate in the context of some of the matters that were being decided was irrelevant in relation to that set of facts. This decision is important in making it clear that a person who is an alternate director is in no different position to that of a director in the context of the duties owed and the standard expected of the director in all respects. The law looks at the position of the individual rather than the position that he or she occupies. The fact that the original director would not have had a conflict was irrelevant – it was the position of the person standing in the shoes of the director that the court needed to examine in considering these matters. The court also considered whether S had breached any provisions of the Law. In the court's view S was not directly involved in the actual breach of section 232(6). But the court held that S knew that D was a director and that D would be casting his vote in a way that would assist others. In that context, whilst the court found that S believed that the allottees of the shares had a legitimate claim against the company, and ruled that he himself was acting in good faith, that nevertheless he was also potentially in breach of his duty of care.

The language of the judge is interesting in this particular context. Conceding that in this particular case the allotment of the funds amounted to a potential reduction of capital which raised concerns about the way in which the moneys were used, the judge noted that in his view S had failed to exercise reasonable care and diligence. "I would make that finding because on the situation as he knew it there was at the very least a real question whether the money could be returned to the allottees otherwise than by way of reduction of capital ... and S failed to take any measures to ensure that the money would be recovered by the company if that became necessary. If his understanding of the terms on which DCP were holding the money on trust was as he stated in evidence, he singularly failed to have that reflected in the minutes, the terms of the resolutions, in correspondence or in any other appropriate way. He agreed to the course taken notwithstanding these deficiencies and as a result the money passed completely out of the company's control, and in circumstances in which its interests with respect to the money were entirely unprotected." (at para 240)

The standard set down by the judge in this particular case is particularly high. It points to the judge being prepared to look at the issues surrounding the obligations of directors and alternate directors and has made it clear that the law expects the high standards of all concerned in those circumstances. It will be a welcome addition to the body of law being built in this area.

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