Professor Bob Baxt asks whether the law should be changed to enable directors to legally take into account the interests of stakeholders.

    Readers of this magazine may be aware that the Governance Institute of Australia (GIA) is currently seeking comment on an interesting discussion paper entitled Shareholder primacy: is there a need for change?

    In this paper, the GIA raises for comment and discussion the question of whether it is appropriate to change the law so that directors can legally take into account the interests of a range of stakeholders, other than the shareholders of a company (which is the current position under Australian law). In the UK, section 172 of the Companies Act 2006 requires the directors of companies to take into account interests such as those of creditors, employees and others.

    The Australian legislation contains no such provision. Indeed, as has been stated often by the High Court of Australia, and other courts in this country, directors are not legally required to consider interests other than those of shareholders in performing their duties under the law, both the common law and the Corporations Act 2001 (the Act).

    My statement is correct despite the fact that the Western Australian Court of Appeal, by a majority, ruled in the Bell Group litigation (Westpac Banking Corporation v Bell Group Ltd (in liq) (No. 3) (2012) 89ACSR 1; [2012] WASCA 157), that the directors of the Bell Group company (and its subsidiaries) had breached their common law duties to act in good faith and in the best interests of the company, in formulating a rescue package with major trading banks which had supplied original finance to the Bell Group.

    This breach occurred because they had apparently failed to take into account the interests of creditors other than the relevant banks. Acting Justices of the Western Australian Supreme Court, Drummond and Lee, stated that in their view, principles of corporate governance, which are now often referred to in discussing the duties of directors and how they should behave in the context of both the law and what the community expects of them, include a duty to take into account the interests of other stakeholders such as creditors. Acting Justice Carr disagreed with his fellow judges on this particular point and adopted the traditional approach, which I have set out above. This requires the directors to act with the interests of the company, that is, the shareholders, as their sole obligations. There is in fact, no recognition in Australia, by the High Court (which is the highest court in the land) of a broader legal duty.

    Interesting viewpoint

    The suggestion made by the GIA that the law might warrant amending in order to take into account broader community views, that wider stakeholder interests should be at the heart of the way in which a company should operate, is a very interesting one. There is a provision in the Act, namely section 1324, which arguably raises some doubts on the overall question of whether a duty is owed by directors to persons other than shareholders. This section in general terms states that where a director has breached his or her statutory duties (namely the duties set out in sections 180 –184, in particular), then any person whose interests are affected by that breach, may seek a remedy from the courts in the form of an injunction or a declaration, requiring the director to correct that breach of duty.

    The expression “any persons whose interests are affected” has been interpreted by a wide range of Australian courts, as applying broadly to include the kind of stakeholders that the GIA is ‘putting up” for consideration as potential beneficiaries of a change in the law. In addition to being able to seek an injunction or a declaration, or some similar order, section 1324 was amended a few years later with the addition of subsection 10. Under this provision the court is given a discretion, in a case where there has been a breach of statutory duty which has been challenged by a person whose interests are affected, to consider not only ordering an injunction or declaration, but also awarding damages in favour of that interested person or persons against the directors and presumably against others.

    There have been a number of cases in which the courts have indicated that before such an award of damages can be made, the particular complainant must first have sought injunctive or related relief. Some judges have, however, disagreed with this narrower approach and suggested that a remedy in damages (at the discretion of the court) can be made even if an injunction or some other relief is not sought.

    The better view, in my opinion, is that the complainant must establish that some relief has been sought in the first place, although there may be circumstances where that would be an inappropriate application. The Queensland Court of Appeal decision in McCracken vs Phoenix Constructions (Qld) Pty Ltd (2012) QCA 129 9, ruled wrongly, in my view, that no remedy in damages can in fact be awarded under any circumstances. That interpretation denies the clear language of section 1324(10). I believe that if this particular issue were argued in the High Court of Australia, the Queensland Court of Appeal decision would be overturned.

    The High Court of Australia has observed, by way of obiter dicta, that the law in fact does not require directors to observe a legal duty to persons other than shareholders. The most recent example of this approach can be seen in the decision in Spies v The Queen (2000) 201 CLR 603. Furthermore, the Canadian case, BCE Inc v 1976 Debenture Holders [2008] 3 S.C.R 560; 2008 SCC 69 saw the Canadian Supreme Court (the equivalent of the High Court of Australia) rule that duties are not owed by directors to persons other than shareholders (in that case certain debenture holders argued that a legal duty was owed to them by the directors of the relevant company).

    Recently, at a well attended seminar at the University of Melbourne Law School, Justice Ken Hayne, a member of the current High Court of Australia, delivered an interesting lecture under the title “Directors’ duties – and a company’s creditors”. This presentation, in honour of the late Professor Harold Ford, one of Australia’s leading company law figures, attracted a great deal of attention. The High Court of Australia would have had an opportunity to deal with this particular question in the Bell Group litigation had it gone into argument in the High Court.

    But, the case was settled and so the majority ruling of the Western Australian Court of Appeal, referred to earlier, remains on foot as the leading statutory authority in Australia. Justice Hayne noted that had the High Court sat in the appeal, he would not have been able to be a member of the court as he had advised the Bell Group of companies when he was a barrister. But he also made it clear that he believed that the Western Australian Court of Appeal majority judgment was wrong. He did so by relying on a careful, historical analysis of the way in which duties of directors to shareholders had been established and then cemented in the common law as well as in the statute. Regrettably, the High Court did not have a chance to consider the case and so we await another chance for that to occur.

    Corporate governance

    The rules of corporate governance, which receive significant publicity and attention, on an ever increasing scale, operate on the basis that these rules, except in the case of companies whose shares are listed on the Australian Securities Exchange (ASX), (thus requiring the companies law to observe rules contained in the Listing Rules of the ASX, to comply with the relevant rules), do not include a legal obligation to comply with the relevant rules. The expectation, however, is that companies will do so.

    The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, (the Principles), relies on the formula: “If not, why not?”
    Companies that do not wish to observe the Principles (now in its third edition) are in effect “required” to explain why they have decided not to adopt the rule in question.

    Considerable debate continues on whether these Principles should legally apply. A recent conference held by Deakin University, examined the way in which certain European countries required by law the observation of certain “rules” similar to the Principles (in particular these laws require companies to appoint a certain percentage of women to their board of directors).

    Australia at the moment is arguably a long way away from adopting this type of approach though there may be moves to make some of the broader Principles binding, through legislation in one form or another.

    As noted earlier, the ASX Listing Rules provide one way in which this can occur. Legislation – for example in relation to reports on steps taken with respect to environmental issues – provides another way forward.

    In the meantime, the GIA has sought public comment due by the end of December 2014 on whether the law in Australia should be changed. If the GIA receives a sufficiently strong response to this particular request, what can happen? The Corporations and Markets Advisory Committee (CAMAC) will no longer be in existence, so we have no reform body that can directly deal with this matter in Australia. Arguably, the Australian Law Reform Commission could be asked to undertake such a task if the government felt inclined to listen to such a request. While this would be a satisfactory way to proceed, a specialist body such as CAMAC would have been a more appropriate avenue to take in pursuit of these matters.

    I would be surprised if the GIA receives an overwhelming body of support for a change in the law to make it a rule of law that directors must take into account the interests of other stakeholders such as creditors, employees, among others. This would create a tension in the way in which company boards operate.

    It is permissible for directors, acting in the best interests of the company, to consider the interests of stakeholders. For example, companies can make gifts to charity and pursue other well-intended public pro bono pursuits without the law requiring them to do so. Creditors and other interests are protected in other ways through statutory provisions that give them the right to recover certain sums of money – for example, when companies go into liquidation. If directors act foolishly when companies are insolvent, that is, they breach section 588G of the Act – they may become personally liable to the company for the debts that have been incurred. That again is a special case where the legislation clearly identifies an obligation on the part of the directors not to further damage a company’s financial position, in certain circumstances. It goes beyond imposing a general obligation requiring directors to take into account the interest of the creditors.

    In my view the law could be clarified to make it clear that directors are not required, by law, to comply with the rules of corporate social responsibility. Let them face the negative comment that they may receive in the media, if they wish to ignore the way in which the community believes that directors of companies should behave. But such an obligation should only be imposed by way of specific laws requiring directors to comply with these rules. The burden on directors, as it is, imposed by many other pieces of commercial legislation, and the continued use of the strict liability and reversal of onus of proof formula in legislation, create very significant burdens. The addition of artificial obligations by the use of media and others, on company directors to observe “good behaviour” goes much further than the law should require.

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