Directors signing on behalf of Companies are not personally liable

The recent Supreme Court  case of Reozone Pty Ltd v  Rene Santoro [2016] NSWSC 1383 confirms that a Director will not automatically be personally liable for a company’s liabilities if the guarantee was signed with a qualification on behalf of the company.

Facts

• • Elite Plant Hire Pty Ltd (Elite) was in the business of renting vehicles, plant and machinery.

• • Rene Santoro (Santoro) signed a Loan Agreement from Sydney Trucks and Machinery (STM)for the supply of machinery and vehicles to Elite.

• • The Loan Agreement provided that Santoro granted a charge over all her present and future real “estate/property” to secure payment of money owed by Elite to STM.

• • Santoro’s signature appeared on the Loan Agreement above the words “Customer Signature” and “Accepted for and on behalf of the Company Name Rene Santoro Director ELITE PLANT HIRE PTY LTD”

• • Santoro ‘signature did not appear on the Loan Agreement in the space below the words “GUARANTOR: I Rene Santoro …secure payment by granting a charge over all real estate/property held now or in the future”

• • Elite went into liquidation and STM claimed that Santoro charged her real property with payment of debts owed by Elite to STM

Issue

The Court considered the question whether by her signature on the Loan Agreement Santore indicated to a reasonable person in the position of STM that  she granted a charge over her personal real property as security for Elite’s debts

Decision

1. 1. The Court considered a number of similar cases and found that the question is whether objectively a party has indicated that they accept personal liability by the placement of their signature on the relevant document. In this regard the document should be considered as a whole and the circumstances in which it came to be entered into.
   2. The Court found that Santoro did not sign the contract without qualification in the execution clause and the only signature on the document was expressly a signature on behalf of Elite.  In those circumstances it would be natural for the other party to assume, where a party signs with a qualification as agent for the company and not otherwise, the signatory is not accepting personal contractual liability.

Lessons for Directors

Directors should always qualify their signature on documents executed on behalf of a company and include the words “for and on behalf of XYZ Pty Ltd” to avoid any inference that they are accepting personal contractual liability.  However, the Courts will decide any dispute in this regard by considering the contract as a whole and also the circumstances in which it came to be entered into.

State Street Australia and Section 203D of the Corporations Act

On 7 June 2016, Beach J, Federal Court of Australia, handed down his judgement for the case, State Street Australia.[1] In his decision, Beach J considered the interpretation of s 203D of the Corporations Act 2001 (Cth) (the “Act”), which delineates a statutory process for the removal of directors by members of a public company. One of the issues in dispute was whether the section provided an exhaustive codification of the process for a removal of a director, or whether the section should be read as merely one method of removal, without prohibiting other methods provided by a company’s constitution.

Section 203D(1) of the Corporations Act  states:

• • A public company may by resolution remove a director from office despite anything in:

    • • the company’s constitution (if any); or
    • • an agreement between the company and the director; or
    • • an agreement between any or all members of the company and the director.

If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed.

Decision

In deciding on this issue, Beach J expressed the view that “although s 203D(1) is mandatory in the sense that it overrides a company’s constitution to the extent of any inconsistency, it does not provide an exhaustive codification of the mechanism for removal.”[2] In reaching this decision, Beach J firstly considered the construction of the section, before turning to relevant authorities.

Reasoning

Notably, Beach J directly addressed the previous and conflicting decision of Bryson AJ in Scottish & Colonial Ltd.[3]  In Scottish & Colonial, Bryson AJ’s gave attention to the different wording of section 203D in contrast to its precursor section prior to the Corporate Law Economic Reform Program Act 1999 (Cth). Whereas the current section uses the word “despite”, the precursor section used the words “notwithstanding”.  Bryson AJ reasoned that the strong nature of the language in the current section showed an intention to diverge from the interpretation of earlier provisions and, considering the emphatic wording, the current section should operate regardless of whether a company’s constitution afforded directors with less or no protection.[4]

In considering a number of other authorities, Beach J concluded that Bryson AJ’s decision in Scottish & Colonial “is not consistent with the prevailing view”,[5] and an “outlier”.[6] Consequently, Beach J decided “not to follow it”.[7] In reaching this decision Beach J considered a number of cases, all of which either directly or indirectly move away from the position taken by Bryson AJ.[8]

Further to his analysis of Australian case law, Beach J also raised 6 points regarding the construction of the section in support of the conclusion that s 203D of the Act “provides a mechanism rather than the mechanism”[9] for the removal of directors by members in a public company. These points are briefly summarised as follows:

• • The section uses the language “may” rather than “may only…” Accordingly, the language is not restrictive.[10]

• • The section uses the phrase “despite anything”.[11] Implicitly, the interpretation of these words is limited only to any inconsistency in a company’s constitution.

• • “Nothing turns on the point that the section is not a replaceable rule.”[12]

• • Nothing can be read from the absence in the section of a predecessor subsection from a previous Act. This is because “Such a subsection [is] unnecessary given the plain text of s 203D(1).”[13]

• • Subsections (2) to (6) repeatedly refer to “the director” and “the resolution”. Thus, in the words of Beach J, “It is apparent that all other rights are attached to and triggered by the utilisation of the mechanism under subsection (1) only.”[14] The text does not indicate an intention for the rights in subsections (2) through to (6) to be conferred in all cases, but only where subsection (1) has been triggered. Hence, the application of section 203D is not given a comprehensive scope.

• • The proviso uses definite articles ( “the director” and “the resolution”) as a reference back to subsection (1). Thus, proviso is coupled with the operative part of the section and “cannot separately be said to be mandatory in all cases where the operative provision was not.”[15]

Future Lessons

Therefore it seems that a public company constitution (including companies limited by guarantee) can adopt an alternative process in their constitution for the removal of directors. Many charities and not for profits are incorporated by way of a company limited by guarantee.

Did you know that a public company constitution can allow for the removal of directors?

The removal of Directors has serious consequences, seek legal advice

Contact us. Call (07) 3252 0011 and speak with our Business Development Team today to book an appointment with our commercial lawyers.

Written by Andrew Lind (Director) and Callum Gibson (Graduate Law Clerk).

Footnotes

[1] State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] FCA 675.

[2] Ibid, [16].

[3] Scottish & Colonial Ltd v Australian Power and Gas Co Ltd [2007] NSWSC 1266

[4] State Street Australia as per Beach J at [27] quoting Scottish & Colonial Ltd at [17], [21], [39], and [41].

[5] State Street Australia, [33].

[6] Ibid, [26].

[7] Ibid, [33].

[8] Allied Mining & Processing Ltd v Boldbow Pty Ltd [2002] WASC 195; Attorney-General of the Commonwealth v Oates [1999] HCA 35; Dick v Comvergent Telecommunications Ltd [2000] NSWSC 331; Bisan Ltd v Cellante [2002] VSC 504; Central Exchange Ltd v Rivkin Financial Services Ltd [2004] FCA 1546; (2004) 213 ALR 771; Dalkeith Resources Pty Ltd v Regis Resources Ltd [2012] VSC 288

[9] Ibid, [17].

[10] Ibid.

[11] Ibid, [18].

[12] Ibid, [19].

[13] Ibid, [20].

[14] Ibid, [21].

[15] Ibid, [22].

Director’s duties – the bar has been raised

Directors duties and financial statements when put together carry a lot of weight.  The decision of His Honour Middleton J in Australian Securities and Investments Commission v Healey [and others] [2011] FCA 717 (the Centro Case) handed down by the Federal Court on 27 June 2011 held that the defendant directors had breached their director’s duties in failing to discharge their duties of care and diligence.

If you are a director of a company, especially one in which you are not involved in the day to day management of, this decision is cause for some sober reflection.

In our assessment the “bar has been raised” by this decision in the expectation that the law places on directors and their duties of care and diligence, especially in their function of representing to the world at large the financial position of the company as disclosed in the publicly available financial statements.

This judgement (131 pages of it) has particular relevance in relation to the procedure adopted for consideration of the financial statements of the company and the resolution to sign the directors declaration required.

The following extracts from the judgement indicate the tenor of the judgement (emphasis added).

1. 14. A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors.
   15. This proceeding involves taking responsibility for documents effectively signed-off by, approved, or adopted by the directors. What is required is that such documents, before they are adopted by the directors, be read, understood and focussed upon by each director with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence and intelligent people.
   16. The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.
   17. All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.
   18. A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.
   19. The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere ‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.
   20. Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.
   21. No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.
   22. No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports.
   23. The omissions in the financial statements the subject of this proceeding were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representatives for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.

Some immediate ‘good governance’ implication questions

1. 1. Does your board have the right mix of wisdom, experience and expertise? If not, what steps will you take to seek that?
   2. Do your directors have the ability to read and understand financial statements? If not, what training is going to be organised?
   3. What does a familiarity with the financial status and regular review of the financial statements require? Monthly?
   4. Do your directors have the time and the ‘head space’ to read, understand and enquire into the financial statements? They might be wise, experienced and expert but if they may simply not have the time needed.
   5. Do you ask your co-directors – have you read, understood and enquired into the financial statements?
   6. Do your directors understand that they have the freedom to delay the adoption of the financial statements, ask the hard questions and insist on answers and further specific professional advice if required?
   7. What does monitoring corporate affairs and policies require? Are policy changes reported to the Board and in certain cases not able to be adopted without the approval of the Board?

Company Boards are increasingly asking us to have a ‘half day work-shop’ with their Board to unpack and explain their duties and provide practical advice on applying those duties. The agendas for such a workshop can be tailored for each board and often covers other ‘big ticket’ legal, risk, compliance and tax issues.

Changes to ATO Director Penalty Regime – Personal liability of Directors for Company debts

The personal liability of directors for company debts has been significantly changed by recent amendments to the Tax Administration Act 1953 (Cth).

Former ATO Director Penalty Regime

Under the previous ATO Director Penalty regime, directors would be held liable for a company’s unremitted PAYG withhold tax (i.e. the estimated income tax withheld from employee salaries and director fees) if the director did not comply with an ATO-issued Director Penalty Notice (“DPN”).  The former regime effectively allowed directors to avoid personal liability by placing the company into administration within 21 days of receipt of the DPN.

New ATO Director Penalty Regime

Some of the material changes to the director penalty regime include:

1. 1. Directors will be personally liable not only for company PAYG withholding tax but also for employee superannuation guarantee charges.
   2. Directors will not be able to avoid personal liability by placing a company into administration where the company has not lodged its necessary returns and the PAYG and/or superannuation debts are at least 3 months overdue.
   3. A new director will not be held personally liable for PAYG withholding tax and superannuation obligations within 30 days of commencement as a director.
   4. Where the company has not remitted PAYG withholding amounts in respect of fees or salary paid to a director or associate, the ATO can prevent the director or associate from claiming a PAYG credit on their personal tax returns and levy PAYG withholding non-compliance tax on the director or associate (i.e. effectively, requiring the director to personally pay the PAYG income tax that ought to have remitted to the ATO by the company).

The new director penalty regime applies to private companies (“Pty Ltd”) and public companies (“Ltd”), including not for profit companies limited by guarantee.  In addition, committee members of incorporated and unincorporated associations are also liable under the director penalty regime.  The new regime came into effect on 29 June 2012 and, taking a conservative approach, applies retrospectively.

Particularly for new directors it is important that during the first 30 days after their appointment they undertake rigorous due diligence of the company’s PAYG and superannuation records.  If the director is not satisfied with the outcome of those enquiries he or she ought to take independent advice immediately with a view to resigning.

For more information regarding the Personal Liability of Directors for Company Debts

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our Commercial Lawyers today.

Charity Shadow Directors and De Facto Directors

Directors or Management Committee Members are those who have responsibility for governance of a charity.

At the Christian Management Australia Annual Conference, Andrew Lind presented a paper on just who might be shadow directors and de-facto directors in charities.

That issue has particular relevance in light of recent charity law reforms, with the ACNC’s requirement for registered charities to declare responsible entities (or responsible persons); the duties they owe and the ACNC’s powers to remove them.

Who are shadow directors and de-facto directors?

Shadow directors and de-facto directors are people who are acting in the governance of the charity but who have not been formally appointed to a director/member of the board/management committee.

From a commercial perspective we can grasp a better understanding of de-facto and shadow directors by considering the following, pursuant to section 9 of the Corporations Act 2001 (Qld), the definition of a director also includes a person who is not validly elected as a director if the person:

1. 1. a) Acts in the position of a director (de-facto director); or
   2. b) The directors of the company act on instructions of the person’s instructions or wishes (shadow director).

This person will be subject to the same obligations and liabilities as a director would be exposed to.

The Australian Charities and Not for Profits Act 2001 (Cth) (“ACNC Act”) defines a director of a company (under the ACNC Act, a company is defined in the Act as a body corporate or any unincorporated association) as:

1. 1. a)  If a company is incorporated – a director of the company, or an individual who performs the duties of a director of the company; or
   2. b)  If the company is not incorporated – a member of management of the company, or an individual who performs the duties of such a member;

regardless of the name that is given to his or her position, or whether or not he or she is validly appointed.

In charity compliance it is important to consider the duties that a director or management member normally performs in their capacity in the position..

It is important to be mindful of this as the ACNC provides little or no guidance for not-for-profit organisations on the issue.

Please note that for the remainder of this article, any reference to director also refers to management member.

What are some examples of tasks that would qualify a person to be a de-facto or shadow director?

The law is clear that there is no single test for determining whether the duties a person carries classifies them as a de-facto or shadow director.

Recent case law from the commercial cases provides some tests for identifying when a person is acting as a director.

We refer to two cases notes below:

Case note 1: Grimaldi v Chameleon Mining NL

In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, a case which went before the Federal Court of Australia, a consultant was held to be an officer of a company for reasons such as

• • he played a significant role in directing the company’s corporate strategy;
  • he made decisions which affected the company’s finances;
  • he and led several negotiations;
  • in several instances, he was involved in the day to day running of the company; and
  • he was also reasonably perceived by outsiders to be a director or senior officer of the company.

In Grimaldi, the alleged director was not regarded by the board as a director, nor was he held out to be a director. He was only allowed to attend director board meetings on invitation by the board.

Further, he had no power to formally bind the company. In spite of this, the court held that he was clearly authorised on several occasions to perform functions that would lead a reasonable third party to believe the alleged director was acting as a director.

In their judgement, Justices Finn, Stone and Perram said the following:

“We accept that the Board Members seem only to have allowed Mr Grimaldi’s attendance at Board meetings by invitation and did not appear to regard him as director as such. However, while they did not hold him out as a director eo nomine [by that name], they clearly authorised him on occasion to perform functions such as would lead a reasonable third party dealing with him to believe he was acting as a director…”[1]

This makes it clear that a person can still be held to be a director if they satisfy other criteria. This is even if a person only attends board meetings by invitation of the board, does not have a right to vote at board meetings and is not perceived by members of that board meeting to be a director.

One of the tests (and certainly not the only test) applied in this judgement to determine whether a person is a shadow director or de-facto director, is whether a reasonable third party dealing with the person would believe the person to be a director of the company. Ask people, who they perceive to be directors of your Charity?

“Even though not authorised to be a director, Mr Grimaldi was either given, or had arrogated to himself with the acquiescence of at least the two executive directors… functions in the affairs of [the Company] which would properly be expected to be performed by a director of that corporation given its circumstances. Given the extent and the significance of those functions, he so acted in the position of a director to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director.”[2]

Here, the Court held that Mr Grimaldi was either given the ability to carry out tasks that would normally be expected of a director, or had claimed that ability with the passive inaction of other directors. Mr Grimaldi was therefore acting as a director.

Case note 2: Shafron v Australian Securities and Investments Commission

In Shafron v Australian Securities and Investments Commission [2012] HCA 18, a case which went before the High Court of Australia, a consultant was held to be an officer of a company, for reasons such as that he had advised the board on substantive matters, was one of three most senior executives, and had assisted in deriving proposals for separating its subsidiaries exposed to asbestos claims from rest of the group.

In the judgment, Chief Justice French, and Justices Gummow, Hayne, Crennan, Kiefel and Bell said:

“…the Court of Appeal did not decide that making a real contribution to a decision was sufficient to constitute participation in making that decision. Rather, the Court’s focus was upon what was necessary to constitute participation… Participation in any decision of a corporation does not make a person an “officer” – the decisions in which the person participates must have the significance for the business of the corporation…”[3]

Notably, the court held in Shafron that it is not the participation in any decision of a corporation that makes an alleged director an officer, but it is the decisions in which the person participates in. These decisions must have significance for the business of the company.

Conclusions and Practical Steps

In considering how broad “responsibility entity” is, registered charities need to be aware that a person need not be recognized as a director by their own formally appointed board.

As long as that person is performing significant functions that a reasonable outside person would perceive a director to perform, that person could be held to be liable as a director.

Charities will also need to consider whether their insurance which covers directors and officers also extends to these people.

Another important consideration would be for charities to see if there is any such person perceived by third parties to be a director and if such a person carries out tasks that are significant to the governance of the charity.

Clear role definition is important in the charity to differentiate such persons from directors. Such actions are imperative in ensuring charity compliance, and mitigating the risk that your charity is removed from the ACNC register due to a breach of the ACNC Governance Standards.

If you feel that you or your members of your company or charity may be at risk of falling under the definition of a director, specific legal advice will need to be taken in determining whether the ACNC Act has been breached. You may also need advice about implementing good governance principles and policies that allow for your members to be protected, or prevented as the case may be, from actively making director or management committee member decisions.

For more information regarding Shadow Directors and De-Facto Directors

If you require guidance for your not-for-profit organisation, please contact our client engagement team or call us on (07) 3252 0011 to book an appointment with one of our specialist NFP & Charity Lawyers today.