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Ethics and Governance · Module 4: Governance in practice

Four Decisions That Broke a Board

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Chapters

  1. 0:00Collapse
  2. 0:20Conflict
  3. 1:01Purpose
  4. 1:32Care
  5. 2:13Insolvency
  6. 2:44Recap

In short

Directors of an Australian company owe statutory duties under the Corporations Act: disclose material personal interests and stay out of the vote (s 191, s 195), act in good faith for a proper purpose (s 181), read and understand the financial statements even when relying on others (s 180, s 189), and prevent insolvent trading (s 588G).

  • A conflict of interest must be disclosed, and in a public company the director usually cannot vote.
  • Reliance on management or advisers is only reasonable if the director still applies their own mind to the accounts.
  • Incurring debts while there are reasonable grounds to suspect insolvency breaches s 588G.

Transcript

0:00Collapse

Ironbark Minerals collapsed owing suppliers $180 million. The board said it acted in good faith, every time. But good faith was never the whole test. Four decisions, four duties.

0:20Conflict

Year one. The board approves a five-year haulage contract. The trucking firm belongs to a director, Mark Ellis. Mark tells the board about his interest, then stays and votes. Pause. He disclosed it. Is that enough? Disclosure under section 191 was right, but only half the job. Ironbark is a public company. Under section 195, an interested director must not be present for the discussion, or vote. In a proprietary company, he could have voted. Not here.

1:01Purpose

Year two. A takeover bid arrives. The board honestly thinks it's too low. So it issues new shares to a friendly investor, mainly to block the bid. The company didn't need the money. Section 181 has two limbs: good faith, and proper purpose. The power to issue shares exists to raise capital, not to decide who controls the company. Honest belief passes the first limb. It doesn't touch the second.

1:32Care

Year three. $90 million of debt due within months is shown in the accounts as long-term. Nobody on the board notices. They relied on the CFO and the auditors, and signed. Pause. Can directors simply rely on the experts? Reliance is presumed reasonable only if they've assessed the advice themselves. In the Centro case, the court said it plainly: directors must read and understand the financial statements. That's the duty of care and diligence in section 180.

2:13Insolvency

Year four. Cash runs out. There are clear signs Ironbark can't pay its debts. The board keeps trading, and orders millions more on supplier credit. That's insolvent trading under section 588G. And the business judgment rule? It's a shield for the duty of care only. Here the only routes are the section 588H defenses, or the safe harbour, which needs a real plan for a better outcome.

2:44Recap

Four decisions, four duties. Screenshot this one. Which one would you have caught? Tell us in the comments.

Try a question on this lesson

From the EstatePass Ethics and Governance bank. Answer it, then read the explanation.

Question 1 of 10/0 correct

Hakea Ltd, a public company, is considering a lease of premises owned by a trust of which director Sam is the sole beneficiary. Sam has already given notice of his interest at a directors' meeting. The other directors have passed no resolution about his participation, and ASIC has made no declaration. What does s 195 of the Corporations Act 2001 require when the lease is considered?

Sources

  • Corporations Act 2001 (Cth) s 180, 181, 189, 191, 195, 588G
  • ASIC v Healey (2011)

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Any companies and people in our lessons are fictional. EstatePass is not affiliated with CPA Australia; lessons and questions are our own, written from public standards and legislation.