Australia: the director's duty to act in the best interests of the company and the meaning of corporate governance

Judgment has been given in The Bell Group Ltd. (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, something that the trial judge (Owen J.) thought might not happen. There were, in his words, "occasions on which I thought the task of completing this case might be sempiternal" (para. 9,761). It is not difficult to see why: litigation was protracted and Owen J's judgment falls just short of 10,000 paragraphs.

Owen J's judgment (delivered in the highest court in the State of Western Australia: the Supreme Court) is important because of the depth of analysis provided with regard to the director's duty to act in the best interests of the company and the operation of this duty where the company is insolvent or near insolvent. The decision also contains discussion of the concept of corporate governance and considers whether the director's duty to act in the best interests of the company should be regarded as a fiduciary duty. It also provides a good illustration of the manner in which corporate governance code principles are assimilated into the legal system. For these reasons, inter alia, the judgment will be of interest beyond Australia. Several extracts follow (but these invariably fail to do full justice to the decision).

With regard to the duty to act in the best interests of the company, Owen J. observed (paras 4,395 - 4,396) :

It is ... incorrect to read the phrases 'acting in the best interests of the company' and 'acting in the best interests of the shareholders' as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored".

In my view ... when a company is in an insolvency context, the directors must 'take into account' the interests of creditors. It does not necessarily follow from this that the interests of creditors are determinative. When directors are deciding what is in the best interests of the company one of the things that they must consider is the interests of creditors. But it would be going too far to state, as a general and all-embracing principle, that when a company is in straitened financial circumstances, the directors must act in the interests of creditors, or they must treat the creditors' interests as paramount, to the exclusion of other interests. To do so would come perilously close to substituting for the duty to act in the interests of the company, a duty to act in the interests of creditors".

With regard to corporate governance, Owen J. observed (extracts taken from paras. 4362 - 4,367):

There are no hard and fast rules that constitute 'corporate governance'. But there are some basic underlying principles that help to explain the guidelines and legal principles that have developed over time and now dictate how a director is expected to carry out her or his responsibilities.

One of the 'in' phrases in modern commercial life is corporate governance. At the risk of appearing thrasonical, it will be convenient to repeat some of what I said about corporate governance in The Failure of HIH Insurance, Report of the Royal Commission, (2003), Ch 6. At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It includes the practices by which that exercise and control of authority is in fact effected.

There are various organs that influence the decision-making processes of a corporation and which are involved in corporate governance. But primary governance responsibility lies with the board of directors. In formal terms the directors are appointed by, and are accountable to, the body of shareholders ... The power to manage the business of the company has been delegated to the directors. The delegation arises as part of, or by virtue of, the contract between the shareholders and the company represented by the Articles of association.

With the power to manage a business comes (necessarily) an element of control over the assets that are employed in the operation. When a corporation that conducts a business acquires assets, those assets belong to it. They do not belong to those (such as directors) who manage the corporation. Yet the individuals who manage the corporation have effective control over those assets and can affect the interests of the corporation by the way in which they use the assets. The individuals who manage the corporation are, in a real sense, stewards of those assets on behalf of the corporation and, in an indirect sense, other persons or entities (such as shareholders) who have a legitimate interest in the affairs of the corporation.

In my view the notion of stewardship is a key factor in understanding the role of directors. This is borne out by what was said in the Cadbury Report, produced by a specialist corporate committee in the United Kingdom during the early 1990s. It emphasised the trinity of 'openness, integrity and accountability' as prerequisites for sound financial reporting. In my view, those principles are not confined to financial reporting. They apply to corporate governance generally and, consequently, to the role of directors".