This is the final of a three-part series of articles looking at key aspects of the corporate governance framework under the Myanmar Companies Law 2017 – including looking at Australian case law on the application of directors duties. See part 1 here , and part 2 here .
1. D&O duties under MCL and examples from Australian law
We have already:
– mentioned that the key directors’ and officers’ duties in the MCL are based almost word-for-word on the duties in Australian companies law; and
– looked at the origin of directors’ duties in the form of fiduciary duties under English common law.
(See part 2 of this series).
The codified directors’ and officers’ duties are a new concept in Myanmar. To the best of our knowledge, at the time of writing they have not yet been considered or applied by the Myanmar courts. However, the key concepts behind the duties are based on a long history of English common law decisions, and the same version of codified duties has been used for some time in Australia. It is therefore both relevant and helpful to look at the application of the duties by reference to prior court decisions of the Australian courts. Court decisions on breaches of directors duties provide practical context on how those duties should apply in real life situations. This is usually a more useful reference than simply reading the duties as stated in the MCL.
It is important to note that cases about breaches of directors’ duties often arise in relation to small private companies with a controlling shareholder. Such shareholders sometimes treat the assets of the company as if they were the shareholder’s own assets or improperly cause the company to make decisions that benefit the controlling shareholder rather than the company as a whole.
In the following sections, we will take a closer look at the content and application of the two main directors duties, being the duty to act with care and diligence and the duty to act in good faith in the company’s best interest in sections 165 and 166 of the MCL.
Duty to act with care and diligence
Section 165(a) of the MCL states that:
A director or officer must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(i) were a director or officer of the company in the company’s circumstances; or
(ii) occupied the office held by, and had the same responsibilities within the company as, the director or officer.
The standard is an objective one. What would an ordinary person in the same circumstance and with the same responsibilities and knowledge be expected to have done?
‘Business judgement rule’
Section 165(b) of the MCL states that:
A director or other officer who, in the exercise of their powers and discharge of their duties, makes a decision to take, or not take, an action in relation to the operation of the company’s business, is taken to meet the requirements of sub-section (a), and any like legal or equitable duties….if they:
(i) make the decision in good faith for a proper purpose;
(ii) do not have a material personal interest in the subject matter of the decision;
(iii) inform themselves about the subject matter of the decision to the extent they reasonably believe to be appropriate; and
(iv) rationally believe that the decision is in the best interests of the company.
Section 165(b) provides a ‘defence’ in relation to an allegation of a breach of the duty to act with care and diligence. This type of defence was first developed under common law and is often referred to as the “business judgement rule”. Courts have traditionally been reluctant to review actual business decisions of directors, provided the decisions have been made in good faith and for a relevant purpose.
Section 165(b) largely preserves this defence, but adds some additional criteria that courts must look at – and that directors must therefore be able to meet – in relation to personal interest, obtaining information and acting in the company’s best interests.
Duty to act in good faith in the company’s best interest
Section 166(a) of the MCL states that:
Subject to this section, a director or officer must exercise their powers and discharge their duties:
(i) in good faith and in the best interest of the company; and
(ii) for a proper purpose.
Note that section 166(b) allows directors and officers of a wholly-owned subsidiary to act in the best interests of the holding company if permitted to do so by the company’s constitution. Section 166(c) allows the same for other subsidiaries (not wholly-owned) if agreed to by the other shareholders. Section 166(d) allows directors of a joint venture company to act in the interests of the shareholder who appointed them if permitted to so by the constitution.
Some examples of relevant Australian court decisions
The following are some summaries of example Australian court decisions on breaches of directors duties – in particular the duty to act with care and diligence and the duty to act in good faith in the company’s best interest. These decisions were made by reference to directors duties as set out in Australian companies legislation, on almost identical terms to the MCL.
In Australian Securities and Investments Commission (ASIC) v Healey (2011), the court held that seven defendants (who were the chief executive officer who was also a director, and six non-executive directors, including the non-executive chairperson) had contravened their statutory duty of care and diligence by approving the consolidated financial statements of the Centro Group (comprising several companies and investment trusts) for the financial year ending 30 June 2007 at board meetings attended by the defendant directors. The eighth defendant was the chief financial officer and he admitted contravening his statutory duty of care and diligence.
Centro had two main businesses. The first was the investment in and management of retail property. The second part of the business was funds management.
The financial statements for the financial year ending 30 June 2007 failed to disclose significant matters. In the case of the Centro Properties Group, the financial statements failed to disclose $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and also failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of the Centro Retail Group, the financial statements failed to disclose about $500 million of short-term liabilities that had been incorrectly classified as non-current liabilities. The information not disclosed was significant in relation to assessment of the risks facing the Centro Group and the information not disclosed was either well known to the directors or should have been well known to them.
According to the court, directors have “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”. This means that directors must carefully read and understand financial statements before they approve the financial statements in accordance with companies law and, if necessary, directors should make further inquiries if matters in the financial statements indicate the need for such inquiries. A director needs to consider whether the financial statements are consistent with the director’s knowledge of the company’s financial position. In this case, the directors were “intelligent and experienced men in the corporate world” and the omissions from the financial statements “were matters that could have been seen as apparent without difficulty upon a focusing by each director, and upon a careful and diligent consideration of the financial statements”.
Therefore, in order to fulfill this responsibility, directors need to have sufficient financial literacy and knowledge of the company’s financial position. Next, directors need to apply this financial literacy and knowledge to review the financial statements with the required degree of care and diligence.
The defendant directors had the necessary financial expertise and ASIC (the Australian equivalent of DICA) did not allege otherwise. In relation to knowledge of the company’s financial position, the court stated that the defendant directors knew or should have known that the company had substantial short-term liabilities which were required to be repaid during the financial year ending 30 June 2008, and the directors knew of the post balance date guarantees. However, the directors failed to review the financial statements with the required degree of care and diligence.
In Parker v Tucker (2010), the sole director of a company was held to have contravened his duty to act in good faith in the best interests of the company (and also held to have contravened his duty to act for a proper purpose, his duty to act with reasonable care and diligence and his duty not to make improper use of his position) by undertaking a scheme to divert the company’s assets and business to a new company he established. The assets and business were also transferred for inadequate consideration. The result was that the company was left with no assets and no income earning capacity but with significant liabilities and was placed into liquidation.
In Bailey v Mandala Private Hospital Pty Ltd (1987) a director, who was also controlling shareholder, of a family company which owned a house occupied by him and his de facto wife caused the company to issue shares to her with the object of ensuring that she would control the company and the house after his death. The court held that the issue of shares was made without concern for the interests of the company and in contravention of the director’s duty to act in good faith in the best interests of the company. A minority shareholder, a daughter, obtained a declaration from the court that the issue was invalid and should be set aside.
In Taxa Australia Pty Ltd v G Wang (2018), it was held to be a contravention of the duty to act in good faith in the best interests of the company (and also held to be a contravention of the duty to act with reasonable care and diligence and the duty to not make improper use of position) for a director of a company to arrange to have a bank account set up (which was controlled by the director’s de facto spouse) and to then arrange to have the company’s customers make payments for goods supplied by the company to that bank account instead of the company’s bank account.
In DTM Constructions Pty Ltd (t/as QA Developments) v Poole (2017), it was held to be a contravention of the duty to act in good faith in the best interests of the company (and also held to be a contravention of the duty to avoid a conflict of interest) for a director and officer of a building and construction company to divert the opportunity to acquire 21 blocks of land in a new housing estate from the company to a new company they incorporated for the purpose of acquiring the blocks of land.
In Brentwood Village Ltd (in liq) v Terrigal Grosvenor Lodge Pty Ltd (No 4) (2016), it was held to be a contravention of the duty to act in good faith in the best interests of the company (and also held to be a contravention of the duty to act for a proper purpose and the duty not to make improper use of position) for the director of a company to transfer a significant asset of the company for no consideration to a company controlled by the director’s children in circumstances where the company faced a major taxation liability and the director was motivated to divest the company of this significant asset.
Strategic Management Australia AFL Pty Ltd v Precision Sports & Entertainment Group Pty Ltd (2016)
– Strategic Management Australia AFL Pty Ltd represented Australian Football League (AFL) players in negotiations regarding their playing contracts with football clubs, endorsements and sponsorship opportunities. A director of the company (who was acting in the role of managing director) and an officer were held to have contravened their duty to act in good faith in the best interests of the company (and also held to have contravened their statutory duty of care and diligence) by failing to ensure that AFL players represented by the company had current agreements with the company thereby denying the company fees generated from negotiating player contracts with football clubs.
Other MCL duties
Finally, as a reminder, the MCL codifies several other duties besides the duty to act with care and diligence in section 165 and the duty to act in good faith in the company’s best interest in section 166. The following are the main additional duties as set out in the MCL:
167. Duty regarding use of position
A director or officer must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the company.
168. Duty regarding use of information
A director or officer must not improperly use information obtained by them as a director or officer to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the company.
169. Duty to comply with the Law and constitution
A director or officer must not act, or agree to the company acting, in a manner that contravenes this Law or the company’s constitution
170. Duty to avoid reckless trading
A director or officer must not cause or allow the business of the company to be carried on, or agree to the business being carried on, in a manner likely to create a substantial risk of serious loss to the company’s creditors.
171. Duty in relation to obligations
A director or officer must not agree to a company incurring an obligation unless that director or officer believes at the time on reasonable grounds that the company will be able to perform the obligation when required to do so.