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The duty not to make improper use of a Director’s position

Director Duties – Part 2

You may recall that in our previous legal update we started a new series of articles on Director’s Duties. Now, in just our second article, who would have thought that we’d get to overseas insurance fraud this quickly?

How not to buy insurance

Last week the Australian Securities and Investments Commission (ASIC) commenced civil action against the directors of the Aboriginal Community Benefit Fund (ACBF).

The ACBF, now known as Youpla, was a funeral fund that provided insurance services primarily to indigenous Australians. According to ASIC, ACBF purchased insurance policies with a Vanuatu-based insurer, Crown Insurance. As it happened, Crown was controlled by two people who were also directors of ACBF.

In 2017, Crown doubled the premiums that it charged ACBF. This drained ACBF’s liquidity. ACBF then maintained the policies on an ongoing basis, affecting both the long-term viability of the fund and its ability to meet member claims (it’s noteworthy that, in separate proceedings, ACBF has already been found to have engaged in misleading and deceptive conduct by falsely claiming it was owned by the Aboriginal community).

Statutory Directors’ Duties

In isolation, overpaying for insurance may not amount to a breach of a director’s duties.

But the nexus between the payment and the directors’ interest in Crown gave rise to the alleged breach. ASIC’s claim is that the commercial arrangements with Crown were not in the interests of ACBF and were to the benefit of the directors involved. This then goes to the claimed breaches of sections 180, 181 and 182 of the Corporations Act.

This week we look at section 182 – the duty not to make improper use of a director’s position.

Improper Use of position

Under section 182, a director must not improperly use their position to gain an advantage for themselves (or someone else) or cause a detriment to the company. Similar restrictions apply to the use of information that a person receives as a director.

Breaches of this duty often arise in a near-insolvency scenario where a director knows that a company is in a parlous state and takes action to benefit themselves ahead of company creditors. What constitutes “improper” is context-sensitive and will depend on the specific responsibilities of the director in question. However, there is a long line of authority that suggests contracting with a related party will amount to an “advantage” even where that related party supplies goods or services for that payment.

Presumably, ASIC will happily point to these authorities when they try to show that the directors in question benefitted from the premiums paid to Crown.

Aintree Group Legal will be happy to discuss your commercial law needs and duties as a Director. Contact us today for assistance.