As a matter of law, in so far as section 181 and the corresponding general law duty are

concerned, is it correct to say that the interests of the corporation include, inter alia, both the
interests of future members and, when the company is in financial trouble, the interests of
creditors? As a matter of policy, is it desirable that, for the purpose of these duties, the
interests of the corporation should include these stakeholders interests in these
circumstances, or should this duty focus only on protecting the interests of current members?

I INTRODUCTION1
A company's 'interests' should be determined by reference, not merely to the interests of its
shareholders as a whole in the circumstances, but to its constitutional objects and purpose and by
reference to its duties and responsibilities as an entity.
It should always be remembered that a director of a company owes no duty to any other
person than his company. In many circumstances he will owe the company a duty to ensure that its
duties are complied with, but those duties do not, by some vicarious process, become his own. In
fact, in some circumstances the fulfilment of some of these duties may be beyond his control.
The difficulties with holding companies to their objects began when, in the case of Foss v
Harbottle2 when the court gave credence to the argument that private corporations could not be
treated as 'ordinary corporations' were at the time and were more analogous to private partnerships.
'The Act of Incorporation was intended to be beneficial to the company, and promote the
undertaking, but not to extinguish any of the rights of the proprietors per se.'3 This appears to have
been taken to mean that shareholders can both have their cake and eat it; a company may have all of
the rights of an individual, but it has responsibilities only to those 'partners' who have invested.
This paper modestly attempts to indicate the need for the interests of the company to be
assessed less by reference to particular stakeholders and more by reference to admittedly often
illusory4 explicit registered company objects and, or where they are absent, implied objects.

II THE LAW OF BEST INTERESTS

This essay develops from the following base understanding of the law. The duty to act in
good faith in the best interests of the corporation is a single, and not a compound, duty as can be
seen from statutory construction5 and also from interpretations of the general law duty. The two

1All unexplained references to sections of legislation are references to the Corporations Act 2001 (Cth).
2 (1843) 2 Hare 461.
3 Ibid [486].
4 See generally, Cotman v Brougham [1918] AC 514, 521.
5181(1)(a)
requirements in the phrase build on each other. Both good faith and consideration of best interests
are required to fulfil the duty; breach is determined where no reasonable director could have held an
honest belief that they were acting in the best interests.6 Where no consideration to best interests
has been given an objective test of the reasonableness of a transaction may be undertaken,7 though
this is not settled in Australia.8
The best interests of the company are generally found among the interests of the
shareholders as a whole. This is trite law. What is contestable is whether the interests of the
shareholders are in fact the interests of the company or whether an assessment of their interests is
merely a form of heuristic employed to determine the interests of the company.
Also contested is whether the interests of future members are included in the interests of the
members as a whole, though this is becoming more settled in favour of the affirmative view. This
paper raises no objection to such a finding, though a summary of the law and policy will be
presented on the subject.
Creditors interests are also settled insofar as when a corporation is insolvent or nearing
insolvency the interests of creditors are given elevated consideration. The unsolved issues here are:
a) if the members of the company are the prime interest, why the interests of creditors are
considered as determining the interests of the company in any circumstances; b) when in time the
interests of creditors become relevant, and; c) how much weight the interest are to be given.

III ARE THE INTERESTS OF A COMPANY

LINKED TO ITS CONSTITUENTS
OR
TO OTHER STAKEHOLDERS?

A Shareholder primacy
That corporations have standing as persons is a public concession given in return for the
benefit that corporations can bring to society. Debate rages, though, over whether corporations are
for the benefit of members9 or for a wider public benefit.10 This is where the principle of
shareholder primacy, ostensibly supported by courts and the legislature, developed.

6Hutton v West Cork Railway Co , 671

7Charterbridge v Lloyds Bank Ltd [1970] Ch 62 (Charterbrige).
8Equiticorp Finance (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 147-148.
9Adolph A Berle, 'Corporate Powers as Powers in Trust' (1931) 44 Harvard Law Review 1049.
10 E Merrick Dodd, 'For Whom Are Corporate Managers Trustees?' (1932) 45 Harvard Law Review 1145 (1932).
 At the core of the theory is that the interests of shareholders, as company 'owners', deserve
consideration in corporate decision-making.11 The board should obtain democratic imprimatur
before making large decisions on behalf of the company, and if that is not possible, should act in the
interests of the shareholder group. There are several reasons why this theory is redundant, not only
in practice, but also for reasons of policy.
While courts attenuate to the interests of shareholders, they do not practically speaking
uphold them over all other interests. They certainly do not require directors to obtain resolutions
before carrying out management of the company.
Even shareholders have to use what powers they have in the 'interests of the company as a
whole'.12 In Greenhalgh v Arderne Cinemas Ltd13 Evershed MR left room for divergence between
the interests of the company as an autonomous entity and the interests of the individual hypothetical
member.14
Even when ignoring the tacit15 judicial preference for determining the interests of
corporations separately from the interests of members, there can be no good reason for establishing
shareholders as the only interested parties to a company's success. Companies are, even when
proprietary, publicly endorsed entities. They cannot establish legal personality except by public
registration. For this reason the public has an interest in the good conduct of a company. Of
course, the public should not have access to the company's private information it still has in
personam rights and freedoms however the concession of personhood, and the corollary limit of
liability, mean that the public expect the company to owe the same duties individuals owe and
higher, as companies cannot be regulated by morality.
In all, corporations operating on a public concession do so at the pleasure of the public.
They have a duty to act intra vires. This duty is what constitutes the corporation. Shareholder
interests often align with this duty, but very often they do not. The principal demonstration of this
is the not-for-profit body corporate.

11 Lynn A Stout, 'Bad and Not-so-Bad Arguments for Shareholder Primacy' (2002) 75 Southern California Law Review
1189.
12 Ngurli v McCann (1953) 90 CLR 425, 438.
13 [1951] Ch 286.
14 Ibid, 291.
15 Lynn A Stout, 'Bad and Not-so-Bad Arguments for Shareholder Primacy' (2002) 75 Southern California Law Review
1189, 1203.
1 Member Interests in the Case of Not-For-Profit Corporations

In Re Lee, Behrens & Co Ltd Eve J propounded the following in regard to determining
whether a payment by a company was gratuitous:
i) is the transaction reasonably incidental to the carrying on of the companys business;
ii) is it a bona fide transaction; and
iii) is it done for the benefit and to promote the prosperity of the company?

The third limb of this test is, it is submitted, too narrow a construction of what interests a company
can hold. Prosperity is generally conceived in terms of resource accumulation. It is doubtful that
His Honour intended the true meaning of the word to attain or move towards hopes or
ambitions.16 What this limb does is limit the concept of 'benefit' to financial advancement. A
director could not enforce repayment of a debt that was owed more in morality than in contract or
equity. This constrains companies to operating in an overtly legal sphere. They can take advantage
of the rights of adults while being able to hide from moral obligations behind the bulwark of
directors duties and ultra vires. Unsurprisingly, this judgment does certainly not accord with non-
profit principles it was written in the commercial context. This means, though, that Eve J must
have considered, tacitly, the articles of association and the general purpose of the company in
relating his judgment to the third limb of his test.
Not-for-profit companies are the perfect example of why a company's interests cannot be
brushed aside in favour of the interests of its members. Evidently, no profit is to be derived from
not-for-profits. While such corporations may not be subject to s 181,17 they are subject to a similar
duty with the addition of a business judgment rule which makes no material difference to
assessment of interests.18 The only interest the members have is the corporation's success at
fulfilling its object, be that to house people, to provide meaningful employment, to educate et
cetera.
This lack of financial interest makes for a stark distinction between not-for-profits and other
corporations. If the financial interests of members are silent how are the interests of the entity to be
determined?
The focus of not-for-profit directors on stakeholders and the object of the organisation

16 See the Latin sps meaning 'hope'. That being said, sps is itself derived from more ancient European and Middle
Eastern roots centring around eating to satisfaction and getting fat: The Indo-Aryan spaiye and the Sanskrit
(sph yate). Take my word for it I spent far too long looking into this. Not only this, but also the possible
implications of creditor being an anagram of director.
17 Corporations Act 2001 (Cth) s 111L.
18 Australian Charities and Not-for-profits Commission Regulation 2013 (Cth) r 45.25.
generally was described as 'divergent' from the focus of profitable companies.19 I would argue that
the opposite is true. The focus of for-profits on shareholder interests is no more than a heuristic to
narrow what the interests of the company in fact are, as their interests, more often than not, will
align. It does not mean, though, that this always leads to a correct conclusion.
One of the objects of the governance division of the Australian Charities and Not-for-profits
Commission Act is to ensure public confidence that registered entities pursue their purposes.20 This
is further evidence that the legislature regards corporate objects as fundamental to registration and
regulation.

B Future Members

Vaughan-Williams J was perhaps the first to take cognizance of the interests of future
members in his first instance decision in the litigation against Aron Salomon.21 He did so, obiter
dictum, saying that it would be fraudulent to sell shares to future members when a director had sold
at an inflated price property to the company.
The sole purpose of Salomon's company was to protect his business from liability. Although
it was found in the Court of Appeal that this purpose was illegitimate (an opinion on which this
paper reserves itself) it could not be said that Salomon was acting outside of the purposes of the
company or against its best interests. The company's interests were specified as being no more than
the boot-making business' and his own.
Absent fraud, the interests of future members have been held to be relevant insofar as they
are the hypothetical member at an indeterminate point in the future. This is, undoubtedly, a softener
to the strict 'current members' heuristic and allows directors freedom to make decisions that may
have a negative impact on the current shareholders. However, it seems redundant when compared
with a test solely focused on the welfare of the corporation as an entity in its own right.

C Creditors

It is not controversial to state that creditors have a right to their money. Among their class
are persons who have negotiated repayment on certain terms, have been awarded certain amounts
by the judgment of courts, have given trading credit as a term of engagement or who are owed

19 John Lessing et al, 'Corporate governance, schools and other not-for-profits' (21 September 2012) Bond University
Corporate Governance eJournal, 2.
20 Australian Charities and Not-for-profits Commission Act 2012 (Cth) s 45.5(1)(d).
21 Broderip v Salomon [1895] 2 Ch 323; Salomon v A Salomon & Co Ltd [1897] AC 22.
wages. There is a strong policy argument to suggest that these people deserve access to
consideration ahead of members of the company.
The director's duty to the company does not extend to individual shareholders,22 though they
act outside of their duties if they act oppressively23 and may owe direct duties to individuals in
cases where they have made positive recommendations24. That directors do not owe immediate
duties to any person but the company (unless they have established some relationship of a
particularly fiduciary character) has been found, inter alia, in cases of potential investors,25
creditors26 and employees27.
The duties to creditors are a case in point. Directors do not owe immediate duties to
creditors. They are responsible to ensure creditors receive fair treatment only through a vicarious
duty owed by the company. It is in the best interests of the company, in times of doubtful solvency,
to consider carefully the repayment of its creditors. This makes sense only if one accepts that the
object of a company cannot be to avoid obligations. With the enormous respect due to Mason J,
that the company might experience 'adverse circumstances'28 if creditors' interests are ignored,
while certainly true, does not reach deeply enough. Sometimes a company may even experience a
great windfall by shuffling repayment of dues to the end of the priority list.29
Creditors interests cannot be diminuted by member ratification.30 The interests of the
members as a whole do not, when the company is nearing insolvency, align with the interests of the
company. At such a time the company has a duty to ensure its debts can be repaid. Directors have
a duty to ensure the company takes note of its obligations.
Andrew Keay argues the repayment of creditors is a priority because shareholders no longer
have a stake in the company they have already lost that by virtue of the insolvency.31 However,
insolvent does not mean asset-less. If directors sought to fraudulently liquidate the company in
favour of the shareholders then the shareholders may even take a windfall. The reason this cannot

22 Percival v Wright [1902] 2 Ch 421.

23 Piercy v Mills [1920] 1 ChD 77; Hogg v Cramphorn Ltd [1967] Ch 254.
24 Cases of 'entire dependence' by the individual on the person acting as director for information and advice: Coleman
v Myers [1977] 2 NZLR 225; Brunninghausen v Galvanics (1999) 46 NSWLR 538.
25 ASIC v Maxwell [2006] NSWSC 1052.
26 Spies v R (2000) 201 CLR 603.
27 Parke v Daily News Ltd [1962] Ch 927.
28 Walker v Wimborne (1976) 137 CLR 1, 7.
29 For instance, the background to the Deed of Company Arrangement consented to by Obeid family creditors to the
detriment of City of Sydney Council which lead to: Re Streetscape Projects (Australia) Pty Limited (deed of
company arrangement) [2013] NSWSC 1289; Kate McClymont, 'Court battle lifts the lid on huge wealth of Obeid
clan', The Sydney Morning Herald, 4 April 2012, 9.
30 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722.
31 Andrew Keay, 'The Director's Duty to Take into Account the Interests of Company Creditors: When Is It Triggered?'
(2001) 25(2) University of Melbourne Law Review 315; cf Lynn A Stout, 'Bad and Not-so-Bad Arguments for
Shareholder Primacy' (2002) 75 Southern California Law Review 1189.
happen is not because the creditors have ownership over the company, but because the company
owes duties to those from whom it seeks to borrow. The company is interested, by virtue of its
registration, to act in furtherance of this duty and avoid the unconscionable result of enriching its
constituents at the expense of outsiders it has undertaken to repay.
It has been suggested that near-insolvent companies are a 'personified fund or estate upon
which both creditors and members may have claims.'32 Such a suggestion would make separate
personhood untenable for any company nearing insolvency. The business of such a company could
never be re-established as it risks the dissolution of the property of the 'estate'.
Intan Eow has proposed a more concrete test establishing the validity of entering
administration, called the 'value maximisation test', as a modification to s 436A.33 Although the
name suggests a finance-centric bent, and is intended to maximise financial value, it is apparent that
underlying the test is an assessment of the viability of continuing to pursue the objects of the
corporation.34 It is acknowledge in Eow's article that administration should not be used merely as a
'precursor to liquidation', but rather as a last-ditch effort to rescue the corporation.35 Again, the
directors, in considering administration, must look to the possibility of continuing the company's
objects.
Creditors may not always deserve protection by the company and certainly not by
fiduciaries of the company.36 Dichotomously, some creditors take an informed risk of non-return
(purchasers of debentures; banks); some creditors are forced by circumstance to extend credit
(those who give trade credit; judgment creditors; employees). As a result, it is strange to think of
all creditors as manifestations of the same creature.
That being said, all creditor debts are similar: an obligation to repay unlike the discretion
to pay dividends always exists.37 Corporations who borrow money do so undertaking to repay;
entities with judgment debts have a legal duty to make good that debt; servants are employed under
an express undertaking to pay wages. It would be unconscionable for any person to turn their mind
to enriching themselves to the exclusion of payment of their creditors. For a board, the mind of a
company, to direct that the corporation enrich constituents ahead of creditors would be to act

32 Intan Eow, 'The Door to Reorganisation: Strategic Behaviour or Abuse of Voluntary Administration? (2006) 30(2)
Melbourne University Law Review 300.

33 Ibid, 331.
34 Ibid, 333-336.
35 Ibid, 335; citing Cadwallader v Bajco (2001) 189 ALR 370, 418.
36 See generally Justice K M Hayne, 'Director's Duties and a Company's Creditors' (2014) 38 Melbourne University
Law Review 795.
37 Lynn A Stout, 'Bad and Not-so-Bad Arguments for Shareholder Primacy' (2002) 75 Southern California Law Review
1189.
outside the best interests of the company.
To use a Dickensian fiduciary analogy, it could not be said to be in the interests of an infant
ward to organise their entry into a pick-pocketing society even if they were able to keep all of the
profits and be perfectly safe from harm or prosecution. Similarly, in the world of the grimy white
collar, the conduct of a solicitor in ASIC v Somerville who advised phoenixing as a method of
avoiding debt was held to be beyond the pale of fiduciary obligation.38 Certain benefits cannot be
considered 'in the interests'. There is a presumption that all beneficiaries' interests exist within the
law and an assumption they exist within some f orm of morality. In the case of companies, that
morality must be accepted by those from whom the concession of personhood is granted the
public at large.
The interests of a corporation's creditors must be considered, for the purposes of s 181, not
only by reference to the value of the credit, but also to such factors as the type of undertaking
(including securities promised), the vulnerability of the creditor, and the prejudice that might occur
to the company if the debt is repaid. The interests of the company exist in a moral sphere. The
company is neither required to sacrifice itself but nor can it wilfully avoid its obligations.
However, this cannot be taken to mean that a novel duty is imported to directors for the
benefit of creditors. The only duty of the board is to cause the company to act in its own best
interests, which cannot include shirking its obligations. The distinction is important.

IV CONCLUSION

Determination of the interests of a corporation is a task sui generis. While it may be

reasonable for a director to balance the favours of stakeholders, especially shareholders, they should
be careful to inspect interests peculiar to the company and monitor for divergences. The courts
should always, in assessing whether the best interests have been maintained, make comment on the
interests particular to the organisation. A director, complying in good faith, should have had in
mind the purpose and implied public undertaking of the corporation even if this diverted from the
interests of members or creditors.
Foisting on directors the duty to act in the interests of any other than the company is to 'use
the law of fiduciary to fill gaps'.39 To conceive of the interests of a company as merely the interests

38 [2009] 77 NSWLR 110.

39 Production Resources Group LLC v NCT Group Inc [2004] 863 A 2d 772 (Delaware Court of Chancery),
790; in Hayne, above n 32, 814.
of its current (or even future) members is to misconstrue the true social function of the corporate
structure and cedes to its contemporary obstructionist function. It fails to consider the primary
purpose the substratum40 of a particular company (which may be, in the case of sole
director/sole shareholder companies, to protect the interests of an individual) in determining what
its best interests are.
Directors have an obligation to pursue the objects of a company. A company's objects
impliedly do not include terms repugnant to policy. Companies are, after all, reliant on a public
concession of personhood.
Widening of directorial responsibility has consistently been the focus of aims to strengthen
corporate social responsibility. While this is a valid aim, the focus has been too much on the value
of such policy and too little on consistency of law. The interests of the company already consist of
more than human interests; companies, in fact, should have interests of their own inherited from
registration.

40 Ashbury Carriage Company v Riche (1875) LR 7 HL 653; Paul J Omar, 'Powers, Purposes and Objects: The
Protracted Demise of the Ultra Vires Rule' (2004) 61(1) Bond Law Review 93
 BIBLIOGRAPHY

A Articles/Books/Reports

Anderson, H, 'Creditors' Rights of Recovery' (2006) 30(1) Melbourne University Law Review 1

Berle, A A, 'Corporate Powers as Powers in Trust' (1931) 44 Harvard Law Review 1049.

Chancellor, E, Devil Take the Hindmost: A History of Financial Speculation (Pan Books, London,
2000)

Dodd, E M, 'For Whom Are Corporate Managers Trustees?' (1932) 45 Harvard Law Review 1145

Eow, I, 'The Door to Reorganisation: Strategic Behaviour or Abuse of Voluntary Administration?

(2006) 30(2) Melbourne University Law Review 300

Griffith, JAG & H Street, Principles of Administrative Law (Pitman, London, 1967)

Hayne, K M, 'Directors' Duties and a Company's Creditors' (2014) 38(2) Melbourne University Law
Review 795

Henley, P, Were corporate tsunami donations made legally? (2005) 30 Alternative Law Journal
154

Keay, A, 'The Director's Duty to Take into Account the Interests of Company Creditors: When Is It
Triggered?' (2001) 25(2) University of Melbourne Law Review 315

Klein, E & J du Plessis, 'Corporate Donations, the Best Interest of the Company and the Proper
Purpose Doctrine' (2005) 28(1) University of New South Wales Law Journal 69

Langford, RT, Director's Duties: Principles and Application (The Federation Press, Sydney 2014)

Lessing, J, D Morrison & M Nicolae, 'Educational institutions, corporate governance and not-for-
profits ' (21 September 2012) Bond University Corporate Governance eJournal

Omar, PJ, Powers, Purposes and Objects: The Protracted Demise of the Ultra Vires Rule 2004 61(1)
Bond Law Review 93

Rajak, H 'Judical Control: Corporations and The Decline of Ultra Vires' (1995) 26 Cambrian Law
Review 9

Stout, L A, 'Bad and Not-so-Bad Arguments for Shareholder Primacy' (2002) 75 Southern
California Law Review 1189, 1203.
 B Cases
Broderip v Salomon [1895] 2 Ch 323
Cadwallader v Bajco (2001) 189 ALR 370
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62
Cotman v Brougham [1918] AC 514
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286
Re Lee, Behrens & Co Ltd [1932] 2 Ch 46
Re Smith & Fawcett Ltd [1942] Ch 304
Hutton v West Cork Railway Company [1883] 23 ChD 654
Ngurli Ltd v McCann (1953) 90 CLR 425
Walker v Wimborne (1976) 137 CLR 1

C Legislation

Australian Charities and Not-for-profits Commision Act 2012 (Cth)

Australian Charities and Not-for-profits Commission Regulation 2013 (Cth)
Companies Act 2006 (UK)
Corporations Act 2001 (Cth)
Limited Liability Act 1855 18 & 19 Vict c 133

D Other

Dermansky, P, 'Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With
Wording Similar to Section 172 of the Companies Act 2006 (UK)?' (Melbourne University,
Unpublished, 2009)

Kate McClymont, 'Court battle lifts the lid on huge wealth of Obeid clan', The Sydney Morning
Herald, 4 April 2012