Sure, Directors have a lot of power within a company. But with great power, comes great responsibility. The Corporations Act 2001 (Cth) (the Act) imposes certain duties on directors and officers of a company, which when breached can result in the director being held personally liable. This article runs you through five need to know facts about your directors’ duties.
1. Duty to Act in Good Faith
Under section 180(1) of the Act, directors are required to conduct their duties:
- In good faith;
- In the company’s best interests; and
- For a proper purpose.
This duty requires a director to act honestly in discharging their duties, in the best interests of the company as a whole, and to exercise their powers for the purpose for which they were given.
2. Duty to Prevent Insolvent Trading
Directors also have a duty under section 588G of the Act to prevent insolvent trading. Insolvency is a complex area of company law. However, put simply, a company is considered insolvent if it is unable to pay all its debts as and when they fall due.
As a director, a duty to prevent insolvent trading requires constant awareness and understanding of the company’s financial position. It is important to note that a temporary lack of liquidity will not necessarily mean that a company is insolvent. Some specific considerations to keep in mind include:
- The company’s existing debts;
- Debts within the near future; and
- The company’s present and expected cash resources.
3. Duty to Act with Reasonable Care and Diligence
As well as owing a duty to act with care, skill and diligence under the general law, a director also owes a duty to act with reasonable care and diligence under section 180 of the Act. This duty requires exercising a degree of care and diligence that a reasonable person would exercise if they:
- Were a director of a company in the company’s circumstances; and
- Occupied the same office within the company with the same responsibilities as the director.
Other considerations in determining whether the director has acted with reasonable care and diligence include:
- The nature and size of the business;
- The distribution of responsibilities among the board;
- Whether the board has delegated its power; and
- Whether the director possessed any special skills or experience.
This duty is more easily understood by considering some circumstances where the director may potentially breach his or her duty by:
- Making a business judgement before they have appropriately informed themselves about the subject matter; or
- Failing to actively monitor the management of the company.
4. Duty to Avoid Conflicts of Interest
A director also has a duty of disclosure where their material personal interests conflict with the interests of the company (section 191 of the Act). In such circumstances, the director must give the other directors notice of this interest to avoid a conflict. Examples of a material personal interest include the director’s financial interests, and also extend to that of third parties such as a director’s family member.
5. Duty Not to Misuse Information or Position
Under sections 182 and 183, directors also have a duty not to improperly use their position or information obtained in their role to:
- Gain a personal advantage for themselves or third parties; or
- Cause detriment to the company.
Whether or not such action actually results in an advantage to the director, or a detriment to the company, is of little relevance. Importantly, this duty is one of the few that continues to exist even when the director ceases to be a director for the company.
As you can see, being the director of a company comes with great responsibility. If you think you might be breaching one of your duties as a director, or you think another director of your company might be breaching their duty, get in touch. LegalVision’s specialist corporate lawyers would be delighted to assist.
Questions? Let us know on 1300 544 755.