As a director, you legally owe various duties to your company. Therefore, you must understand what is required and what kind of conduct can breach them. If you breach your director duties, you risk severe legal consequences, including losing your position in the company in some cases. This article will delve into four fundamental director duties and the conduct that typically breaches them.
What Are Director Duties?
Company directors are subject to prescribed behaviours and rules when performing their duties.
There are many duties that directors owe to a company, but some of the fundamental duties include the duty to:
- perform the role with care, diligence and skill;
- act in good faith and in the best interests of the company;
- not improperly use the position to gain a personal advantage; and
- not improperly use information.
Below, we explore these duties and their breaches in further detail. However, it is essential to note that many of these duties also extend to “officers” of a company other than a director.
What is My Duty of Care, Diligence and Skill?
Your duty of care, diligence and skill requires an objective assessment of what a reasonable person would do in the same circumstances and in the same position. Of course, determining what a “reasonable” person would do depends on the factual circumstances. Furthermore, the court will assess this on a case-by-case basis.
A court will consider a director’s conduct in all circumstances at the time and without the benefit of hindsight. When assessing the company’s circumstances, a court may consider factors like the:
- type of company;
- provisions of its constitution;
- size and nature of the company’s business;
- composition of the board; or
- experience and skill of the particular director.
When performing their duties, directors must properly consider the company’s interests. Notwithstanding the sincerity of a director’s intentions, conduct that is so unreasonable that no one in their position giving adequate consideration to the company’s interests could have arrived at it is a breach of this duty.
How Can I Breach My Duty of Care, Diligence and Skill?
Some actions by directors that are in breach of the duty of care, diligence and skill include:
- not possessing a general understanding or keeping themselves informed of the company’s business operations;
- not being familiar with the company’s financial position;
- authorising financial statements that are misleading or false;
- engaging in unreasonably risky trade practices;
- failing to inform board members of relevant matters;
- engaging in dishonest, fraudulent or illegal actions;
- ignoring corporate business misconduct, like failing to make proper enquiries where other company officers have committed wrongdoing; and
- not taking reasonable steps to guide and monitor the management of the company.
It is also standard practice and permitted for a director to delegate and entrust other persons with performing specific tasks or providing advice. However, directors should be cautious when delegating those tasks. A director may be found in breach of the duty of care, diligence and skill when tasks are allocated to a person where it is unreasonable to rely on that person’s information, judgment and or advice.
Continue reading this article below the formDuty to Exercise Powers and Duties in Good Faith and for a Proper Purpose
This duty is a two-fold obligation which directors owe to the company as a whole and not to any individual shareholder.
Firstly, a director must act ‘in good faith’. That is to say, they must act honestly or sincerely and without an intention to deceive. A decision is made in good faith where a director genuinely believes it is for the company’s benefit and not merely for their self-interest. However, this does not necessarily mean that a decision cannot also benefit a director.
This duty relates to a director’s state of mind when they make a particular decision. The state of mind or belief must be reasonable, and the director must honestly believe it to be in the company’s best interest. Where there are competing interests, a director must balance them fairly.
Secondly, a director must perform their duties properly. In determining whether or not a director has used their power for an improper purpose, courts follow a two-step step test, which involves:
- determining the nature and scope of the director’s power; and
- examining the definite purpose for which it was exercised and concluding whether that purpose was proper or not.
This is an objective test, which displaces the director’s state of mind. More than mere honesty is needed to meet the proper purpose requirements.
How Can I Breach My Duty to Exercise Powers and Duties in Good Faith and for a Proper Purpose?
Some actions by directors that may breach the duty to act in good faith and for a proper purpose include where a director:
- failed to disclose wrongdoing relevant to the decision;
- enters an imprudent loan to gain a success fee;
- resolved to issue and allot new shares due the purpose of defeating a control block of shareholders;
- a director using their position to gain an advantage for themselves or someone else;
- a director using their position to cause detriment to the company; and
- when a director is reckless or intentionally dishonest when exercising their powers.
Duty to Not Improperly Use Their Position
Whether a director (or secretary or other officer) has improperly used their position will depend on the specific circumstances of the situation. When assessing whether someone breaches this provision, a court will consider what a reasonable person in the same position, with the same knowledge and authority, would do in the circumstances. The test is an objective standard of impropriety.
This means that a person may act improperly even without any intention of acting dishonestly or against the company’s best interests. This duty arises not just when a conflict of interest exists but from the pursuit of personal interest.
Directors also breach their duty if the purpose of their action is to gain an advantage or cause a detriment, even if the detriment did not happen. In practice, it is less likely for the company or shareholders to pursue the director if there is no actual detriment. “Detriment” can range from financial loss to reputational loss to the company. Again, it is not relevant who gains the advantage.
How Can I Breach My Duty to Not Improperly Use Position?
Some examples where courts have found that a director breached this duty include where:
- they sold, gave away or used company property for the advantage of themselves or others;
- they entered into a non-arms-length transaction with the company;
- they used the company to pay their personal bills; and
- the company entered into agreements with other companies to which a director provided consultancy services.
Duty to Not Improperly Use Information
This duty applies to all information a director obtains access to due to their position. By virtue of their position, directors can gain access to a significant amount of vital and confidential company information. This can include:
- business records;
- financial records;
- development strategies; and
- plans for future expansion or partnerships.
When determining whether a director (or other officer) has breached this duty, a court will not consider their subjective state of mind.
However, a court will likely not find that a director has breached their duty where the company consents to the behaviour. For example, suppose a director resigns from the company to set up another business and takes a client list with the company’s consent. In that case, they will not breach their duty to not improperly use the information. In such cases, it is helpful for the company to grant written consent for the director’s record.
How Can I Breach My Duty Not to Use Information Improperly
Some actions by directors that may breach the duty not to use information improperly include:
- using a company’s client information to solicit clients for another business without the company’s consent;
- copying the company’s documents, contracts, marketing and administrative documents for use in another business without the company’s consent;
- using company information to purchase shares in a business in which the company has also expressed an interest; and
- misusing a company’s confidential information.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
There are numerous duties that directors must comply with. Therefore, directors need to understand the scope of those duties and what type of conduct (or lack of) that could potentially breach those duties.
Some of the main duties you must be aware of as a director include your duty:
- of care, diligence and skill;
- to exercise powers and duties in good faith and for a proper purpose;
- to not improperly use your position; and
- to properly use information.
If you need help understanding the scope of your responsibilities and duties as a director, contact our experienced dispute lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Directors must act honestly or sincerely and without an intention to deceive. A decision is made in good faith where a director genuinely believes it is for the company’s benefit and not merely for their self-interest.
Some ways a director might breach their duty to act in good faith include failing to disclose wrongdoing relevant to the decision, entering an imprudent loan to gain a success fee, resolving to issue and allot new shares due the purpose of defeating a control block of shareholders or a director using their position to gain an advantage for themselves or someone else. If you need assistance further understanding your responsibilities as a director, you should seek legal advice.
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