Setting up a company can be a challenging process. Extensive amounts of time and resources are spent preparing the corporate structure of the company, including drafting the company constitution, shareholders agreement and other key legal documents. If you suspect, after having set up the company, that a fellow director has breached his or her duties as a director in the company, what can you do? Well, first of all, you will need to identify how this director has breached his or her duties (if at all) and in what ways.

Director’s duties 

There is a range of director’s duties set out under general law and the Corporations Act 2001. These duties are binding on all directors of proprietary companies that are limited by shares. If you suspect that a director has breached one of his or her duties, considering these general director’s duties is a good starting point.

Some general director’s duties include:

  • Acting with care and diligence. A breach of this duty involves a director’s engagement in risky financial transactions without any foreseeable benefit to the company.
  • Acting in good faith, in the best interests of the company and for a proper purpose. This duty is similar to the fiduciary duty that is imposed on directors in common law and statute law. Directors must avoid conflicts of interests and always disclose to the company when a potential conflict of interest may arise in a particular situation.
  • Not using the position of director improperly. A breach of this duty would be to use your position of power and influence to take advantage of another party in the company, or to act in the detriment of the company.
  • Not improperly using information that is gained during the course of carrying out duties as a director. Improper use would include gaining a personal advantage, or acting in a way that detriments the company or disadvantages other parties within the company.
  • Avoiding conflicts of interest. Directors have a fiduciary duty to the company.
  • Keeping records about the financial position of the company, and
  • Not trading while the company is insolvent.

 Has there been a breach?

The next question to consider is if any of these duties have been breached. Of course, at this stage, it is important to consider whether or not certain actions of the director have been authorised by:

  • The company’s constitution;
  • The company members in a general meeting; Or
  • By the board of directors.

For example, you may suspect that a director has breached his duties by taking out loans against the company. However, it may have been the case that the company gave the director authority to take out such loans through a resolution as per the shareholders agreement. In this situation, it may not be the case that the director has breached his duties, given that the company granted approval for his actions.

What are the consequences for a breach?

Establishing that a director has breached his duties can cause serious consequences to the director. Some consequences of breaching director’s duties include:

  • Criminal sanctions that could include imprisonment for anti-competitive conduct, acting in bad faith or dishonestly;
  • Civil sanctions, such as fines;
  • Disqualification from your position as director; And/Or;
  • Commercial consequences that include placing at risk your company’s reputation and assets.

Conclusion

If you suspect that a director in your company has breached his duties, you could speak with a lawyer to seek legal advice, review your company’s documents and gain an understanding of your options.

 

Lachlan McKnight

Next Steps

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