As a director of a company, you have many rights and obligations under the law. This article looks at your duties and obligations as a director and steps you can take to ensure that you are protected from personal liability.
Where do these duties come from?
Your duties as a director are contained in three areas, namely:
- common law (that is, judge-made law);
- statute (that is, the Corporations Act 2001); and
- the company’s constitution.
What are these duties?
The main duties contained in common law and statute are as follows:
- Duty to act in good faith in the interests of the company as a whole: a director may breach this test where the director fails to consider the company’s considerations or assume that the company’s interests correspond with the director’s interests.
- Duty to the company: a director must not use its powers for an improper purpose or to the detriment of the company (for example, a director may not obtain an advantage for themselves).
- Duty to act with due care and diligence: for example, a director must be informed on a company’s financial affairs, keep proper financial records and may not reduce this duty by delegating responsibility to a committee or senior management.
- Duty to retain discretion: a director must not place themselves in a position where they are unable to make decisions in the best interests of the company; for example, entering into transactions where they would have to put the interests of a third party ahead of the company’s interests.
- Duty to avoid conflicts of interest: a director may not place themselves into situations where they have (or may have) a personal interest which conflicts (or may conflict) with the interests of the company. This duty is often subject to the provisions of the constitution and the full disclosure and approval of the directors.
- Duty not to make improper use of position and information: that is, a director is under an obligation not to disclose information which is confidential to the company and not to abuse corporate opportunities (for example, avoid situations where personal interests conflict, or may conflict with the company).
- Duty not to trade whilst insolvent: that is, not allowing a company which is insolvent to incur a debt or become insolvent by incurring that debt.
Your company’s constitution may contain additional duties, which you will be required to abide by.
What other laws should a director be aware of?
In addition to directors’ duties, a director of a company may be liable for breach of other laws, such as:
- Common law relating to theft and fraud;
- Securities laws: for example, insider trading;
- Insolvency law: for example, allowing the company to incur a debt whilst insolvent or the debt causes the company to become insolvent;
- Health and safety law: that is, ensuring the company is meeting its obligations under work, health and safety laws
- Environmental law: for the contravention of environmental legislation;
- Anti-trust law: for example, misleading or deceptive conduct;
- And other laws relating to, for example, continuing to act as a director whilst disqualified or destroying or falsifying documents.
What do you need to do to ensure compliance?
Whilst it may seem that compliance with the laws surrounding your duties and obligations as a director will be difficult, the best way to reduce the potential for breach or liability is if a director:
- is honest and careful in dealing with the company and on its behalf with others;
- understands his or her legal obligations and makes compliance with them a key part of business;
- keeps informed and up to date with the company’s financial position and performance;
- gets professional advice or more information when the director is in doubt or see the need for specialist input; and
- gives the interests of the company, its shareholders and creditors priority over other stakeholders.
Are there any ways to limit or restrict a director’s liability?
Many directors enter into a deed of indemnity with the company to protect against personal liability. Whilst each deed will be different, it is important to note that the company is unable to indemnify a director for some liabilities. These liabilities include:
- a liability to the company (for example, breach of duty);
- liabilities arising out of fraudulent, dishonest or criminal behaviour, or conduct involving lack of goodwill;
- a liability for certain specified penalty orders and compensation orders; and
- liabilities for legal costs relating to the above matters, where the director does not successfully defend the claim.
Directors’ and officers’ (D&O) insurance also indemnifies a director for liabilities incurred in the role of director. Whilst it offers similar protection to a deed of indemnity, it also offers protection where:
- the company is legally prohibited from indemnifying a director;
- the company is unable to indemnify a director because it is insolvent; or
- the company makes a decision not to indemnify a director.
Note that typical exclusions from D&O insurance relate to dishonesty, fraudulent behaviour, personal profiting, prior or pending litigation and claims arising from any acts occurring before a specific date.
In summary, acting as a director of a company comes with many duties and obligations. It is important to therefore understand these duties, act honestly in all business affairs, keep informed as to the business’ performance and place the interests of the company, creditors and shareholders as top priority. Ensure you have a deed of indemnity with the company and you understand what is covered under any D&O policy the company may have so that you understand how you may be protected from personal liability.
We are able to give you specific advice, tailored to your circumstances, on your duties and obligations as a director and ways in which your personal liability may be reduced to the maximum extent under the law.