Who is a Director?

A director is a person who is appointed to manage the company’s business affairs on behalf of the shareholders. They are responsible for the decisions they make concerning the company and should make any such decisions diligently. There are certain directors’ duties which they must follow.

Generally, a company’s shareholders will appoint a person or persons to be a director. However, the law can sometimes consider some people to be directors even if shareholders have not validly appointed them. The decision will be based on the control and influence they have over the company’s affairs. Such people are known as shadow directors or de-facto directors

What Are Directors’ Duties?

Directors are subject to duties established by law to promote good governance of company affairs. Director duties ensure that directors act in the company’s best interests rather than their own. These duties apply to appointed directors, shadow and de-facto directors. Directors are also subject to these duties even if they employ an agent to act on their behalf. 

Directors’ duties are derived from:

  • the common law (case law);
  • statute, primarily the Corporations Act 2001 (Cth); and
  • the company’s governing rules, being the company constitution and shareholders agreement if the company has one.

Main Duties of a Company Director

Duty to the Company

Directors must not use their powers for an improper purpose or to the detriment of the company. Directors must vote in the company’s interests and help the company take advantage of commercially favourable opportunities. They must not vote to give themselves a personal advantage or vote to favour the majority over the minority. 

Duty to Act in Good Faith

Directors are required to exercise their powers and duties in good faith, in the company’s best interests. They must also comply with the Corporations Act. This means that they must act honestly and sincerely in their decisions. This duty is similar to the fiduciary duties that common law and general legislation impose on them. 

Duty to Act With Care and Diligence

Directors must maintain oversight over the company’s affairs, taking due care to make necessary inquiries to understand the business’ operations and activities fully. This extends to remaining informed about the company’s financial affairs, including whether the company is solvent. Directors should attend board meetings to maintain their oversight of company decisions. They must also review any financial reports to fully understand them and make necessary inquiries to gain that understanding. 

Duty to Manage Conflicts of Interest

Directors have a fiduciary duty to the company to put the company’s interests ahead of their own. They must fully disclose any personal interest in any contract with the company, vote on behalf of the company, or abstain from voting. They cannot have a personal interest in a transaction with the company unless they disclose the interest and they do not vote on it. 

Duty to Avoid Improper Use of Information and Position

Directors have a duty to avoid conflicts of interest and not improperly abuse their position. They must not use their position to gain an advantage for themselves or someone else or otherwise causing detriment to the company. Directors must also not improperly use any information that they gain because of their role as director, for their own benefit and or to the company’s detriment. 

Duty to Not Trade Whilst Insolvent

In addition to remaining informed about the company’s financial position, directors must ensure the company does not trade while insolvent. Moreover, the company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance.

Duty to Reasonably Rely on Information Provided by Others

Where necessary, directors should rely on information from experts and employees to ensure they understand the company’s affairs and make diligent decisions. This reliance is required to be reasonable; that is, a director should rely on information from a competent and reliable person who can be reasonably expected to give that information. 

Financial Reporting

Directors have a duty to ensure that their company keeps adequate records of financial information. Financial information includes records and books that outline all the transactions that the company is entering into, the company’s financial standing and any other related issues.

Where the company is being wound up, directors have a duty to:

  • report to the liquidator on the company’s affairs; and
  • assist the liquidator in discharging their duties. This may involve providing the liquidator with the company books and any records the director has in their possession.

Duty to Lodge Information With ASIC

Directors have a duty under the Corporations Act to lodge certain information with governmental bodies such as ASIC. It is a requirement that directors lodge formal financial reports and records to ASIC regularly.

Penalties for Not Fulfilling Directors’ Duties

Given the significance of these duties, shareholders need to appoint directors who demonstrate a good understanding and commitment to fulfilling their duties. Individuals should also only agree to be a director if they are willing and able to fulfil their duties. There are serious consequences for not doing so. 

If directors fail to fulfil their duties, they can be subject to penalties that include:

  • criminal sanctions and penalties of up to 15 years imprisonment for reckless and dishonest breach of directors’ duties; 
  • civil sanctions and penalties of up to either $1,050,000 or three times the benefit derived from the director’s misconduct; 
  • civil action brought by shareholders, the company or its creditors; or 
  • disqualification from being a director.

Key Takeaways

Directors have a duty to ensure compliance with general and specific laws, like the Corporations Act, and also to a company’s shareholders. Directors must exercise their powers and discharge their duties with the degree of care and diligence of a reasonable person in the same circumstances. There are both criminal and civil penalties for breaching the Corporations Act. Civil penalties include fines, compensation to a corporation for damage resulting from the contravention, or disqualification from managing corporations. If you have any questions about directors’ duties, please contact LegalVision’s corporate lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How can a director act in good faith?

Acting in good faith involves a director exercising their powers honestly and sincerely, in the company’s best interests. It also involves compliance with the Corporations Act. Also, directors must use business judgment, which includes informing themselves about the topic and making decisions in the best interests of the company.

What is a company constitution?

A constitution sets out how the company will be run, including procedures and outlines for the appointment and removal of directors, a director’s remuneration and whether this need to be disclosed, and general management, powers and delegation.

Are there penalties for noncompliance with directors duties?

There are serious consequences for breaching your director duties. Penalties include criminal sanctions and penalties of up to 15 years imprisonment for reckless and dishonest breach of directors’ duties, or civil sanctions and penalties of up to either $1,050,000 or three times the benefit derived from the director’s misconduct.

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