- Directors have a duty to not only ensure compliance with general and specific laws (Corporations Act 2001 (Cth)) applying to the company’s operation, but also to 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.
Directors’ Duties in Australia
Directors are responsible for the decisions they make in relation to the company, and have a responsibility to exercise due care and skill.
Directors duties are governed by:
- the common law (case law);
- statute, primarily the Corporations Act 2001 (Cth); and
- the company’s governing rules, being the Constitution, and the Shareholders
- Agreement if the company has one.
As a director, you must govern a company on behalf of the shareholders. While you are protected to an extent by limited liability, there are still certain duties that you must uphold in common law and under the Corporations Act and company constitution.
Who is a director?
The Corporations Act defines directors as:
- a person validly appointed as a director;
- a person who acts in the position of a director even if he/she has not been validly appointed; or
- a person who gives instructions to other individuals within the company are
- accustomed to following such instructions.
- Directors duties are designed to promote good governance and ensure that directors act in the interests of the company, including putting the company’s interests ahead of their own.
- There are four main duties for directors: Care and diligence, good faith, improper use of position, and improper use of information.
- If a director is found to have been negligent in their duty, or dishonest, significant penalties can be imposed on such director personally.
Main Duties of a Company Director
Duty to the company
Directors are not to use their powers for an improper purpose or to the detriment of the company. Directors must vote in the interests of the company and help the company take advantage of commercially favourable opportunities, and must not vote to give themselves a personal advantage, or vote to favour the majority over the minority.
Act in Good Faith
Directors are required to exercise their powers and duties in good faith in the best interests of the company and comply with the Corporations Act. This duty is similar to the fiduciary duties that are imposed on directors in common law and general legislation.
Care and Diligence
Directors must always be informed about the financial affairs of the company including whether the company is solvent.
Conflicts of Interest
Directors have a fiduciary duty to the company not to put the interests of the company ahead of their own. They must fully disclose any personal interest in a contract with the company and vote on behalf of the company, or abstain from voting. They cannot have a personal interest in a transaction with the company unless the interest is fully disclosed, and they do not vote on it.
Improper Use of Information and Position
Directors have a duty to avoid conflicts of interest and not make improper use of their position. They must not use their position with the purpose of gaining an advantage for themselves or someone else or otherwise causing detriment to the company. There is also a duty not to make improper use of information (s183 of the Corporations Act).
Trading whilst Insolvent
In addition to being informed about the financial position of the company, directors must ensure the company does not trade if insolvent (s588G, Corporations Act.) Moreover, the company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance.
Relying on information provided by others
The reliance on experts and employees when making decisions is important as a director. Directors can only make reasonable reliance, and whether or not the reliance is reasonable is assessed in accordance with s189 of the Corporations Act.
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.
Lodging 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 on a regular basis.
Consequences for Breaching Director’s Duties
There are a range of legal consequences if a director breaches their duties. The consequences depend on the type of breach committed and the severity of the breach. These may include:
- criminal sanctions and penalties of up to 5 years imprisonment for anti-competitive
- conduct, acting dishonestly or in bad faith;
- civil sanctions and penalties up to $220,000; and
- disqualification from managing corporations i.e. disqualification from being a director.
The company may also suffer loss and damages that result from loss of public confidence and reputational damage due to the breach of directors duties.
Frequently Asked Questions about Directors Duties
Q: How can a director act in good faith?
A: Directors must use business judgment, which includes informing themselves about the topic and making decisions in the best interests of the company. Directors must be informed about the issues being voted on. Failure to give proper consideration to the company’s interests and to act dishonestly or in bad faith could be improper behaviour.
Q: What is a Company Constitution?
A: A Constitution sets out how the company will be run, including procedures and outlines for the following:
- how directors can be appointed;
- when approval is required from the shareholders;
- the director’s remuneration and whether this need to be disclosed;
- how a director can be removed by the board; and
- general management, powers and delegation.
Q: Who is an officer of a corporation?
A: The Corporations Act imposes duties on directors as well as ‘officers of a corporation’. Under s 9 ‘officers of a corporation’ include company executives who hold senior positions below board level.
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