Shareholders own a company, while directors manage the company. The law imposes duties on directors to protect shareholders, including the duty to not improperly use their position. Directors who breach these duties may be held personally liable and incur fines up to $200,000. This article outlines what the duty not to misuse a position is, explaining each element of the duty and what happens if a director breaches the duty.
Duty Not to Improperly Use Their Position
A director must not improperly use their position to either gain an advantage or to cause detriment to the company. The law separates the duty into two parts:
- the duty not to misuse their position; and
- the duty not to misuse information.
What Does ‘Gain an Advantage or Cause Detriment’ Mean?
‘To cause detriment’ can range from causing financial loss for the company to damaging the company’s reputation. Directors breach their duty if the advantage they gain is for themselves or a third party. Who gains the advantage is not important, so long as it has caused a detriment to the company.
Directors also breach their duty if the purpose of their action was to gain an advantage or cause a detriment, even if the detriment did not happen. In practice, however, it is less likely for the company or shareholders to pursue the director if there was no actual detriment.
What Does it Mean to Use a Position Improperly?
Whether directors have improperly used their position depends on the circumstances of the situation. When assessing whether someone has misused their position, the court considers what a person with the same duties and responsibilities as the director in question would do.
For example, in QLS Superannuation Pty Ltd v Parker, the director of Company A had a disclosed interest in Company B. When Company A resolved to lend money to Company B, the director did not check Company B’s repayment history. The court deemed that a director in this same position would have reviewed Company B’s repayment history and therefore held that the director improperly used his position.
What Does it Mean to Use Information Improperly?
This duty applies to all information that a director gains because of their position. Directors naturally gain access to a significant amount of confidential information, including:
- business records;
- development strategies; and
- plans for new business partnerships.
A director’s state of mind is irrelevant when determining whether they breached the duty. In Grove v Flavel, a director of a company was aware that the company may be insolvent and chose to repay some creditors in priority to others. The court held that he had breached his duty without assessing the director’s state of mind.
Directors will not have breached their duty if the company consents to the behaviour. For example, if a director resigns from the company to set up another business and takes a client list, they have not breached the duty as the company consented to it. It is vital for the company to grant written consent for the director’s record.
What if a Director Misuses Their Position?
Directors will face consequences for breaching their duty. These may include:
- being fined up to $200,000; or
- paying the company to compensate for any damages suffered as a result of the breach.
Directors who cause a detriment to a company by improperly using their position or information may have breached their director duties, whether they intended to or not. Directors, especially those who have interests in other companies or who have access to key information, should be vigilant and ensure that they remain transparent if they wish to avoid breaches.
If you have any questions, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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