Only in the early twentieth century did the courts definitively establish that company directors were obliged to act in good faith, in the best interests of the company and for proper purposes. Today, the law concerning director’s responsibilities is both well-structured and well-developed. This article explains what the director’s responsibilities are, whom they owe these duties to, and the reasons why they exist.
1. Who is a Director?
The Corporations Act 2001 (Cth) (‘the Act’) defines a director as a person who is:
- Appointed to the position of a director; or
- Appointed to the position of an alternate director who is acting in that capacity.
The Act makes clear that being a director is a matter of substance. Accordingly, a person is a director if they act as such but do not hold that title.
Similarly, a director is a person who is not validly appointed as a director but who:
- Acts in the position of a director (‘de facto’ director); or
- According to whose wishes and instructions other directors are accustomed to acting (‘shadow director’).
2. Where Do The Director’s Responsibilities Come From?
The responsibilities of all directors have various sources in law. These sources include:
- Common law: the tort law of negligence
- Equity: most notably its fiduciary obligations; and
- Legislation: the Corporations Act 2001 (Cth)
Although the sources of law are different, there is considerable overlap between these areas of law. For example, the responsibility to act with care and diligence exists at common law and within the Corporations Act 2001 (Cth). All director’s responsibilities are just as important as each other. Breaching director’s duties can have serious consequences.
3. What are the Director’s Responsibilities?
Directors have four main obligations:
- Act with care and diligence;
- Act in good faith;
- Use their position for proper purposes; and
- Use any information gained as a director properly.
However, each of these individual responsibilities forms part of one, overarching obligation: loyalty and good faith.
Directors owe these obligations to the company as a whole. This concept includes both the interests of shareholders and the company.
Care and Diligence
Directors must use care and skill when performing their obligations to the company. The duty exists both at common law and under the Act.
Directors must exercise the same degree of care and skill that a reasonable person in the position of the director would have demonstrated in a similar situation. A court establishes the breach of this duty using this objective test.
A director fails if a reasonable person in the same situation and holding the same position would not have acted as they did.
Directors must always act in the best interests of the company and for a proper purpose. The duty originates in the fiduciary duties of equity and has been enshrined in the Corporations Act 2001 (Cth).
A key determinant of good faith is whether a director acts in the best interests of the company as a whole and not for the benefit of some individual shareholders.
Acting for a proper purpose means that when a director acts, their actions are for the benefit of the company. An action undertaken that is not in the interests of the company, is for an improper purpose.
Sometimes the one action can have a mixed purpose. In that situation, directors acted for both an improper and proper purpose. In these cases, the courts must decide if directors have breached their duty.
Duty to Avoid Conflict of Interest and Not to Profit From Their Position
A director’s personal interests can never conflict with those of the company. As a result, directors cannot make a private gain from their position. Directors also cannot use the information they acquire as directors for personal gain or to benefit a third party. This duty originates in the fiduciary duties of equity but is also required by statute.
Proper Use of Information
Directors cannot use the information they acquire through their position for personal gain or to benefit a third party. This duty originates in the fiduciary duties of equity but has also been made law via the Act.
Directors owe these duties to the company as a whole. This concept includes both the interests of shareholders and the company.
4. Why Do These Responsibilities Exist?
Directors have responsibilities because they occupy a position of trust. Absent appropriate safeguards, their position could be abused. If it were, the company and its members would be made vulnerable. The duties are designed to make directors accountable and to minimise the risk of inappropriate behaviour by maximising the detriment for such actions.
Of course, this is not an exhaustive list of a director’s responsibilities. For example, directors must prevent a company from trading when it is insolvent, or they may be personally liable for company debts incurred after the date of insolvency. They must also observe all federal, state and territory legislation concerning matters like employment, superannuation, workplace safety and taxation.
LegalVision has helped many founders. If you would like help or have any questions concerning director’s responsibilities, it would be our pleasure to assist you. Call LegalVision today on 1300 544 755.