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Directors occupy a position of trust and responsibility in a company. As such, you cannot improperly use your position of power for personal gain. To protect against dishonesty and misconduct, directors must act in accordance with several legal duties. One of the key duties you must abide by is the duty to act in good faith and for proper purpose when discharging their responsibilities. This article sets out: 

  • what directors duties are;
  • what the proper purpose duty is; and 
  • what the potential consequences are of breaching this duty.

What Are Directors Duties?

As a director, you are responsible for many of the key decisions which greatly impact the company’s performance and its value. Consequently, you must always act for the benefit of the company and its shareholders. In turn, the shareholders of a company rely on you to act in their interest.

You are required to comply with a number of duties because directors hold a unique position of power and trust. These legal obligations are referred to as directors’ duties.

Some key directors duties include:

  • performing the role with care, diligence and skill;
  • preventing trading while insolvent; and
  • acting in good faith in the best interests of the company.

What Is the Proper Purpose Duty?

It is necessary for directors to yield a significant degree of power so that you can make decisions that benefit the company. You must not use your position to achieve any other improper purpose.

Reflecting this, one of the key duties directors must comply with is the requirement that you act in good faith and for a proper purpose. This duty exists in order to: 

  • ensure that you act in the best interests of the company; and 
  • prevent you from using your powers to secure a private gain or advantage. 

For example, a director who uses their position to access confidential client information to set up a competing business for personal gain would be a clear breach of the proper purpose duty. 

Consequences of Breaching the Proper Purpose Duty

There may be serious consequences if you breach a directors’ duty. This is necessary to deter you from violating any of your obligations as a director.

Some of the possible consequences include: 

  • hefty fines;
  • compensating the company or others for losses suffered;
  • accounting to the company for profits that you made;
  • criminal sanctions that could include imprisonment for serious breaches; and
  • disqualification from managing companies.

Managing Risk

There are several actions you can take to manage the risk of:

  • potentially breaching your directors’ duties; and
  • a liability arising from a breach of your directors’ duties.

These actions including:

  • disclosing potential conflicts of interest as and when they arise;
  • following thorough and correct record keeping processes;
  • ensuring that you have the proper authority to make certain decisions in accordance with the Corporations Act, the company’s constitution and shareholders agreement; and
  • enter into a director’s deed of access, insurance and indemnity with the company.

A director’s deed of access, insurance and indemnity is valuable because it enables you to: 

  • have proper access to the company’s books and records;
  • receive compensation for personal liabilities that arise in the defending a claim, such as legal fees arising from a claim; and 
  • access reimbursements for any liability arising from a claim through directors and officers insurance held by the company.

Key Takeaways

You should ensure that you understand your directors’ duties and that you are diligent in managing: 

  • your duties; and 
  • the risks of a liability arising from a breach.

One of the key duties which underlines all of the actions a director takes is that a director must use their position in good faith and for a proper purpose. The purpose for which a director is appointed into their position is to act in the best interests of the company. As such, directors must ensure they discharge their responsibilities in the best interests of the company, and not to secure a personal gain or advantage. If you would like assistance ensuring that you comply with your directors’ duties, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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