A company director is afforded an important role and great power when governing a company on behalf of, and in the interest of, its shareholders and members.
As the saying goes, “With great power, comes great responsibility” and arising from the role and powers of a company director are a number of duties (some onerous) the director owes to the company when performing their role, that can have serious consequences if breached.
What duties are owed?
In Australia, company directors have several duties imposed on them at common law and by statute under the Corporations Act 2001 (Cth) (the “Corporations Act”).
A company’s constitution may also impose further duties and obligations on its director(s) but this is company specific.
Directors also owe fiduciary duties (that arise in equity) that are not expressly stipulated in legislation, including the fiduciary duty owed by the director to the company to act in good faith and in the interests of the company.
Common Law Duties
At common law, directors have a duty to:
a. Act with care and diligence;
b. Not misuse position or information;
c. Act in good faith and for a proper purpose;
d. Avoid conflicts of interest/duty;
e. Not fetter discretions (for example not contracting with third parties where that conduct would mean putting the company’s interests after that of the third party).
Statutory Duties
There is some overlap between the above common law duties and the duties imposed upon directors under the Corporations Act. The key statutory duties pursuant to the Corporations Act are as follows:
a. To act with a degree of care and diligence;
b. Not to improperly use position;
c. Not to improperly use information;
d. To act in good faith (and in the interest of the company) and for a proper purpose.
e. To prevent insolvent trading (For example, ensuring the company is able to pay its debts when they fall due and that incurring such debt will not cause the company to become insolvent).
Directors also have various duties relating to financial reporting that are outlined in Chapter 2M of the Corporations Act, including keeping written financial records.
Note: The above list is not exhaustive and there are other statutory duties imposed on directors pursuant to tax laws, the Australian Securities and Investment Commission Act 2001 (Cth) consumer laws, OHS laws and industry specific laws.
Who are they owed to?
Directors are first and foremost required to perform their role in a manner that benefits the company as a whole (being both the members and the shareholders of the company). Whilst in some instances other interests may be considered by a director (for example employees or creditors), the director must always act in consideration of what is best for the company.
As such, a director owes the directors’ duties to the company.
What happens if a director breaches their duties?
Directors who breach their duties can open themselves up to both civil and criminal liability, as well as commercial consequences such as loss of reputation.
A breach of the duties imposed by the Corporations Act can result in criminal sanctions (including in some cases a period of imprisonment), as well as civil penalties such as heavy fines imposed by the Australian Securities and Investments Commission (“ASIC”).
In some circumstances, where a director breaches their duties and consequently the company suffers loss, the director may be personally liable to compensate for that loss. Also, where a director breaches their duty and allows the company to trade whilst insolvent, the ‘corporate veil’ can be pierced and the director be held personally liable for the debts of the company incurred whilst insolvent.
A significant failure to comply with directors’ duties can also give the courts and/or ASIC the power to impose a period in which the director is prohibited from managing the (or any) company.
Due to the potentially significant consequences of a breach, it is of the upmost importance that if you are a director of an Australian company, you ensure you understand all of your powers and responsibilities and act in a manner consistent with these responsibilities to avoid breaching (even inadvertently) any of the duties imposed on you.
If you would like further information, are concerned you may have breached your directors’ duties, or you have been accused of doing so, we would be pleased to hear from you.
The Next Step
Glaser Lawyers offers all clients a complimentary and obligation free consultation.
We look forward to working with you to achieve your aims and protect your interests.
Please call 1300 000 770 or email admin@glaser.net.au to make your appointment.
