Director’s Duties In A Company

The Corporations Act 2001 (Cth) (“the Act”) sets out the duties of Directors which largely mirror those which have been enshrined in the common law, and a breach of those duties may result in a director facing personal liability, civil penalty, or criminal conviction.

In addition to those duties, there are additional obligations imposed upon directors by other state and federal legislation, such as taxation laws, employment standards, work health and safety regulations, environmental protection measures, consumer protection strategies, Australian Stock Exchange Listing Rules for publicly listed companies and privacy protocols.

Any person considering being a director of a company should take his or her duties seriously.

The persons who are obliged to comply with their statutory duties are an officer of the company. Section 9 of the Corporations Act 2001 (Cth) defines “officer” to include a director, secretary or any other person who acts in the position of a director, regardless of the name that is given for their position. A person who acts in the position of a director without formally being recorded as the director can often be referred to or classified as a ‘shadow-director’.

What are a director’s civil duties?

Director’s general duties civil obligations include:

Care and diligence

Under Section 180 (1) an officer must exercise care and diligence in the discharge of their duties that a reasonable person in the same circumstances would. Under section 180(2) it is a defence if a person makes a “Business Judgment”, which does not breach their duty if they:

1. Make the judgment in good faith and for a proper purpose; and
2. Do not have a material personal interest in the subject matter of the judgment; and
3. Make an informed decision; and
4. Rationally believe that the judgement is in the best interest of the corporation.

Good faith, best interest and proper purpose

Under section 181 an officer of a company must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.

Not improperly use position

Under section 182 an officer of the company must not improperly use their position to:

1. Gain an advantage for themselves or someone else; or
2. Cause detriment to the company.

Not improperly use information

Under section 183, a person who obtains information because they are, or have been, an officer of the company or an employee must not improperly use that information to:

1. Gain an advantage for themselves or someone else; or
2. Cause detriment to the company.

What happens if I breach a directors duty?

If a person does not meet these requirements and the court is satisfied that the person has contravened one of the sections then the court can make a declaration of contravention pursuant to section 1317E of the Act, and:

1. Impose a fine of up to $200,000 (section 1317G of the Act); and
2. Disqualify a director from managing companies (section 206E of the Act).

Are there other remedies for breach of directors duties?

Director’s personal liability

The courts are also able to impose other remedies for breach of duty. Section 598(2) of the Act provides that where the court is satisfied that where a person is guilty of fraud, negligence, default, breach of trust, or breach of duty and a company has suffered or is likely to suffer loss or damage as a  result, then the court may on the application of either the Australian Securities and Investment Commission (“ASIC”), an Administrator, a Liquidator or a person nominated by ASIC, make an order pursuant to section 598(4) of the Act directing that person:

(a)    To pay money or transfer property to the company; and

(b)   To pay to the company the amount of the loss or damage.

Director’s Criminal Liability

Section 184 of the Act effectively states that an offence is committed if a person recklessly or dishonestly breaches section 181, 182 of 183 of the Act. Persons who commit the offences may be criminally liable and be fined amounts up to $220,000 and/or be imprisoned for up to 5 years.

Duty to prevent insolvent trading

Section 588G (1) of the Act imposes a duty on directors to prevent their companies from trading whilst insolvent. This applies if the person was a director of a company at the time when the company incurs the debt and is insolvent at that time, or otherwise becomes insolvent as a result of that transaction and the director had reasonable grounds to suspect the company was insolvent or would become insolvent as a result of them entering into that transaction.

Maintain adequate books and records

Section 286(1) of the Act imposes an obligation on the company directors to maintain adequate books and records that:

1. Correctly record and explain its transactions and financial position and performance;
2. Enable true and fair financial statements to be prepared and audited. This obligation extends to transactions undertaken by a company as a trustee.

Section 286(2) of the Act requires that the books and records of the company be maintained for a period of 7 years. Pursuant to sections 344 and 1317E of the Act, the penalties for breaching these duties:

(a)    The imposition of a fine of up to $200,000 (section 1317G of the Act);

(b)   Disqualification from managing companies (section 206C of the Act).

Section 588E (4) of the Act provides that where a company is being wound up and in the circumstances where the company has failed to maintain proper records, or retain them for the requisite period, then the company will be presumed to be insolvent for the period for which the records are not available. This can give rise to serious consequences where it has been alleged that a director has allowed a company to trade whilst insolvent.

Duties of Corporate Trustees

Corporate trustees are very common pursuant to section 197 of the Act, where a company is acting as or purporting to act as trustee and incurs a liability which it cannot meet, a director of that company can be held liable to discharge the whole or part of the liability if the company is not entitled to be fully indemnified against the liability out of the trust assets because of one or more of the following:

1. The company has breached its trust;
2. The company was acting outside the scope of its powers as trustee;
3. A term of the trust denying or limiting the companies rights to be indemnified against the liability.

What other obligations does the Corporations Act impose on Directors?

The act requires directors to:

1. Update the company database maintained by ASIC as required to ensure its accuracy in accordance with section 142, 146, 168, 205B and 205D of the Act;
2. Comply with all reasonable requirements and provide proper assistance  to validly appoint an external administrator pursuant to sections 4, 75 and 53OA of the Act;
3. Refrain from acting as a director of a company, whether formally appointed or not if excluded from doing so pursuant to sections 206B and 206C of the Act. This most relevantly excludes bankrupts or anyone that has entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966;
4. Disclose to other directors of their companies any potential material conflicts of interests that they may have in relation to the conduct of their duties as a director in accordance with section 191 – 195 of the Act.

For more information or advice regarding Business and Commercial Law, contact the experienced team at Rockliffs Lawyers today.