You’ve probably heard of this duty before, but what does it really mean? There are any aspects to the duty to act in the best interests of the company. As a rule of law, this duty applies to all company directors. Interestingly, it can also apply to certain employees. Remember, breaching this duty can have grave legal consequences. Read on to find out more.
What is the Duty to Act in the Best Interests of the Company?
The duty to act in the best interests of the company is a duty found under section 181(1)(a) of the Corporations Act 2001 (Cth). As a general statement, this duty means to conduct yourself in accordance with the companies needs and not against it. This can include the companies financial needs, reputation and relationships. Anyone that is under this best interests duty must act for the benefit of the company as a whole. The phrase ‘as a whole’ means the whole company, including its shareholders.
Who Must Act in the Best Interests of the Company?
Now, the Corporations Act 2001 (Cth) specifically states that this duty applies to directors of companies. However, this duty can also apply to company employees. Now, this does not mean all employees are under the duty. Only certain employees that meet a specific criteria will be under the duty to act in the best interests of the company. Accordingly, only employees deemed as an agents or officers of the company will be under this duty.
For Company Directors
The duty to act in the best interests of the company has a strict interpretation regarding company directors. Every company director is under the duty to act in the best interests of the company. This is because directors hold a high level of responsibility to govern and strategically direct their company or organisation. This high level of responsibility means that the director’s relationship with the company is a fiduciary relationship. As directors are in a fiduciary relationship with the company, they must abide by something called fiduciary duties. Accordingly, acting in the best interests of the company is an extremely important fiduciary duty. Therefore, directors owe this duty to the company as a whole, this includes the shareholders of the company as a collective.
For Employees
A range of employees will be required to act in the best interests of their employer. However, this duty does not apply to all employees, unlike company directors. Employees will only be subjected to this duty if they are found to be in a fiduciary relationship with their employer. Therefore, if their employment contract states that they hold fiduciary duties or that they must perform duties holding high levels of confidentially, such as financial management, then it is likely that this best interests duty will apply. Furthermore, if an employee has received consent to act as a director, or if they act as an agent or officer they will be subject to this duty.
How can the Best Interests Duty be breached?
The duty to act in the best interests of the company may be breached in a variety of ways. The most common ways directors and certain employees can breach this duty is by:
- A misuse or abuse their power, i.e. misusing confidential information, trade secrets,
- Conflicts between their own personal interest and the interests of the company,
- Taking advantage of their position to make secret profits, i.e. bribes,
- Misappropriating and misusing the company’s assets.
If a director conducts themselves in a way that is contrary to any one of these duties, they may be breaching their duty to act in the best interests of the company and thus their fiduciary duties. A breach of this duty may also mean that the directors have breached the provisions of the Corporations Act 2001 (Cth), which can have devastating consequences, as outlined below.
Consequences for not Acting in the Best Interests of the Company
There are many consequences for acting in a way that breaches this best interests duty. In most circumstances, i.e. if a director uses their position improperly or makes personal profits, a civil penalty will apply. However, if the conduct contains some dishonesty on the directors part, then possible criminal offences may also apply.
Key Takeaways
The best interests duty is one of the most important duties and obligations placed on directors. This duty ensures that the director of a company is making decisions and business judgements that will be of benefit to the company as a whole. Once a director begins to misuse funds, make secret profits and disclosure confidential information, a breach has occurred. If you suspect a breach of this duty has occurred, it is always best to speak to a business lawyer.
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