Directors’ duties in Australia are designed to promote good governance and ensure that directors act in the interests of the company – including putting the company’s interests ahead of their own. The Corporations Act 2001 (Cth) (the legislation that governs Australian businesses) states that: ‘The business of a company is to be managed by or under the direction of the directors’.
Becoming a company Director allows you to play a role in governing the growth and operation of the business, however, all directors have certain basic legal duties and responsibilities that they must abide by.
Four Basic Duties
The Corporations Act specifies four main duties
Care and diligence:
Directors have a duty to act with the degree of care and diligence that a reasonable person might be expected to show in the role. This includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent. This duty is not diminished by delegating responsibility. Directors are unable to hide behind ignorance of the company’s affairs, where that ignorance is of their own making.
For example, if a director received a balance sheet that did not balance, it might amount to a breach of his or her duty of care and diligence not to ask for it to be corrected.
Directors have a duty to act in good faith in the best interests of the company and for a proper purpose. This requires the Directors to avoid conflicts of interest, and to reveal and manage conflicts if they arise. Directors may breach this duty where they fail to give proper consideration to the company’s interests. This may occur where, for example, a director assumes the company’s interests correspond with their own interests, and do not consider its interests as a separate entity.
Proper use of position:
Directors have a duty not to improperly use their position to gain an advantage for themselves or someone else or to the detriment to the company. This might include obtaining an advantage for themselves, or defeating the voting power of existing shareholders by creating a new majority (as the power to issue shares must be exercised in the interests of the company as a whole). A proper purpose could be for the raising of capital or taking advantage of a genuine commercially favourable opportunity.
Proper use of information:
Directors must not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else or to the detriment to the company. A director may be in breach of this duty for engaging in conduct with the purpose and intention of obtaining a benefit for anyone or causing a detriment to the company, regardless of whether it actually occurs.
In addition to the Corporations Act, a corporation’s internal management rules can also provide guidance on directors’ duties by specifically stating obligations in the company constitution.
It is important to note that even a minor breach of directors duties can attract serious criminal and civil penalties against the directors. Dishonest behavior or trading while the company is insolvent can lead to maximum penalty of $200,000 or five years imprisonment. Other penalties include compensation to the corporation for damage resulting from the contravention or disqualification from managing corporations.
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