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General Duties as a Director

Directors hold a pivotal role in the governance of companies. In Australia, directors must act in the best interests of the company and stakeholders, as required by law.

The Corporations Act 2001 (Cth) (Corporation Act) governs most director duties in Australia. These duties promote good corporate governance, protect shareholders, and ensure directors act with integrity and accountability.

Failure to comply with these duties can result in significant legal consequences, including civil and criminal penalties.

This article explores the main responsibilities of directors in Australia, including their duties at law and significant court cases. Our experienced lawyers are on hand to provide advice if you need further information.

Key Takeaways

  • Directors have various duties under the Corporations Act.
  • Courts can lift or pierce the corporate veil in certain circumstances.
  • This means directors can be personally liable for breaches, including debts that the company cannot repay.
  • Companies and directors have continuous disclosure obligations.
  • Directors must uphold the interests of the company as a whole, rather than individual shareholders or other entities.
Farrah Motley holds degrees from the Queensland University of Technology in both law and accounting. Farrah is a registered Australian Legal Practitioner and has been pracising employment law for over a decade

General Duties of Directors

The relationship between the company and its directors is fiduciary in nature. This requires directors to act in the company’s best interests. According to the Corporations Act and other applicable laws, a director has the following obligations:

Duty to Act with Care and Diligence

Company directors must act with the same level of care and diligence as a reasonable person in similar situations. Section 180 of the Corporations Act mandates this duty.

We can assess this duty by considering the company’s circumstances and the director’s responsibilities.

Directors can demonstrate this under the ‘business judgement rule’. Section 180(2) of the Corporations Act outlines this rule. This rule says that directors make business decisions carefully and diligently, following common law and equity duties, if they:

  • make the decision in good faith and for a proper purpose
  • lack a material personal interest in the decision’s subject matter
  • inform themselves about the decision’s subject matter to a reasonable extent
  • rationally believe the decision is in the corporation’s best interests

Duty to Act in Good Faith and for a Proper Purpose

Directors must act honestly and in the company’s best interests when making decisions and carrying out their responsibilities. Section 181 of the Corporations Act mandates this duty.

Directors should focus on the company’s overall interests, not just those of individual shareholders or other groups.

This requires a careful balancing of various stakeholders’ interests, including shareholders, employees, creditors, and sometimes the broader community. While shareholders are a primary concern, the directors’ focus must remain on the company’s success and longevity.

Duty Not to Improperly Use Position

Directors must not improperly use their position to gain an advantage for themselves or someone else. Directors must also not use their position to cause harm to the company. Section 182 of the Corporations Act mandates this duty.

For example, directors must vote for what’s best for the company, not for their own personal gain.

This duty encompasses all decisions by the director, whether during board meetings or informal decision-making. This is an integral part of maintaining trust and integrity within the corporate governance framework.

Duty to Avoid Conflicts of Interest

Directors of a company must avoid any conflict of interest. They must disclose any material personal interest they have in company affairs to other directors. Section 191 of the Corporations Act mandates this duty.

The director needs to notify the other directors about their interests and how they connect to the company. You must record this information in the meeting minutes. This obligation does not apply to proprietary companies with only one director.

This rule has exceptions, such as when board members share a conflict of interest. An exception also applies where the interest involves a director’s pay.

A director’s violation of this disclosure duty does not invalidate any company actions or agreements.

Duty to Prevent Insolvent Trading

Directors are responsible for preventing a company from trading while insolvent or with a reasonable suspicion of insolvency. Section 588G of the Corporations Act imposes this duty on directors.

Directors can be personally responsible for certain debts if they were directors when the company took on the debt. Directors should actively monitor the company’s finances to prevent incurring debts that they cannot repay.

We have developed a guide for preventing insolvent trading.

Allison is an experienced top-tier qualified Australian paralegal

Other Duties

Directors must also:

  • make sure their company follows the financial record-keeping and reporting rules in the Corporations Act
  • exercise independent judgement when evaluating financial statements, ensuring that the information is consistent with their understanding of the company’s affairs
  • be responsible for maintaining the company’s registers, which include member registers, option registers, and the ASIC register.
  • make sure the company has a yearly meeting for shareholders, following the company’s rules
  • comply with the competition and consumer law, workplace health and safety, privacy law, environmental law and taxation

Some of these duties also apply to shadow directors.

Piercing the Corporate Veil

In corporate law, companies treat the business, directors and shareholders as separate and distinct legal entities. This separation allows companies to hold assets, and liabilities, and engage in contractual activities independent from each other.

In certain circumstances, the concept of “piercing the corporate veil” applies. This allows courts to disregard a company’s separate legal identity and hold its directors or owners personally liable.

The court’s decision to pierce the corporate veil depends on factors such as whether the company:

  • is a sham
  • used for fraudulent purposes
  • conceals transaction details
  • directors have acted in bad faith

The court will not be able to pierce the corporate veil if a director profits from a company’s actions or keeps poor records. These reasons are insufficient.

Where a court successfully pierces the corporate veil, a director or owner will face individual consequences.

Consequences of breaching director’s duties

Failure to fulfil directors’ duties has serious consequences, with both criminal and civil implications. Directors can also personally face liability.

These consequences aim to safeguard the interests of shareholders and other stakeholders. Additionally, they help maintain the integrity of corporate governance.

Breaking the law under the Corporations Act can lead to severe consequences. This includes fines of up to $1,110,000 or three times the money gained or lost from the breach. In addition, individuals may face up to 15 years in jail. In some cases, offenders may be subject to both penalties.

Shareholders, the company, or creditors can also file civil lawsuits to seek compensation or profits. Furthermore, authorities may bar directors from holding director roles.

Case Law Examples

Trustor AB v Smallbone and Others (No 2)

In this UK case, the court held it could “pierce the corporate veil”. They found the company was functioning as a device or façade to obscure facts and evade a person’s liability.

The court held both the company and its director personally liable. This case considered misleading representations and breaches of the company’s continuous disclosure obligations under the Corporations Act. These actions led to significant penalties and bans.

This case highlighted the importance of directors’ duties to ensure financial statements are accurate. The court held the directors liable for failing to notice significant errors in the financial reports. These actions led to significant penalties and bans.

In this case, the directors breached several duties. Breaches included not acting in good faith and using the director positions improperly. These actions and misusing company funds for personal gain led to significant penalties and bans.

Frequently Asked Questions

1. What are the primary legislative sources for directors' duties in Australia?

The primary legislative source is the Corporations Act 2001 (Cth). Plus, various regulations and judicial interpretations provide further guidance.

Yes, directors can face both civil and criminal penalties for breaching their duties. Courts do this by piercing the corporate veil. Consequences can include fines, banning from directorship, and in severe cases, imprisonment.

Directors have a number of defences available under the Corporations Act. These include the ‘business judgment rule’, ‘insolvency safe harbour’ and other legal rules.

Speak to one of our experienced lawyers if you need help with your director duties.

The Australian Securities and Investments Commission (ASIC) is the regulatory body responsible for enforcing compliance with the Corporations Act.

It can investigate breaches, commence legal action, and impose penalties on directors who fail to comply with their duties.

Directors can ensure compliance by:

  • staying informed about the company’s operations
  • seeking professional advice when necessary
  • attending all board meetings
  • regularly reviewing financial statements and other critical documents

If you need guidance on director duties, please reach out to our experienced lawyers.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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