Directors’ Duties in Australia

The philosophy behind director’s duties is to promote good governance and to protect the company and its stakeholders.  In Australia,there are three (3) sources law that govern the obligations of Directors of unlisted Companies:

• statute Corporations Act 2001 (Cth)(Act) and subordinate regulations and rulings;
• common law (judge-made law) that interprets the Act and creates binding authority; and
• the company’s constitution.

The contents of this article will refer to various cases referencing the Statute, however the common law duties of a Director will be discussed in the context of the Statutory duties.

Statutory directors duties

Duty of due care and diligence

Section 180(1) of the Act provides that a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

• were a director or officer of a corporation in the corporation’s circumstance, ^[1] and
• occupied the office held by, and had the same responsibilities within the corporation as a director or officer. ^[2]

Directors must make independent and informed judgements.^[3]  In addition, they cannot claim ignorance of the company’s affairs, if the ignorance is of their own making.^[4]

Good faith and proper purpose:

Section 181(1) of the Act provides that a director or other officer of a corporation must exercise their powers and discharge their duties:

• in good faith in the best interests of the corporation, ^[5] and
• for a proper purpose.

Directors breach the duty of good faith when they subjectively omit to give proper consideration to the company’s interests such as the shareholders as a collective group.^[6]  In addition, there is an objective standard, whether an intelligent and honest person in the position of a director of the company could, on the whole, considering the relevant circumstances, have reasonably believed that the transaction(s) were for the benefit of the company.^[7]

A proper purpose is taking advantage of a genuine commercially favourable opportunity^[8] or raising capital for the company.^[9]  However, a proper purpose is not where directors would gain an advantage for themselves,^[10] or by creating a new majority to defeat voting power of minority shareholders.^[11]

Duty not to improperly use position

Section 182 of the Act provides that a director is in breach of this section when they engage in conduct with the intention and purpose of obtaining an advantage for anyone or causing a detriment to the corporation, regardless of  the outcome.^[12]

Duty not to use information obtained as a Director for their own benefit

Section 182 of the Act provides that a director  breach this section when they engage in conduct with the intention and purpose of obtaining an advantage for anyone or causing a detriment to the corporation regardless of whether the outcome results in benefit or detriment.^[13]

Duty to disclose material personal interests

Section 191 of the Act provides that a Director has a duty to notify other directors of material personal interest when conflict arises:

• A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise.

Duty to prevent insolvent trading

588G(1) and 588G(2) contain the provisions that encapsulate a Director’s duty to prevent insolvent trading by a company:

• a person is a director of a company at the time when the company incurs a debt; and
• the company is insolvent at that time, or becomes insolvent by incurring that debt; and
• at that time, there were reasonable grounds for suspecting that the company is insolvent, or would become insolvent;
• the person is aware at that time that there were such grounds for so suspecting, or
• a reasonable person in a like position in a company in the company’s circumstances would be so aware.

This duty is to protect the welfare of stakeholders in the company.^[14]  Defences are available.

Penalties

For civil liability, the Courts can order:

• a pecuniary penalty of up to $200,000 under section 1317G;
• disqualification from management under section 206C; and/or
• require payment of compensation under section 1317H.

For criminal liability, if a director or an officer is found guilty of failing to exercise their powers and discharge their duties in good faith and in the best interests of the corporation, or for a proper purpose, may be fined up to $200,000 and imprisonment for up to five (5) years under Schedule 3.

Further information

Related articles by Dundas Lawyers

Company money to be used for company purposes
Shadow directors and de facto directors

Further information

For further information on how Dundas Lawyers can advise you on your obligations as a Director of a Company, please contact: