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Directors’ duties

By Anthony Satti, Practice Group Leader, Legal Vision

  • Directors are generally responsible for the management of the company.
  • Their powers and decision-making are mainly governed by the company’s constitution, shareholders agreements and duties at law.
  • This article identifies the key director duties and penalties for breach of duties.

How are directors appointed?

A public company must have at least three directors, two of whom ordinarily reside in Australia. A proprietary company must have at least one director, one of which usually resides in Australia. A director can only be appointed if they are above 18 years of age.

Usually, a director is appointed by a company’s shareholders at a shareholder general meeting. A director may also be appointed by the board of directors at a board meeting.

However, sometimes the law can deem people to be directors even if they have not been formally or validly appointed. This will largely be based on the control and influence they have over the company’s affairs. Such people are known as shadow directors or de-facto directors.

What are directors’ duties?

Directors have legal duties to promote good governance of company affairs and to ensure that they act in the company’s best interests rather than their own. A company’s constitution and shareholders agreement may impose additional duties on a director.

Directors’ duties at law are derived from:

Set out below are the key duties of a director at common law and under the Corporations Act.

Main duties of a company director

  1. Duty to act for a proper purpose

Directors must not use their powers for an improper purpose. They must vote in the company’s interests and must not vote to give themselves a personal advantage.

For example, directors usually have the power to issue shares under the company’s constitution. A proper purpose would be to raise capital for the company. An improper purpose is issuing shares that aim to substantially dilute the power of one or more shareholders.

  1. Duty to act in good faith

Directors must act in good faith, that is, in the company’s best interests. This means that a director must genuinely believe they are acting in the company’s best interests. Also, they must act in a way that an honest and reasonable director would. Practically, a director must make all decisions honestly, responsibly, and ethically.

  1. Duty to act with care and diligence

A director must exercise their powers and discharge their duties with the same care and diligence that a reasonable person would exercise if they:

  • were a director of a company in the same circumstances
  • occupied the same office and had the same responsibilities within the company as the director.

Practically, this means that directors must be able to:

  • take reasonable steps to guide and monitor the company’s management. This includes being familiar with the business and how it is run, adequately overseeing or auditing management, reviewing financial reports, and attending all board meetings (unless exceptional circumstances exist);
  • read, understand, and focus on the content of any report
  • consider whether statements are consistent with their knowledge of the company’s profits
  • make any enquiries as necessary
  • adequately perform their tasks.

The ‘Business Judgment Rule’ is an available defence if a director breaches these duties. A business judgment relates to decisions made (ie, to act or not to act) during the company’s business operations. A director who makes a business judgment satisfies their duty of care and diligence concerning that judgment or decision if they:

  • make the judgment in good faith for a proper purpose
  • do not have a material personal interest in the subject matter of the judgment
  • inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate
  • rationally believe that the judgment is in the best interests of the company.
  1. Duty to avoid conflicts of interest

Here, a director must not enter into an engagement where they have a personal interest that conflicts with their duties to the company or places their personal interests ahead of the company.

Directors must notify the company of any ‘material personal interests’ in transactions that relate to the company’s affairs. Depending on the duty’s source, the director may not be able to enter or pursue the transaction without shareholder consent. Such interests may be:

  • personal
  • of some substance or value
  • have a realistic ability to influence the director’s decisions in administering the company’s affairs and voting.

A director must also not appropriate, or divert to another person, a business opportunity that the company is considering, pursuing or could reasonably be expected to have an interest in.

Moreover, a director must not improperly use their position to gain an advantage for themselves, for someone else, or otherwise cause detriment to the company. Information that directors have access to must not be improperly used for their own benefit or to the company’s detriment.

  1. Duty to prevent insolvent trading

Directors must ensure the company does not trade while insolvent. A director breaches their duty when:

  1. the person was a director at the time of the relevant debt
  2. the company is or becomes insolvent because of that debt
  3. at the time of the debt, a reasonable person would have grounds to believe that the company is, or would, become insolvent or aware that it is likely
  4. the person fails to prevent the debt.

There are certain exceptions to a breach of this duty. For example, if the director reasonably believes that the company is solvent or took steps to prevent the debt from incurring. There is also a “safe harbour” available where the directors develop one or more courses of action that are likely to lead to a better outcome for the company than appointing an administrator or liquidator. The safe harbour incentivises directors to take reasonable steps to restructure their companies or trade their way out of difficulty, rather than immediately ceasing to trade.

  1. Administrative duties

Directors have administrative duties in managing a company, including:

  • ensuring that their company keeps adequate records of financial information, minutes, resolutions, books and accounts
  • maintaining the company’s registers (members registers, options registers, etc.)
  • maintaining the company’s ASIC register. For example, lodging Form 484s for changes to the company’s members, address, directors, etc.
  • ensuring the company is holding a shareholder annual general meeting
  • ensuring that any meeting is being called and held in accordance with the terms of the constitution or Shareholders Agreement

Penalties for not fulfilling directors’ duties

Breaching directors’ duties is not to be taken lightly. There are serious consequences for breaching them, which could include:

  • criminal sanctions under the Corporations Act. These include a fine up to the greater of $999,000 or three times the benefit derived or detriment avoided by the breach, or imprisonment up to 15 years, or both
  • civil penalties, under the Corporations Act of up to $1,110,000, or three times the benefit derived or detriment avoided by the breach
  • a civil action brought by shareholders, the company, or its creditors, seeking remedies of compensation or an account of profits or
  • disqualification from directorship.

Key takeaways

Directors have multiple duties at law which ensure they are acting ethically, with care and skill, and in the company’s best interests.  Directors need to be always mindful of these duties when managing their company. Otherwise, they face potentially grave criminal and civil penalties.

.Frequently asked questions

What duties do directors have?

The main duties of a director in Australia, set out by common law and the Corporations Act, are the duties to act for a proper purpose, with care and diligence, and in good faith. Directors must also avoid conflicts of interest in transactions, and prevent insolvent trading.

What happens if a director breaches their duties?

There are several potential penalties for a breach of directorial duties. The Corporations Act outlines criminal sanctions, which can range from fines to up to 15 years imprisonment, and civil penalties of up to $1,100,000 in damages. Further, parties including shareholders, the company, or its creditors can bring civil actions against a breaching director, resulting in the imposition of damages. The director can also be disqualified from directorship.

Anthony Satti can be contacted on 1800 534 315 or via the website

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

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