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Don't underestimate the obligations of a company director

Company Law News | June 2015

What are your duties as a director?

Under the Corporations Act 2001 (Cth) ("the Act") directors have a number of duties which they owe to the company, including:

  • A duty to exercise care and diligence (Section 180);
  • A duty of good faith (Section 181);
  • A duty not to use their position in an improper manner (Section 183);
  • A duty not to improperly use information obtained as a result of their position (Section 183).

Civil duties and obligations

In circumstances where a director breaches any of these obligations the Court may make a "declaration of contravention" under Section 1317E of the Act. The Australian Securities and Investment Commission (ASIC) may then ask that Court imposes a fine of up $200,000.00 on the director if their breach:

  1. has materially prejudiced the company's, or its shareholders' interests; or
  2. the company's ability to pay its creditors; or
  3. is serious pursuant to Section 1317G of the Act.

Duty to prevent insolvent trading

Company directors have a strict duty under the Act to prevent insolvent trading.  Section 588G imposes liabilities on directors in circumstances where they have allowed the company to incur a debt at a time when the director is aware, or could reasonably suspect that, the company was, or may become as a result of incurring the debt, insolvent.

A director will be deemed to have committed an offence if at the time the debt was incurred the director actually suspected that the company was insolvent (or would become insolvent by incurring the debt) and the director's failure to prevent the debt being incurred can be shown to have been dishonest.

The director may be ordered by the Court to compensate the company for any damages suffered as a result of the director's breach according to Section 1317H of the Act. If the Court is satisfied that a disqualification is justified in accordance with Section 206C of the Act, the director may then be disqualified from managing companies for a period of time which is deemed appropriate by the Court.

Other legislation may include personal liability for directors including the Taxation Act, Fair Work Act, Workers Compensation Act and environmental protection statutes.

Criminal liabilities

Section 184 of the Act imposes criminal liabilities on company directors in circumstances where they:

  1. have acted recklessly or intentionally been dishonest and have failed to act in good faith in the best interests of the company or have failed to act for a proper purpose;
  2. use their position dishonestly with the intention of gaining an advantage for themselves or someone else or with the intention of causing detriment to the company;
  3. use their position recklessly so that the use may result in themselves or someone else gaining an advantage or may result in causing detriment to the company;
  4. use information they have obtained through their position dishonestly with the intention of gaining an advantage for themselves or someone else or with the intention of causing detriment to the company; or
  5. use information they have obtained through their position recklessly so that the use may result in themselves or someone else gaining an advantage or may result in causing detriment to the company.

Directors found guilty of an offence under Section 184 of the Act can face a maximum penalty of 2,000 penalty units (currently $220,000), 5 years imprisonment or both.

Defences

There are three main defences available to directors, including:

  1. The business judgment rule. This rule applies when a director is defending a claim for a breach of duty of care and diligence when a decision relates to the ordinary business of a company. To be successful the director must demonstrate they:
       a. Made the decision in good faith and for a proper purpose;
       b. Did not have a personal interest in the subject matter of the decision;
       c. Informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
    d. Rationally believed the decision was in the best interests of the company.
  2. Reliance on others. In some circumstances a director will not be responsible for exercising a power if they believed:
       a. On reasonable grounds; and
       b. In good faith; and
       c. After making proper enquiries in the circumstances
    that the advice given was prepared by a person who was reliable and competent.
  3. Use of delegated power. A director may rely on the fact that another person was responsible for the exercise or decision and judgments. The director would need to demonstrate that they had reasonable grounds to believe that other person was reliable and competent in relation to the power delegated.

Don't be afraid to seek expert advice when necessary

The role of directors in today's climate is very challenging, especially given the many regulations and duties imposed upon them. It is good business practice and commercial risk management to seek financial and legal advice at any time when the company is faced with issues which may have an adverse effect on the company or persons or authorities outside of the company.

If a director has breached their duties they may be liable to compensate the company, and may also be disqualified from holding office. For a serious breach of director's duties, including fraudulent behaviour, the Act can impose criminal liabilities.

Forum Law Solicitors are experienced in corporate governance and the duties imposed on company directors. Annette Fontana sits on a number of boards and she has been a Graduate member of the Australian Institute of Company Directors since 2002. If you have any questions or concerns regarding breaches of directors duties owed to a company please contact our office on 02 9560 3388.


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