A Guide to Director’s duties
In the 2020/2021 financial year, there was a 3.8% increase in the number of businesses in Australia, with 365,480 new businesses starting up. If you’ve just started up a new business, or are considering starting up a business, and you have set it up through a company, it’s important that you are aware of your director’s duties.
Why do I need to know about director’s duties?
Director’s duties are legal obligations that directors of companies need to follow. Failure to comply with a director’s duty can lead to harsh penalties, including large fines and prohibition from managing a company in the future. Breaching a director’s duty can also be a criminal offence with the potential for hefty fines and even imprisonment.
Another potential consequence of breaching a director’s duty is that you may be held personally liable to compensate the company, or other parties, for loss or damage suffered. Usually, there is a ‘corporate veil’ that protects directors in their personal capacity. For example, if a company is sued by a third party, it is only the company’s assets that can be recovered against and not the personal assets of individual directors. In other words, a director’s family home or their personal car or savings will not be ‘on the line’. However, if there has been a breach of a director’s duty, a director could be made personally liable.
What are the director’s duties?
Director’s duties come from a number of sources, including the Corporations Act 2001 (Cth), the common law and other legislation.
The Corporations Act sets out a list of director’s duties, including:
- The duty of care and diligence
The requirements of this duty are based on the level of care and diligence that a reasonable person in the director’s position would exercise. There is no set standard of what this duty requires as it will vary depending on each individual situation.
- The duty to act in good faith
Acting in good faith requires a director to have the best interests of the company in mind when exercising their powers. In other words, a director should not make decisions based on their own personal interests, if those decisions are not in the best interests of the company. Directors of multiple companies have to be careful if the companies compete with each other because if they assist one company to another’s detriment. there will be a breach of this duty.
- The duty to not improperly use one’s position as director
A director cannot use their position as director to attain a personal gain or cause a detriment to the company. As above, directors must exercise their powers for the best interests of the company.
- The duty to not improperly use information one has obtained through their position as director
A director will become privy to information that they would not have access to if they were not a director, for example, business records and plans. Directors have a duty not to use that information for their own personal benefit, for another company or to the detriment of the company.
- The duty to disclose any material personal interest
If a conflict of interest arises, a director must inform other directors of that conflict, including the nature and extent of their interest.
- The duty to prevent insolvent trading
Directors must ensure proper financial records of the company are kept and must stay informed about the company’s financial performance. ASIC has released a guide about the duty to prevent insolvent trading.
Common law – Fiduciary duties
Directors also have fiduciary duties that come from the common law, which are very similar to the duties imposed by the Corporations Act, including:
- the duty to act in good faith and in the best interests of the company
- the duty to exercise one’s powers for a proper purpose
- the duty to exercise one’s discretion and not improperly limit their decision-making authority
- the duty to avoid conflicts of interest
Director’s duties can also be found in various other pieces of legislation, such as:
- workplace health and safety legislation
- environmental legislation
- consumer law legislation
- anti-bribery and corruption legislation
- taxation legislation
How to stay on top of your director’s duties
Being the director of a company comes with a lot of responsibility. Directors should ensure they understand how any proposed actions or omissions will affect the company’s performance and ensure they keep up to date with how the company is performing. We recommend that directors obtain appropriate professional advice, such as accounting and legal advice, not only when starting out, but on a regular basis to make sure everything is running smoothly and is compliant with relevant legislation and regulations.
As demonstrated in this article, director’s duties can come from a large number of sources. A commercial lawyer will be able to identify which legislation applies to you and what you need to be aware of in the running of your business.
Whether you have just started up a company, are planning to start up a company or have been a director of a company for a long time, the commercial team at Lynn & Brown Lawyers are always happy to assist with your company-related queries or concerns.
About the authors: This article has been co-authored by Chelsea McNeill and Steven Brown. Chelsea is a lawyer that graduated from Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.