Directors’ Responsibilities
If you are a director of a company, you need to be aware of the rules, regulations and legal responsibilities regarding that role in the company. This section is focused on the Australian legislation relating to directors’ legal responsibilities. These general principals also apply in most of the countries that allow business owners to set up companies to operate their business. Company directors are subject to a number of common law and statutory directors’ duties in Australia.
These duties are designed to promote good governance of companies and ensure that directors act in the interests of the company – including putting the company’s interests ahead of their own. As mentioned earlier in section 2.1, one of the advantages, from a legal perspective, of a company structure is that a separate legal entity operates the business and, in most circumstances, protects the individuals behind the company from any personal liability. However, an abuse of this protection has seen unscrupulous directors hide behind the company to incur debts that they know cannot be paid. The law has developed over time to protect third parties dealing with these unscrupulous directors.
Some of the key director obligations include
(this list is not exhaustive):
- (a) The duty to act in good faith in the interests of the company as a whole A director will breach this obligation if they are found to have subjectively failed to give proper consideration to the company’s interests as opposed to their own interests.
- (b) The duty not to act for an improper purpose A breach of this duty generally occurs when a director uses their position and knowledge to obtain a personal advantage or defeat the voting power of the existing shareholders of the company.
- (c) The duties of care and diligence A director is obliged to keep themselves properly and completely informed as to the company’s affairs and cannot claim ignorance of their own making (e.g. failure to undertake proper enquiries).
- (d) The duty to avoid conflicts of interest A director is obliged to make informed and independent judgments on decisions and cannot put themselves in a position where their own personal interests may conflict with the best interests of the company, either directly or indirectly.
- (e) The duty not to make improper use of position A director must not use their position to gain an advantage for themselves or any other person.
- (f) The duty not to disclose confidential information A director is often party to confidential information. This duty is to prevent a director from disclosing such information to third parties. This protects the interests of the company and prevents a director from abusing their position.
- (g) The duty not to make improper use of information Similar to confidential information, a director must not use any other information improperly for their own or someone else’s gain, or to the detriment of the company
- (h) The duty not to trade whilst insolvent This duty is to prevent a company from trading whilst insolvent and continuing to incur debts with third parties that the director knows the company cannot pay. Essentially, if it can be proved that a director has continued to trade whilst insolvent, that director can be personally liable for the debts incurred by the company during that time.
Clearly the circumstances that give rise to a breach of one duty may overlap with a breach of another duty. However, Australian law recognises each as a separate breach of duty, and may often result in the breach of a number of other duties as well. A number of defences may be raised by directors to allegations of breaches of duties.
For further advice on breaches of duties, I strongly recommend speaking to your lawyer to discuss what actions should be taken to protect yourself.
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