Chapter 4 DIRECTORS DUTIES

Introduction Although a company is a separate legal person, it is not a natural person, and must therefore act through others. The management of a company lies with the directors who are elected according to the rules of the company or nominated in the constitution. Where a company has shareholders, the shareholders will normally elect the directors.

Introduction Directors and other officers owe certain duties to the company and not to the members as individuals. The duties arise from the following sources;   The fiduciary nature of the relationship between a director and the company; the Corporations Act 2001; The common law duty to act with reasonable care and diligence; and The rules of the company.

Directors’ Duties To act in good faith and in the best interests of the company; To exercise powers for a proper purpose; To use discretions properly; To avoid a conflict of duty with interest; To act honestly; Not to misuse company information; Not to obtain a gain by using their position; To use all due skill and diligence.

Fiduciary Duties Owed By a Director to the Company A fiduciary duty arises where a fiduciary relationship exists. A fiduciary relationship exists where one person places good faith, trust and reliance in another whose advice or assistance is needed. The person holding the position of trust must exercise the power or discretion to the benefit of the person to whom the duty is owed, and not for their own benefit.

Fiduciary Duties Owed By a Director to the Company Duty to act in good faith. Duty to exercise powers for a proper purpose. Duty to avoid conflicts of interest. Duty to creditors not to trade when the company is or is likely to become insolvent.

Statutory Directors’ Duties Duty to act with reasonable care and diligence. Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in that position in the corporation’s circumstances.

Statutory Directors’ Duties The business judgement rule - The director is assumed to have acted with appropriate care and diligence in making a business judgement if they;  Make the judgement in good faith and for a proper purpose; Do not have a material personal interest in the subject matter; Inform themselves about the subject matter to the extent they reasonably believe to be appropriate; Rationally believe that the judgement is in the best interests of the corporation.   Essentially the purpose of the rule is to ensure that directors are still encouraged to demonstrate entrepreneurial flair and appropriate risk- for- gain behaviours.

Statutory Directors’ Duties Duty to retain discretions - The general law imposes two duties on directors regarding their discretions; A duty to exercise an active discretion; and A duty to retain their discretions

Statutory Directors’ Duties Duty to act in good faith Directors must act honestly in the interests of the company as a whole. Provided that the directors act in what they honestly believe to be the best interests of the company, the courts will be reluctant to interfere with the decisions made.

Statutory Directors’ Duties Duty to act for a proper purpose. The directors have a duty to exercise their powers for the proper purposes of the company for the benefit of the company as a whole, and not for any external purpose.  

Statutory Directors’ Duties Duty not to use inside information improperly. Directors (and employees) must recognise that information acquired or created in the course of carrying out their role within the company belongs to the company and cannot be used for personal gain, for gain of a third party or to harm the company.  

Statutory Directors’ Duties The insolvent trading rule – S588(G)  A director contravenes the section if, when the company incurs the debt, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

Statutory Directors’ Duties Duty not to misuse their position S 182 (1) imposes on a director, officer or employee of the company a duty not to improperly use their position for personal gain, gain by a third party or to cause detriment to the company.

Consequences of breach of duty to act with care and skill Civil fine of up to $200,000 Disqualification from management position Payment of compensation to company

Consequences of breach of duty of good faith and acting for proper purpose, use of position and information. The breach of duty of good faith and acting for proper purpose, use of position and information, namely breaches of s181 (1) and (2), s182 (1) and (2) and S183 may result in a director being liable for: A civil penalty, prohibited from a management position or liable to pay compensation to the company A person convicted of breaching an offence under s184 may be fined up to $220,000 and /or imprisoned for up to five years for each offence.