Introduction

Duties of directors imposed by the Corporations Act 2001 (Cth) (CA) and common law are based on the fundamental principle that a director must act in the interests of the company to the exclusion of the director’s own interests (referred to as fiduciary duties). 

The basic, overarching rule is that a director owes fiduciary duties to the company.  Traditionally, the company is generally considered by the courts to be the shareholders, but it is also recognised that a director must take into account the interests of the company’s creditors.

A director will be personally liable for breaches of fiduciary duties, with penalties including fines, payment of compensation and disqualification orders.  In some cases, directors can be held criminally liable with penalties including prison terms.

There are a number of other laws other than the CA which impose liability on directors for breaches of legislative duties such as occupational health and safety, environment and tax, with penalties including personal fines and prison terms.

Role of the Board of Directors

The role of the Board is:

• to set the goals, strategies and performance targets for the enterprise;
• to monitor the performance against its business strategies and targets;
• to ensure that there are adequate processes to require compliance with legal requirements and corporate governance standards; and
• to report progress to members (shareholders) as their appointed representatives.

Thus, directors are responsible for the overall direction and control of the company. The CA and the company’s constitution set out the directors’ powers and responsibilities and directors usually have a right to delegate day to day affairs of the company to other company officers, i.e. management.

Duties and Liabilities imposed by Company Law

As under the CA both creditors and shareholders of companies have a number of ways of bringing legal action against directors and officers of a company, directors should be fully aware of their statutory responsibilities in governing a company.

Under the CA, directors:

• must exercise their powers and discharge their duties:
  • with a degree of care and diligence that a reasonable person would exercise (s 180);
  • in good faith and in the best interests of the company (s 181); and
  • for a proper purpose (s 181);
• must not improperly misuse their position to:
  • gain an advantage for themselves or someone else; and
  • cause determent to the company (s 182);
• must not improperly misuse information about the company to:
  • gain an advantage for themselves or someone else; and
  • cause determent to the company (s 183); and
• must prevent insolvenct trading by the company (s 588G).

Directors of Wholly Owned Subsidiaries

As mentioned above, s 181 of the CA requires a director to act in the best interests of the company.  This can present difficulties for directors of wholly owned subsidiaries when they are to be involved with transactions beneficial to the group of companies, but not in the interests of the subsidiary, such as cash pooling (when the subsidary is cash rich), tax consolidation (when the subsidiary has tax losses or is the head company) or other transactions where it is difficult to separate the interests of the subsidiary from the group.

For this reason, the CA does provide that a director of a wholly owned subsidiary is taken to act in good faith in the interests of the subsidiary if the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company (s 187).  Without this express authority in a company’s constitution, directors of a subsidiary company can only act in the interests of the subsidiary.

Statutory Liabilities

In accordance with s 184 of CA, a director not acting in accordance with any of the above commits an offence, while under s 588G, a director commits a criminal offence if the director allows a company to trade while it is insolvent.  Consequences of breaching any of the above duties range from civil to criminal and can result in personal fines and/or imprisonment and the disqualification from taking any future part in the management of any company.

Personal Liability under Other Legislation

Other legislation imposing personal liabilities on directors and officers include those relating to:

• occupational health and safety;
• taxation; and
• the environment.

Please email us at Ian.Hopkins@hopkinscorporate.com.au or Contact Us for further details regarding directors’ duties, responsibilities and liabilities.