Directors Duties in Australia
The Australian Corporations Act 2001 (Cth) imposes numerous obligations on directors which can expose them to significant liabilities for a breach of their duties.
Below is a high-level summary of duties of directors of Australian companies and consequence of breaching those duties.
General Duties of Directors
- Duties of care and diligence – A director is required to act with the degree of care and diligence that a reasonable person might be expected to show in that position. An objective test is used to determine the reasonableness of directors’ behaviours. However, a director’s position and specific responsibilities are considered when applying the objective test. Importantly, a director who makes a ‘business judgment’ is taken to meet their duty of care and diligence in respect of that judgement.
- Duties of good faith and proper purpose – A director is required to act in good faith in the best interests of the company and for a proper purpose, including to avoid conflicts of interest and to reveal and manage conflicts. An improper purpose would include where the director uses a power to obtain advantage for themselves or someone else.
- Duties not to improperly use position – A director is prohibited from improperly using their position to gain an advantage for themselves or someone else, or to the detriment to the company. Regard is had to all corporate assets, opportunities and information that has come into the director’s possession as belonging solely to the company and unavailable for the director’s use.
- Duties not to improperly use information – A director is prohibited from improperly using the information they gain in the course of their director duties to gain an advantage for themselves or someone else, or to the detriment to the company.
- Duties to prevent insolvent trading – Directors have a duty to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent. There is “safe-harbour” protection that directors are protected in relation to debts the company incurs in connection with taking a course of action that is reasonably likely to lead to a better outcome for the company than voluntary administration or winding up.
Consequences of breaching director’s duties
Consequences of breaching director’s duties mainly include:
- Civil penalties – fines, penalties and actions taken by shareholder or creditors against directors who have failed to comply with their duties;
- Disqualification from being a director determined by the Australian Securities and Investments Commission or the courts;
- Criminal sanctions – potential imprisonment for contraventions of the duty of good faith or improper use of information or position, if the directors involve dishonesty or recklessness;
The specific consequences of breach and available remedies vary depending on the particular duty and the source of the duty (that is, whether contractual, equitable or statutory).
Protection for directors
To maximize the protection available to directors by law, companies should consider:
- Sufficient Directors and Officers Liability Insurance
- Robust terms in the company’s constitution in respect of indemnity of directors
- Strong corporate governance arrangements
- Independent legal advice if directors wish to enter to transactions which may lead to the breach of duties
MistryFallahi Lawyers & Business Advisors has extensive experience to advise on corporate governance including directors’ duties and available remedies for breaching directors’ duties as well as to defend directors or companies on allegations for a breach of directors’ duties.
Joyce Wang is a dual-qualified lawyer admitted in Australia and China. Joyce advises Australian and international clients on mergers and acquisitions, foreign investment, capital raisings and other regulatory and corporate governance matters. Joyce leads the China Desk at MistryFallahi.