Directors are responsible for the decisions they make in relation to the company, and have a responsibility to exercise due care and skill in their role.
Directors duties are governed by:
Directors must govern a company on behalf of the shareholders. While they are protected to an extent by limited liability, there are still certain duties that they must uphold in common law and under the Corporations Act and company constitution.
The Corporations Act defines a director as:
Duty to the Company
A director is not to use their power for an improper purpose or to the detriment of the company. Directors must vote in the interests of the company and help the company take advantage of commercially favourable opportunities, and must not vote to give themselves a personal advantage, or vote to favour the majority over the minority.
Act in Good Faith
Directors are required to exercise their powers and duties in good faith in the best interests of the company and comply with the Corporations Act. This duty is similar to the fiduciary duties that are imposed on directors in common law and general legislation.
Care and Diligence
Directors must be informed about the financial affairs of the company including whether the company is solvent.
Conflicts of Interest
Directors have a fiduciary duty to the company not to put the interests of the company ahead of their own. They must fully disclose any personal interest in a contract with the company and vote on behalf of the company, or abstain from voting. Directors cannot have a personal interest in a transaction with the company unless the interest is fully disclosed, and they abstain from voting on it.
Improper Use of Information and Position
Directors have a duty to avoid conflicts of interest and not make improper use of their position. They must not use their position with the purpose of gaining an advantage for themselves or someone else or otherwise causing detriment to the company. Directors have a duty not to make improper use of information (s183 of the Corporations Act).
Trading whilst Insolvent
Directors must ensure the company does not trade if insolvent (s588G, Corporations Act.) Moreover, the company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance.
Relying on information provided by others
The reliance on experts and employees when making decisions is important as a director. Directors can only make reasonable reliance, and whether or not the reliance is reasonable is assessed in accordance with s189 of the Corporations Act.
Directors have a duty to ensure that the company keeps adequate records of financial information. Financial information includes records that outline all the transactions that the company is entering into, the company’s financial standing and any other related issues.
Lodging information with ASIC
Directors have a duty under the Corporations Act to lodge certain information with governmental bodies such as ASIC. It is a requirement that directors lodge formal financial reports and records to ASIC on a regular basis if required to do so.
Consequences for Breaching Director’s Duties
There are legal consequences if a director breaches their duties. The consequences depend on the type and the severity of the breach. These may include:
The company may also suffer loss and damages that result from loss of public confidence and reputational damage due to the breach of directors duties.
Q: How can a director act in good faith?
A: Directors must use business judgment, which includes informing themselves about the topic and making decisions in the best interests of the company. Directors must be informed about the issues being voted on. Failure to give proper consideration to the company’s interests and to act dishonestly or in bad faith could be improper behaviour.
Q: What is a Company Constitution?
A: A Constitution sets out how the company will be run, and generally includes procedures for the following:
Q: Who is an officer of a corporation?
A: The Corporations Act imposes duties on directors and ‘officers of a corporation’. Under s 9 ‘officers of a corporation’ include company executives who hold senior positions below board level.
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