Many client’s seek our advice about director’s duties and corporate governance.  Typically the issues we see range from director disagreements to more serious issues such as has a director breached their fiduciary and statutory director’s duties imposed on them by the Corporations Act 2001 or under the common law (judge made law) or some other document which governs their duties like the company constitution.  All these issues need to be considered and an appropriate plan should be considered at the earliest possibility. After an investigation, it may lead to the sacking of a director for serious misconduct.

In addition to the requirement to ensure compliance with general and specific laws applying to your company’s operations, your primary duty as a director is to the shareholders. However, if your company is insolvent, or there is a risk of insolvency, your duties expand to include creditors (including employees with outstanding entitlements).

Director’s duties 

There is a range of director’s duties set out under general law and the Corporations Act 2001. These duties are binding on all directors of proprietary companies that are limited by shares. If you suspect that a director has breached one of his or her duties, considering these general director’s duties is a good starting point.

Some of the common general director’s duties include:

• Acting with care and diligence. A breach of this duty involves a director’s engagement in risky financial transactions without any foreseeable benefit to the company.
• Acting in good faith, in the best interests of the company and for a proper purpose. This duty is similar to the fiduciary duty that is imposed on directors in common law and statute law. Directors must avoid conflicts of interests and always disclose to the company when a potential conflict of interest may arise in a particular situation.
• Not using the position of director improperly. A breach of this duty would be to use your position of power and influence to take advantage of another party in the company, or to act in the detriment of the company.
• Not improperly using information that is gained during the course of carrying out duties as a director. Improper use would include gaining a personal advantage, or acting in a way that detriments the company or disadvantages other parties within the company.
• Avoiding conflicts of interest. Directors have a fiduciary duty to the company.
• Keeping records about the financial position of the company, and
• Not trading while the company is insolvent (insolvent trading).  ASIC has published ASIC Regulatory Guide 217 – Duty to Prevent Insolvent Trading – A guide for Directors (RG 217).

If any of the above breaches occur, either ASIC or a liquidator appointed as agent of the company may commence proceedings against the director personally.  We have prepared a guide to the recovery of director related payments by liquidators.

Has there been a breach of director’s duty

Next, you need to determine if any of these duties have been breached. It is important to consider whether or not certain actions of the director have been authorised by:

• the company’s constitution;
• the company members in a general meeting; or
• by the board of directors.

For example, you may suspect that a director has breached his duties by taking out loans against the company. However, it may have been the case that the company gave the director authority to take out such loans through a resolution as per a shareholders agreement. In this situation, it may not be the case that the director has breached his duties, given that the company granted approval for his actions but this should be considered on a case by case basis.

What are the consequences for a breach of director’s duty?

Establishing that a director has breached his duties can cause serious consequences to the director. Some consequences of breaching director’s duties include:

• Criminal sanctions that could include imprisonment for anti-competitive conduct, acting in bad faith or dishonestly;
• Civil sanctions, such as fines;
• Disqualification from your position as director; and/or;
• Commercial consequences that include placing at risk your company’s reputation and assets.

Conclusion

If you suspect that a director in your company has breached his or her duties, you could speak with a lawyer to seek legal advice, review your company’s documents and gain an understanding of your options

About Mark Harley | Principal

Mark has practiced in commercial law, commercial litigation and insolvency law for almost 10 years. He established the firm in 2014. With degrees in law and information technology, as well as being a director of several companies, Mark speaks the language of business owners and has a first hand understanding of the issues facing his clients.