In Australia, the Corporations Act 2001 (Cth) outlines the legal obligations and duties of company directors. These duties are essential for ensuring trust, accountability, and transparency in corporate governance. Directors who fail to meet these obligations may face serious consequences, including fines, disqualification, or personal liability. Below, we examine the key director duties under the Corporations Act and provide examples of common scenarios where breaches may occur.

Duty to Act in Good Faith and in the Best Interests of the Company

Section 181 of the Corporations Act requires directors to act in good faith and in the best interests of the company.

Example of a Breach: A director diverts a lucrative business opportunity away from the company to benefit a competing enterprise they secretly control. This prioritises their personal interests over the company’s, breaching the duty of good faith.

Duty to Avoid Conflicts of Interest

Section 182 mandates that directors must not improperly use their position to gain an advantage for themselves or others, or to cause detriment to the company.

Example of a Breach: A director approves a contract between the company and a business owned by a close relative, without disclosing the relationship to the board. This lack of transparency creates a conflict of interest.

Duty of Care and Diligence

Section 180 requires directors to exercise their powers with the care and diligence that a reasonable person would exhibit in similar circumstances.

Example of a Breach: A director fails to review financial reports before approving them, overlooking significant discrepancies that lead to financial losses. This negligence constitutes a breach of their duty.

Duty Not to Trade While Insolvent

Section 588G prohibits directors from allowing the company to incur debts if it is insolvent or becomes insolvent due to the debt.

Example of a Breach: A director approves significant expenditures despite knowing the company cannot meet its financial obligations. This decision breaches the prohibition on insolvent trading and exposes the director to personal liability.

Duty to Prevent Misuse of Information

Section 183 requires directors to avoid improperly using information obtained through their position to gain an advantage or harm the company.

Example of a Breach: A director uses confidential company information to purchase shares in a competitor before the information is made public, profiting from insider knowledge. This action breaches their duty.

Duty to Act for a Proper Purpose

Section 181 also requires directors to act for proper purposes, ensuring their decisions align with the company’s objectives rather than ulterior motives.

Example of a Breach: A director issues additional shares solely to dilute the voting power of dissenting shareholders, rather than to raise capital. This misuse of authority breaches the duty to act for a proper purpose.

Conclusion

Directors play a crucial role in maintaining strong corporate governance. Understanding and adhering to these duties is essential to avoid legal risks and ensure the company’s success.

If you need advice on director duties or are concerned about a potential breach, contact Boss Lawyers. Our expert team provides tailored advice to protect your interests and navigate corporate legal challenges.