Directors’ Duties in Australia: Do You Know Yours?

Directors’ Duties in Australia: Do You Know Yours?

“Never before in Australian history had so much money been channelled … into the hands of so many people incompetent to manage it“.

• Trevor Sykes, the Bold Riders, on the corporate collapses of the 1980s and 1990s

Australia’s corporate environment is strictly regulated, imposing a great degree of responsibility on company directors.

Putting aside the fact that directors are responsible for the success of the companies they run, they also have what are called directors’ duties – which are stringent duties imposed by Australian legislation.

If you’re a director of a company here in Australia, then this article is for you.

The penalties for not meeting your duties are significant – and can range anywhere from a substantial monetary fine to even imprisonment.

What are directors’ duties?

Directors’ duties refer to legal duties imposed on company directors by various Australian laws, primarily the Corporations Act 2001 (Cth).

They include duties such as the duty to act with care and diligence, to avoid conflicts of interests and to not use information gained as a director for their own personal benefit. We’ll outline these duties in more detail below.

In their day-to-day operations, directors must always ensure they fulfill their duties – as a failure to do so may lead to investigation and ultimately prosecution by Australia’s corporate watchdog, the Australian Securities & Investments Commission.

Why does Australia have directors’ duties?

The purpose of directors’ duties is to ensure that directors of Australian companies act with skill, integrity, and care – so that, ultimately, their companies stay transparent and healthy, and Australia’s corporate landscape maintains a good reputation.

From the 1980s to the early 2000s, Australia experienced one of its worst periods of corporate collapse in its history. Empires such as the Bond group of companies, Skase media, the Rothwell Banks and HiH Insurance collapsed with drama and flair, leading to financial ruin for large swathes of the Australian public.

Ultimately, blame was pointed at directors – with infamous corporate names such as Alan Bond, Chrisopher Skase, John Spalvins and Rodney Adler making headlines across the period.

Australian law changed significantly in light of all the chaos – creating new legal duties on company directors’ in Australia.

Who do directors’ duties apply to?

Directors’ duties apply to virtually every type of director out there – executive & non-executive directors, nominee directors, alternate directors, ‘shadow’ directors and also de facto directors.

For an understanding of the different types of directors, we suggest you read our article on the Australian corporate structure. You can also read our article on the resident director rule.

What are the duties directors must comply with?

Below, we’ll outline some of the primary duties that Australian directors must comply with. This is not an exhaustive list, but an important one.

Duty of care and diligence

Directors must act and exercise their powers with the degree of care and diligence that a reasonable person would exercise if they were a director of that company and occupied the office held by, and had the same responsibilities as, the director.

A director who lacks business experience will not simply be ‘excused’ from exercising the common sense and informed judgment that an ordinary prudent person would be expected to exercise.

Of course, directors don’t know everything. But you’ll still be expected to:

• take reasonable steps to guide and monitor the company’s management
• gain a working knowledge of the company’s fundamental
• keep informed of the business’ activities
• monitor corporate affairs; and
• make enquiries where necessary.

If you need help, you can always ask an expert in the relevant area to assist.

Duty of good faith

Directors will need to exercise and discharge their duties in good faith, in the best interests of the company and also for a proper purpose.

Remember, the interests of the company are not your personal interests.

That remains true even if you started the company and built it from the ground up using your own savings and personal resources.

Duty of ‘no improper use’

Directors must not engage in the improper use of their position or company resources.

That means you can’t use your position as a director, or use information you have access to because you are a director, to gain some advantage for yourself or someone else, or cause detriment to the company.

For example, you can’t use your own company’s client list to go off and start a competing business of your own – and poach those clients on that list. Something like that would most likely breach your directors’ duties.

Duty to avoid conflict of interest

Directors must avoid both actual and potential conflict between their company obligations and their own personal interests.

You’ll need to disclose to your board of directors if you have any material personal interest that that you might have in connection with the company affairs.

If you are being asked to vote on something in a directors’ meeting, and it conflicts with your material personal interest, then you can’t vote on the issue or even be present while the matter is being considered.

Duty to prevent insolvent trading

Directors have a duty to prevent the company from trading while it is insolvent.

If your company trades insolvent, then you as a director could personally be liable for significant penalties and even imprisonment.

Therefore, you’ll need to consider the company’s solvency before you allow the company to take on more debt and satisfy yourself that the company is reasonably likely to pay its debts when they become due.

There are several circumstances where you might breach this duty. This includes the company incurring a debt while insolvent, but also the company becoming insolvent by incurring a debt (or that debt, and other debts at the same time).

Having an expert accountant by your side can certainly help you discover if you’re company is solvent or becoming close to insolvency.

Safe harbour defence

Directors who find themselves prosecuted or investigated for breaching their duty to prevent insolvent trading may be able to rely on the ‘safe harbour defence.

There are a number of circumstances where this might be possible. For example, if you:

• suspect that the company may become insolvent, and you develop a course of action reasonably likely to lead to a better outcome for the company than a liquidator; and
• that debt is incurred directly or indirectly with that course of action,

then you might be saved.

Know your duties and avoid prosecution

If you’re a director of a company, then you’ll need to get across these duties sooner rather than later (if you haven’t already).

The corporate watchdog continues to take a keen interest in the actions of directors, especially in light of the Global Financial Crisis, the Hayne Royal Commission and the introduction of Director IDs.

Sometimes, when going about your business day-to-day, issues will come up. It might be difficult to comply with your duties in a certain context. You want to do the right thing, but you might not be sure of the best way to go about doing it.

The team at 2account is here help. Our accountants and bookkeepers can look into all your company’s finances, and help prevent your company from becoming insolvent. We can also help with all aspects of AFSL and ASX financial compliance, so you don’t fall into any traps at the stock exchange or with your financial licence.

Whatever the issue, give us a call and we’ll be sure to point you in the right direction.