Our Gold Coast corporate lawyers are adept at providing ongoing advice to directors on how they can fulfil their fiduciary obligations in the capacity as directors. The role of a director brings with it a number of basic legal duties and responsibilities outlined in the Corporations Act 2001 (Cth).
Who qualifies as a director?
The Corporations Act 2001 (Cth) defines a director as being a person validly appointed as a director, or alternatively a person acting in the position of a director (also referred to as a de facto director). In addition, company entities have to consider whether the directors have become accustomed to acting in accordance with the particular instructions or desires of a certain individual – often called a “shadow director”. If any of these descriptions applies to an individual within a company context, they must uphold the directors duties imparted to them under the Corporations Act 2001 (Cth).
Our corporate lawyers are qualified to advise company operators on whether they qualify as directors within the meaning contemplated by the legislation, as well as the duties that attach to being a director.
What Are The Directors Duties?
As a director, you are obliged to perform your role with due care and diligence, as determined by reference to what a reasonable person in the same position would be expected to uphold. The duty to act with due care and diligence is particularly relevant in the context of financial statements and the approval of any statements issued by a company seeking board approval. Similarly, directors should ensure that they are not entering into financial transactions on behalf of the company that pose unacceptable risks to the company’s financial health or which do not have adequate prospects of benefiting the company. Part of the obligation of due care and diligence includes informing the board of any matters that should be brought to its attention.
The primary defence to accusations of a failure to exercise due care and diligence is referred to as the “business judgment rule” and is designed to create a broad safety net, albeit one that is not easily proved. The business judgment rule specifies that:
- (a) So long as a director makes a particular judgment in good faith and for a proper purpose;
- (b) Without a material personal interest in the subject matter; and
- (c) Makes adequate efforts to properly inform themselves,
So long as the director rationally believes the judgment to be in the best interests of the company it is not an offence to make a decision that produces an adverse effect on the company.
Directors must act in good faith and in the best interests of the company, for a proper purpose. Directors have a duty to avoid conflicts of interest and in any event reveal and manage any conflicts that do arise. Good faith is a “fiduciary duty”, meaning that it is imposed both under legislation and also by common law. In addition, directors cannot use their position to gain a personal advantage for themselves or their associates at the detriment of the company. Any information gained by a director in the course of performing their directors duties to the company cannot be improperly used to gain an advantage for directors or their associates. In general terms, directors must act in accordance with what they honestly believe to be the best interests of present and future shareholders and, in the case of a high risk of insolvency, the best interests of creditors as well.
Directors must also ensure that the company does not trade while it is insolvent or where the director suspects that the company may be trading insolvent. Directors are obliged to take reasonable steps to ensure the company keeps adequate financial records, information and reports these in accordance with its obligations under the Corporations Act 2001 (Cth). The Australian Securities and Investments Commission (‘ASIC’) also requires that directors lodge information. Listed companies (for example, those that are publicly traded companies on the Australian Securities Exchange (‘ASX’)), there are continuous disclosure obligations designed to ensure that the market has access to price sensitive information.
Our Gold Coast corporate lawyers regularly assist directors in understanding the variety of essential duties they must uphold in the course of the performance of their work for their respective companies.
In the event that directors breach any of the above duties, there are a number of consequences and sanctions that may be implemented. For the most severe abuse of a director’s position, a director may face criminal sanctions.
Many of the most severe penalties for directors come from the Competition and Consumer Act 2010 (Cth), which prevents companies from acting in ways that are considered “uncompetitive”, the idea being that competition within the market benefits consumers. Similarly cartel conduct (i.e. industry price fixing) is also prohibited. A contravention of the duty of good faith or the improper use of their position, or information gained as a result of holding that position, any dishonest or reckless conduct can result in imprisonment for five (5) years.
In addition to the criminal sanctions, any contraventions of directors duties may also result in substantial fines. Shareholders and creditors may similarly take action against breaching directors. If a director is brought to the attention of ASIC or the Courts, they may face the prospects of disqualification from acting in the role of director in the future. Reputational damage can also be significant.
For some organisational structure, the directors duties under the Corporations Act 2001 (Cth) do not apply. For example, incorporated associations are governed by State legislation while charities are governed by the Australian Charities and Not-for-profits Commission Act 2012 (Cth). However, in practice many bodies that are not included within the scope of the Corporations Act 2001 (Cth) also apply by virtue of other legislation or under the common law.
Public companies are obliged to have at least three (3) directors, two (2) of whom must reside in Australia, while proprietary companies can operate with only one (1) sole director who resides in Australia. Directors can take on a number of forms including executive and non-executive directors, managing directors, independent directors, alternate directors and nominee directors. The time that an individual will need to dedicate to the role of director will vary based on the size of the company and the complexity of the work required to be performed.
Ramsden Lawyers, located conveniently on the Gold Coast, has a highly experienced corporate law practice well-versed in advising you on all areas of directors duties.