A director has an array of obligations or duties towards the company and its shareholders that must be adhered to pursuant to common law and statute. There are circumstances such as when the company is insolvent or is at risk of insolvency where duties are also owed to creditors and other members of the public.
Obligations imposed by the Corporations Act 2001 (Cth) include:
- The duty to act with the degree of care and diligence that a reasonable person would exercise if they were a director of a company in the company’s circumstances and had the same responsibilities as the director;
- The duty to act in good faith and in the best interests of the company and for a proper purpose;
- The duty not to improperly use their position to gain an advantage for themselves or someone else or cause detriment to the company;
- The duty not to improperly use information obtained through their position to gain an advantage for themselves or someone else or cause detriment to the company;
- The duty to disclose a material personal interest to other directors in a matter that relates to the affairs of the company;
- The duty to prevent insolvent trading;
- The duty to reasonably ensure that the company complies with financial reporting obligations under the Corporations Act 2001.
A director will not face liability for business judgments made in good faith, with no material personal interest, on the basis of appropriate information, and with a rational belief the decision is in the company’s best interests.
Obligations imposed by common law include:
- The duty to avoid conflicts of interest and not to compete with the company;
- A duty to employees which may arise out of an independent fiduciary relationship, such as agency;
- A duty to act in the interests of creditors when a company is facing financial instability.
Consequences for breach of duties
There are a number of possible consequences that a director could face if they breach their duties, including:
• Being guilty of a criminal offence where recklessness or intentional dishonesty is apparent including a fine of up to $200,000 and/or imprisonment for up to five years;
• ASIC commencing civil penalty proceedings or alternatively, criminal proceedings;
• Having to account of profits where the director has profited from their breach;
• Personal liability to compensate the company or others for loss that they have suffered as a result of the breach;
• Rescission of contract;
• Disqualification as a director of a company.
Personal liability of a director
In certain circumstances, a director may be personally liable for the company’s debts and losses
incurred. These circumstances include:
• Debts incurred if the company continues trading whilst insolvent;
• Losses caused by breach of duties;
• Debts incurred by the company acting as trustee;
• Where the director provides a personal guarantee;
• Illegal activity including the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements;
• Where a company does not meet its Pay As You Go (PAYG) and superannuation guarantee charge (SCG) obligations.