If you are a director of a company, you will be familiar with your fiduciary obligations and the director’s duties prescribed in the Corporations Act 2001 (Cth). We have prepared a brief summary of the director’s duties which we hope will act as a useful refresher.
I’m a director, what must I do?
In general, you must act for the benefit of the company as a whole. Your duty is owed to shareholders. However, if your company is insolvent or is at risk of becoming so, the duty extends to creditors which will also include employees with entitlements.
This general duty is comprised of the following key director’s duties prescribed by the Corporations Act:
1. Act with reasonable care and diligence
Directors are required to exercise their powers and discharge their duties with a degree of care and diligence.
All directors are responsible for the management and control of the company. This includes being informed about the financial position of the company at all times (not just at the end of the financial year).
Fellow lawyers will be familiar with the Centro Case* where the directors relied on financial reports containing ‘obvious errors’. The CEO was fined $30,000 and the CFO was disqualified for two years. The court held that the directors had personal responsibilities to review and approve the financial statements.
2. Act in good faith
As a director, you must act in good faith and in the best interest of the company. Decisions must be made in the best interests of the company and to benefit the company. Directors are to exercise their powers for a proper purpose by ensuring the company receives a benefit.
3. Exercise powers for the purposes for which they were conferred
A director must not improperly use their position or information obtained in the course of their duties to gain a personal advantage or cause detriment to the company.
4. Avoid improper use of position and use of information
A director must not use information obtained in their position to gain an advantage for themselves or someone else. This is a simplified summary of section 184 of the Corporations Act.
As of recently, breaches of this section can attract a jail sentence of up to 15 years and hefty fines of up to $945,000, possibly more. It is concerned with fraud, bribery, market manipulation, insider trading and theft from the company, just to name a few.
5. Duty to prevent insolvent trading
Finally, we have the duty to prevent the company from trading while insolvent. Penalties for insolvent trading could be either civil and/or criminal. It could result in disqualification as a director, substantial fines or repayment to creditors of the amount lost.
A solvent company has the ability to pay all debts as and when they become due and payable.
In the event that a company is insolvent, all directors must ensure no further debts are incurred. Prompt advice should be sought as to whether the company should be restructured, or an insolvency practitioner should be engaged to potentially salvage the company.
Please contact Gartree Thomson Lawyers for professional advice regarding a Director’s statutory duties and fiduciary obligations.
*ASIC v Healey (2011) 278 ALR 618