Currently there are 2,672,325 companies registered in Australia, therefore meaning that there at least 2,672,325 company directors in Australia. Fundamentally, the role of a director is a fiduciary in relation to the company. That means that they have a responsibility to place the companies interests before their own.
The core duties of a director and company officers (including secretaries) are set out in sections 180, 181,182 and 183 in the Corporations Act 2001 (Cth). These are summarised below.
Directors and company officers must:
- Exercise their powers with a reasonable degree of care and diligence (section 180). The test of what is reasonable is what the ordinary person, with the director’s knowledge and experience might be expected to do in the circumstances.
- Exercise powers and discharge duties in good faith in the best interests of the corporation and for proper purposes (section 181). The best interest test restates the fundamental fiduciary principle that a director’s actions must be shaped by what is best for the company not themselves. The proper purpose test is an objective test which displaces the actual state of mind of the director. It should be noted that mere honesty is not enough when it comes to the proper purpose.
- Not improperly use their position as a director to gain an advantage for themselves or to cause detriment to the company (section 182). Directors must avoid a conflict of interest by not seeking their own interest above the interest of the company.
- Not to improperly use information obtained by being a director to gain an advantage for themselves or to cause detriment to the corporation (section 183). This is linked to the core principle that the director is a fiduciary of the company.
If a director breaches any of the duties as outlined in legislative instruments, such as the Corporations Act, a court can order that the director compensates the company for damages resulting from the breach.
Furthermore, if a breach of duty relates to reasonable care, this may ground an action of negligence at the suit of the company against a director. In both cases the director’s personal resources, property and reputation can be significantly affected.
It is crucial that directors, secretaries and officers of the corporation understand their duties and the impact of breaching those duties.
The Takeaway
Breaching a director’s duty is like walking a tightrope blind folded; it will end badly.
If you are a director or have clients who are directors who do not know their duties and their exposure, please contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
