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Directors of companies help grow and shape a business, ensuring compliance with the duties of their role in the process. These duties are long established and strict, reflecting the position of trust they hold in relation to the company.
The duties are codified in the Corporations Act (the legislation governing dealings with companies), in addition to additional duties set down in a company’s constitution.
Importantly, the duties imposed are owed not to the shareholders, but to the company itself. Notwithstanding this, there are provisions in the Corporations Act allowing a director to be held liable to stakeholders.
Directors have the following duties:
A director must act honestly and for the benefit of all the company’s shareholders.
Where a director exercises their power for personal profit, they have failed to show good faith for the best interests of the company.
Directors must exercise their powers and duties with the care and diligence of a ‘reasonable person’.
There are various cases exploring what this includes. In making any determination, various circumstances specific to the company (including its size, type, nature of operating activities, board composition and responsibilities) are considered.
Importantly, where this duty has been breached by a director, the courts have found that such a breach can lead to the affected party bringing an action for negligence against the director.
A director must exercise their power for a proper person (i.e. for the benefit of the company).
The court looks at both the ultimate purpose of the power provided to a director in determining whether it was used inappropriately or not and whether the purpose that specifically motivated the director is within the range of appropriate objects for that power.
Directors must not use their position or information obtained in their role to gain a personal advantage to themselves (or a third party) or to cause detriment to the company.
This duty is in effect, notwithstanding that the actions may not have let to any advantage or detriment mentioned above. It also continues after the director ceases in their capacity as a director of the company.
A director must disclose any material personal interests conflicting with that of the company (by way of notice to the company).
This includes any personal interests of the director themselves or third parties such as a director’s family.
Directors must ensure that the company keeps appropriate financial records, that accurately reflect transactions of the company and its current financial position.
A director has the duty to ensure a company does not trade if it is insolvent (i.e. if it is unable to pay all its debts).
This duty extends so that a director must ensure that there are no circumstances indicating it is or is likely to be insolvent when incurring new debt.
Clients acting as directors of companies should ensure they are comfortable understanding their duties as a director and seek specific advice in relation to their duties.
For more information, please read ASIC’s information about directors duties.
If you would like us to assist you to ensure you are complying with your duties as a director and other compliance issues under the Corporations Act, please contact us.