Directors of companies large and small need to be aware of their fiduciary obligations and duties owed to a company as directors. The Corporations Act 2001 sets out four main duties owed by directors:

  • To act with care and diligence: Section 180 of the Corporations Act requires a director to act with the degree of care and diligence that a reasonable person is expected to show in the role. Common law imposes a similar duty on directors;
  • To act in good faith and for proper purpose: Section 181 of the Corporations Act requires directors to act in good faith in the best interests of the company and for a proper purpose, including to avoid conflicts of interest, and to reveal to the board and manage conflicts if they arise. These are duties of fidelity and trust, which common law imposes as ‘fiduciary duties’;
  • Not to improperly misuse their position as a director: directors must avoid using their position to gain advantage for themselves or someone else, to the detriment of the company. This duty is set out in section 182 of the Corporations Act;
  • Not to improperly use information: Section 183 of the Corporations Act requires directors not to improperly use information they have gained in the course of their director duties to gain advantage for themselves or someone else, to the detriment of the company. 

In addition to the four basic duties mentioned above, directors have the following significant duties and responsibilities under the Corporations Act:

  • Directors must avoid Insolvent trading: a key director responsibility is to ensure that a company does not trade while insolvent or where directors have reason to suspect it may be insolvent, as set out in section 588G of the Corporations Act. There is a new exception to this requirement described as the safe harbour provisions, whereby  the Corporations Act was amended in 2017 to provide directors with a defence to civil action for insolvent trading providing that they were engaging in a course of action which was likely to lead to a better result for the company than putting it into administration or liquidation. Practically speaking this usually requires that the directors take documented advice from insolvency and legal practitioners and follow a course of action designed to allow the company to trade out of difficulties while protecting the interests of stakeholders. This policy was developed on the basis that the public interest may better be served by companies taking action to resolve their financial troubles rather than needing to go into administration or liquidation where the outcome for creditors and employees may not be as good. 
  • Financial records: Section 344 of the Corporations Act requires directors to take reasonable steps to ensure that a company maintains accurate financial records and reporting. We have seen cases in privately held companies where directors purposefully keep poor records so as to hide having advantaged themselves as against minority shareholders in certain ways. This is clearly not on.  

  • Disclosing directors’ interests –  Directors are required by section 191 of the Corporations Act to disclose to the board where they have personal interests which may conflict with their duties as directors, for example they may own shares in a company that deals with the company of which they are  to be a director. The board may require them to sell their interest to avoid the risk of conflict of interest. This is particularly relevant for directors of public companies, which are required by section 208 of the Corporations Act to obtain shareholder approval for related party transactions, and to disclose director’s financial interests to the market by section 205 of the Act. 
  • There is a duty to lodge and update important information with ASIC as set out by section 188 of the Corporations Act, such as the address of the registered office of the company and to lodge annual returns. 
  • A duty of continuous disclosure is imposed on listed companies, requiring them to disclose information to the market which is not generally available which may affect the company’s share price (section 674 of the Corporations Act).

 

Should you have any queries in regard to director’s duties, please contact James Matthies at Matthies Lawyers to gain a clear understanding of your obligations and options. 

Matthies Lawyers | Level 3, 44 Caroline Street, South Yarra 3141

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