Duties of Directors

Directors of companies, from small family proprietary limited companies to large companies listed on the stock exchange, have a number of duties to their company with which they must comply and which govern the way that they act, both in managing the company and in the way in which they must conduct themselves.

Directors’ duties have arisen and been defined by years of both judicial decisions on the topic (ie, common law and equitable principles) and various legislative schemes. In general, the duties of directors have been established to ensure that directors’ loyalty is to the company and not to their own or other interests.

Currently, in Australia directors’ duties are governed primarily by provisions of the Corporations Act 2001 with certain further duties arising from the common law/equity as it currently stands in Australia.

Examples of these duties include:-

To act with care, skill and diligence:

This duty is set out in section 180 of the Corporations Act. It requires directors to undertake all functions and to exercise their powers to an appropriate, objective standard. This duty also includes both a common law and equitable duty of care that the director owes to the company. See the leading New South Wales Court of Appeal decision of Daniels v Anderson (1995) 37 NSWLR 438.

To act in good faith and for a proper purpose:

These two duties (see Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 at [4456] per Owen J for authority that they are two separate duties, although contained in the one section are set out in section 181 of the Corporations Act. In essence, this section requires a director to act to an objective standard in the best interests of the company. As stated succinctly by Robson J in Re S & D International Pty Ltd (No 4) [2010] VSC 388 at [283] “The basic common law duty of a director is that he or she must act bona fide in what he or she believes is in the best interests of the company as a whole”.

To prevent conflicts arising between the director’s private interests and the company’s interests:

Sections 182 and 183 of the Corporations Act preclude directors from improperly using their position (s182) or using information obtained because they are a director (s183) to gain an advantage for themselves or someone else. In effect, this section prohibits a director from acting to the company’s detriment in a “conflict of interest” situation. Directors, pursuant to this duty (and the fiduciary duties referred to below) must always put their company’s interests before their own.

Fiduciary duties:

Due to the unique relationship between a director – who (in concert with other directors if not a sole director) has access to all of the company’s information and makes decisions as to the company’s conduct – and the company there has been a long recognised fiduciary relationship. This fiduciary relationship imposes duties of an equitable nature that parallel, compliment and at times inform the statutory duties contained in the Corporations Act.

To not trade whilst insolvent:

In addition to the usual duties of a fiduciary nature as set out above (whether contained in the Corporations Act or common law/equity) the Corporations Act also contains certain other provisions which may see a director personally liable and/or imposes further duties on a director. A leading example is the obligation of a director – who should have access to the company’s financial records and be aware of its financial situations – to not permit the company to trade whilst insolvent (i.e. if it cannot pay its debts as and when they call due). This is set out in section 588G of the Corporations Act.

If you are a director of a company and require legal advice concerning the company or its office holders then get in touch with our business lawyers by contacting your local Prime Lawyers office.

We have business lawyers located at Sydney, Parramatta, Chatswood, Sutherland and Wollongong.