Directors Breaching Their Duties

Directors of a business have a range of duties and obligations and are liable for meeting requirements in accordance with the Australian law. The particular duties depend upon the role of the person within the company, however, in all circumstances, the directors should act in good faith in the company’s interests as a whole. In this blog, we look at what a director’s duties area and the consequences for a breach of duty.

What are a director’s duties?

A director’s duties are imposed on them by the Corporations Act 2001, whilst being overseen by ASIC. Under this Act, there are a wide range of obligations that must be met – in particular, upholding the best interests of its shareholders.

Some of these common duties of a director include:

• Act with care and diligence: to exercise their powers and discharge their duties with due care, skill and diligence. In particular, directors are not permitted to engage in any risky financial transactions that are unlikely to benefit the business.
• Act in good faith and for proper purpose: to act in the best interests of the company, and not for some private advantage or for any purpose for which the power was not granted. This means directors need to avoid conflicts of interests and disclose to the company when a potential conflict of interest may arise.
• Not misuse information or position: not to improperly use or profit from their position or information obtained as a director to gain an advantage for themselves or someone else, or to cause detriment to the company;
• Avoid conflicts of interest or duty: to avoid conflicts between the director’s personal interests and the company’s interests, and between the director’s duties to the company and the director’s duties to anyone else; and
• Not fetter discretions: to give adequate consideration to matters for decision and to keep discretions unfettered.
• Keeping records about the financial position of the company
• Not trading while the company is insolvent

While these are the duties of a director, it is important to highlight that a director is entitled to delegate to others some responsibilities. However, the director is responsible for adequate supervision and providing sufficient information to the delegate.

If any of the above breaches do occur by the directors of a company, serious implications are considered. 

Based on quite a number of recent cases in Australia, some of the common mistakes or pitfalls that see directors end up in trouble include:

• Being a ‘de facto’ or ‘shadow’ director
• Failing to disclose interests
• Trading while insolvent

It’s important to truly understand your rights as a director and exercise these with great caution at all times.

What are the consequences of a director breaching their duties?

The consequences for a breach of duty of a director are not light. If a breach of any of these duties has occurred, the director may have legal proceedings brought against them by:

• the company;
• shareholders under the statutory derivative action provisions (provided the court in its discretion grants leave to the applicant);
• regulators such as ASIC or the ACCC;
• third parties for misleading and deceptive conduct or anti-competitive behaviour; and
• creditors and insolvency administrators in the context of insolvent trading.

In addition to this, some of the penalties you would expect to see for a director who has breached their duty or failed to fulfil their obligations could include:

• up to five years jail time;
• penalties of up to $200,000;
• disqualification from managing a company; and
• personal responsibility to pay off the company’s debts.
• commercial consequences that placing the company’s reputation and assets at risk.

However, the exact consequences will very much depend on the circumstances at hand. For example, the Courts will consider whether these actions have been done intentionally, recklessly or dishonestly. As well as this, the appropriate courts will also consider whether the actions were authorised by company’s constitution, it board of directors or company members through a general meeting. If so, it is unlikely that a director has breached their duties, but rather has been given approval to do something. This is why each case is examined on a case-by-case basis, looking at the variables of each situation.

For more information

If you believe there has been a breach of duties by a director, you should reach out to one of our experienced lawyers for advice and guidance on next steps. This is particularly important in order to review company documents, evidence and identify the best way forward with the case.

Further to this, if you have been put in the spotlight and need help, our team of lawyers can help to provide advice about your rights and obligations as a director in a company, assist to negotiate a resolution regarding an existing dispute within a company, or represent you in any legal proceedings relating to a company or director dispute.