Director Duties and Liabilities
Directors are ultimately responsible for managing the affairs of a company and must do so in compliance with significant legal duties and obligations. As such, the below is intended as a high level overview of some of the key matters for directors to bear in mind:
The Tightrope
Amongst other things, directors must always ensure they act in compliance with:
- the Corporations Act
- their obligations at common law and in equity (such as fiduciary duties)
- the company’s Constitution
- relevant contractual agreements (such as a shareholders deed)
Personal Liability
Directors can be exposed to personal liability including in respect of:
- personal guarantees and indemnities (such as to support company banking facilities or leases of land)
- accessorial/personal liability provisions of various statutes including those relating to tax, work health and safety and the Australian Consumer Law
Penalties
A breach can result in serious penalties and have adverse ramifications including:
- monetary damages
- fines
- jail
- disqualification from being a director
- reputational damage
Duties
A director’s duties include an obligation to:
- exercise due care and diligence in the performance of their powers
- act in good faith in the best interests of the company
- exercise their powers for a proper purpose
- not improperly use their position, or information they obtain from their position, to benefit themselves or others or cause detriment to the company
- avoid conflicts of interest between their duties as a director and their personal interests
- maintain accurate financial records and report to ASIC on the financial affairs of the company
- prevent the company from trading while insolvent
Limited Defences
When it comes to the Corporations Act, limited defences are available with the main ones being:
- a director will not have breached their duty to exercise due care and diligence (judged by reference to a ‘reasonable person’ in like circumstances) if they rationally believed their decisions were in the best interests of the company
- a director will not be in breach of their duty to avoid conflicts of interest if they disclosed their material personal interests in a matter to the board
Beware
Generally speaking:
- duties cannot be delegated
- a failure to remain informed is no defence
- reliance on external experts does not relieve a director of responsibility
- insurance coverage may not necessarily provide full coverage
- leaving as a director does not relieve a director of liability
- a company can only provide a very limited indemnity in favour of a director
- directors and officers insurance is strongly recommended including having run-off cover
More Information
Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you require legal advice with respect to your obligations as a company director or if you would like to discuss the options available to endeavour to protect your interests.
