Duties And Responsibilities Of Directors Under Australian Corporations Law

An Overview of Directors’ Duties

Discuss about the Duties and Responsibilities of Directors.

Directors are the image of leadership in any company or organisation; they control and manage its activities (Longman, 2003, p. 440). According to s 9 of the Corporations Act 2001, the director of a company is one who is appointed to fill this position or that of an alternate director acting in a similar capacity (Gibson & Fraser, 2013, p. 726). This is subject to certain qualifications such as age where they must have attained the age of majority. Additionally, a disqualified person under part 2D.6 of the Act cannot be appointed as a director except by leave of court or permission granted by the Australian Securities and Investments Commission (ASIC). The definition provided in the Corporations Act 2001 is broad enough to encompass directors who may go by other titles or people acting as directors but have not been appointed to the role (Cassidy, 2006, p. 179). In Perkins v Vincy [2001] SASC 362, the defendant had carried out duties as a director despite not having been properly appointed as one, based on these facts the court held his as a director. Directors’ duties in New South Wales, and Australia at large, have greatly evolved over the years. Stemming from the provisions of common law adopted from the UK, they are now incorporated in statute by way of the Corporations Act 2001. The history of these duties, the current provisions and possible future direction while be analysed in the following discussion. The research will also delve into the consequences resulting in a breach of these duties and remedies available to aggrieved parties. This discussion is aimed at evaluating the duties and responsibilities of directors under Australian Corporations Law.

The duties of directors in Australia are drafted to achieve good governance and ascertain that directors carry out the company’s interests above their own (PWC Australia, 2011). They have been categorised, but are not limited to: the duty of care and diligence, the duty to act in good faith, the duty not to use information for personal benefit and the duty not to misuse their position as directors to gain advantage; they are enforced by the ASIC (CCH Australia Ltd, 2011, p. xii).

According to Romer J in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, the standard of care in this duty is tested against the actions or inactions of a reasonable man under similar circumstances (Corkery, 1987, p. 133).  This duty is encompassed under s 180 of the Act which recognises the duties of directors under common law as well as the business judgment rule. In addition to this test, the size and type of company, the constitution of its board of directors as well as how they distribute their duties should also be considered in the determination of care and diligence employed (Douglas, 2015). Directors’ duties vary as per their personal skills and qualifications. The breach of the duty of care and diligence constitutes an act of negligence and can be brought to court as such (Douglas, 2015). Although directors are expected to exercise due diligence, the law appreciates that not all decisions will be fruitful; it is for this reason that the business judgement rule exists to protect directors from unnecessary prosecution (Latimer, 2012, p. 698).

The Evolution of Directors’ Duties and Responsibilities

In addition to diligence, directors have a duty to ensure loyalty and good faith as they carry out their duties (Latimer, 2012). This duty emanates from the fiduciary relationship they have with shareholders; they are put in a position of trust to ensure the interests of shareholders are met above theirs, as illustrated in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (Cassidy, 2006, p. 216). In this case, directors put their interests above those of the company where they purchased property in the company’s name without fully informing shareholders in order to gain consent. The court found the directors in breach of their fiduciary duty. Section 181 of the Act expects directors to act in good faith; that is, in a manner geared to ensure the company’s interests are met. As such, they should ensure to avoid the compromising situation and to disclose any conflict of interest arising as they conduct their duties (Australina Institute of Company Directors).

The concept of proper purpose was established in Mills v Mills [1938] 60 CLR 150 where it was held that the ‘but for’ test can be applied to determine whether a director’s actions were aimed at carrying out the ‘proper purpose’ (Bartholomeusz, 2015). Megarry V.C. stated that this case illuminated that, where the main purpose of a director’s decision was in the best interests of the company than an incidental benefit to the director would be inconsequential (Ritson, p. 634). According to the courts, it is up to the directors to determine what serves as the best interest of the company as seen in Re Smith & Fawcett Ltd [1942] Ch 304, however the reasonable man’s test is applied to determine the objectivity of these decisions (Cassidy, 2006, p. 217).

In New South Wales, this was illustrated in Winthrop Investments Ltd v Winns Ltd (1975) NSW, the Court of Appeal held that a general meeting of the company’s shareholders, having been fully informed of the facts, would endorse an execution of directors’ powers where it would otherwise constitute  a breach of their fiduciary duty; and may give future authority to execute similar authority if it is in the company’s best interests provided honesty and full disclosure is employed (FindLaw Australia). Directors, therefore, have a duty to ensure they are driven by the interests of the company and employ honesty and reasonableness in making their decisions.

The duty not to use their position for personal gain ties in with the aforementioned fiduciary duty. Section 182 of the Act provides that a director, who conducts themselves in a manner that would be of advantage to them or disadvantage to the company is in breach of their managerial duties despite the result of said conduct or decision. Where a director discovers they have any material interest that would compromise the above-mentioned duty, they should disclose their conflicting interest to the company as per s 191 of the Act. Additionally, directors are obliged to ensure they do not use any information they acquire as a result of their position to their own advantage or that of another at the detriment of the company. This duty is placed on them by s 183 of the Act and is applicable even after they exit the company; breach attracts a civil penalty.

Directors are also tasked with ensuring that they prevent insolvent trading; that is ensuring the company does not trade while insolvent or where it seems it may be insolvent (AICD, 2013). Failure to prevent the company from taking up debt amounts to a breach of duty if it is discovered that they, directors, were aware of the company’s possible insolvency (Tunstall, 2017). This provision is found under s 588G (1) and (2). Additionally, directors are tasked with ensuring financial records and financial reporting is up to date as per the provisions of s 344 of the Act.

Modern Australian corporations’ law, which encompasses the duties and responsibilities of directors, has its roots in the developments of company law in England in 1825 (Bathurst, 2013). The Joint Stock Companies Act 1856 made directors liable if they paid out dividends during insolvency; most contributions, however, were by way of case law. The fiduciary duties of directors to their companies were first established in the early twentieth century (Bathurst, 2013). Isaacs J, in Australian Metropolitan Life  Insurance  Co  Ltd v  Ure  (1923)  33  CLR  199  at  217, refers to evidence in case law of the earlier recognitions of these duties. 

In  1925,  Re  City Equitable  Fire  Insurance  Co  Ltd [1925]  Ch  407  directors’ duty to execute their activities by employing due care and diligence in their activities was recognised; as aforementioned, this is tested against the act or omission of a reasonable man under the same circumstances. According to the court, the standard of care employed, while including the reasonable man’s test should also pay regard to  the nature of the company’s  business as well as the  director’s  qualifications and experiences in their line of duty. Additionally, it is important to note that directors are free to delegate certain duties to other company officials. Where they delegate, directors should ensure these duties are performed with utmost honesty and diligence. Although not the first case, Re City Equitable  Fire  Insurance  Co  Ltd is commonly recognised as the case illustrating the duty of care expected of company directors (Bathurst, 2013).  All the aforementioned principles, although still largely aspects of common law are today encompassed in the Corporations Act 2001 and have thus become statutory duties that carry with them penalties as well as a possible criminal liability that could result in incarceration.

It is important to note that although the general duties of directors are similar among both proprietary and public companies, the law places stricter responsibilities on public companies which are required to be more transparent. Failure to comply with the duties and responsibilities set aside for public companies can lead to delisting and as such directors are expected to be more diligent. An example is found in s 674 of the Act which obliges directors of public listed companies to disclose any information that would affect the value of their securities as per the listing rules failure to which constitutes an offence. On the other hand, s 188 of the Act places certain corporate social responsibility duties on company secretaries and it is the duty of directors in proprietary companies to ensure they are carried by the company secretary. .However, the basic duties remain the same in both types of companies.

The failure of company directors to comply with their duties has serious consequences, which may include a 5-year jail term, criminal and civil penalties or fines of up to $200,000, dismissal as manager as well as the possible personal liability of the directors found in offence (Moroney, 2016).  When winding up a company, either by court order or voluntarily, the company’s administrator in charge of the liquidation process can lead actions against the directors found in breach of their duties and have them found personally liable. ASIC as the body in charge of enforcing directors’ duties can conduct investigations where it receives any reports of a possible breach and commence criminal proceedings thereafter (Moroney, 2016). The courts, where a breach has been identified, can offer the following remedies: and injunction, damages, restoration of company property, rescission, an account of profits and summary dismissal (FindLaw Australia).

Directors’ duties over the years have evolved with the times and it is expected that as the corporate industry evolves these duties will continue to evolve as well to accommodate these changes. Just as the modern idea of corporation in Australia emerged from the early Crown monopolies so is it expected that current company law, and the duties’ of directors today will influence the future ideas of director’s duties. The future of Australian company directors will be characterised by a dynamic legal environment greatly influenced by the concepts of globalisation and technology. However, amidst the ever-changing corporate industry, the core principles of directors’ duties emanating from common law should not be set aside.

Conclusion

As aforementioned, directors play an important role in ensuring good corporate governance. Directors’ duties have evolved over the years from common law provisions to statutory duties. At common law, directors are generally expected to act in good faith, exercise diligence, act in the best interests of the company and disclose any possible conflicts of interest. It is clear from the discussion above that these common law duties are the same which have been adopted into statute by way of the Corporations Act 2001. The Act tasks directors with ensuring they carry out these duties, among others, and creates consequences by way of penalties, fines and possible incarceration to ensure adherence. Where a director breaches the duties bestowed on him, courts can award various remedies such as injunctions, damages, an account of profits, and restitution of property as well as rescission of contracts. As the corporate industry evolves it is expected that these duties will evolve as well to accommodate these changes.

References

AICD. (2013, January). General Duties of Directors. Retrieved from Australian Institute of Company Directors: https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors

Australian Institute of Company Directors. (n.d.). What are the duties of Directors? Retrieved from Company Directors: https://www.companydirectors.com.au/~/media/resources/members/pdf/what-are-the-duties-of-directors.ashx

Bartholomeusz, S. (2015, January 27). Directors Duties in Focus- Duty not to Act for an Improper Purpose. Retrieved from You Legal: https://youlegal.com.au/directors-duties-in-focus-improper-purpose/

Bathurst, T. F. (2013, September 3). “The Historical Development of Corporations Law”. Retrieved from Supreme Court Justice NSW: https://www.supremecourt.justice.nsw.gov.au/Documents/Publications/Speeches/Pre-2015%20Speeches/Bathurst/bathurst_20130903.pdf

Cassidy, J. (2006). Concise Corporations Law. Sydney: Federation Press.

CCH Australia Ltd. (2011). Australian Corporations & Securities Legislation: Corporations Act 2001, ASIC Act 2001, related regulations. Wolter Kluwer Group.

Corkery, J. F. (1987). Directors’ Duties of Care, Skill and Diligence. In J. F. Corkery, Directors’ Powers and Duties (pp. 131-144). Melbourne: Longman Cheshire.

Douglas, J. (2015, August 3). Directors’ duty of care and diligence. Retrieved from Legal Vision: https://legalvision.com.au/directors-duty-of-care-and-diligence/

FindLaw Australia. (n.d.). Effects of Breaching Directors’ Duties. Retrieved from Find Law Australia: https://www.findlaw.com.au/articles/189/effects-of-breaching-directors-duties.aspx

Gibson, A., & Fraser, D. (2013). Business Law 2014. NSW: Pearson Higher Education AU.

Latimer, P. (2012). Australian Business Law. Sydney: CCH Australia Ltd.

Longman. (2003). Dictionary of Contemporary English. Essex: Pearson Education Limited.

Mills v Mills, 150 (60 CLR [1938]).

Moroney, L. (2016, April 27). Consequences for Breaching Directors Duties. Retrieved from Legal Vision: https://legalvision.com.au/consequences-for-breaching-directors-duties/

Perkins v Vincy, 362 (SASC [2001]).

PWC Australia. (2011). A Guide to Directors’ Duties and Responsibilities for non-listed public companies in Australia. Retrieved from PricewaterhouseCoopers: https://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf

Re City Equitable Fire Insurance Co, 407 (Ch [1967]).

Re Smith & Fawcett Ltd, 304 (Ch [1942]).

Regal (Hastings) Ltd v Gulliver, 134 (2 AC [1967]).

Ritson, L. (n.d.). The “Proper Purposes” Duty of Directors and Defensive Measure Against Company Takeovers. Sydney Law Review, 627-638.

Tunstall, I. (2017). Directors duty to prevent insolvent trading. Retrieved from FindLaw Australia: https://www.findlaw.com.au/articles/616/directors-duty-to-prevent-insolvent-trading.aspx

Winthrop Investments Ltd v Winns Ltd, 666 (2 NSWLR [1975]).