The role of a company director is to govern a company on behalf of the shareholders or members of that company. Director’s duties fall under the Corporations Act 2001 which sets out how a director must run a company. These duties are:
- Duty of care;
- Duty to avoid conflict of interest;
- Duty to act in good faith;
- Duty to act for proper purpose; and
- Duty to prevent insolvent trading.
Duty of Care
This duty requires the director to exercise care and skill in the performance of their obligations to the company. The test to determine whether a breach of duty has occurred is an objective one. This means that the director’s actions are measured against what a reasonable person in the position of director would have done in a similar situation.
Duty to Avoid Conflict of Interest
The director’s personal interests must not conflict with those of the company. As such, a director cannot use their position as a director to acquire a personal gain for themselves or another, or use information that they acquire as a director to acquire a benefit for themselves or for another person. Directors may protect themselves from breach of this duty if they obtain member’s approval.
Duty to Act in Good Faith
Directors have to act in the best interests of the company. This means that the directors must act in the best interest of the company as a whole and not in the interests of individual members.
Duty to Act for Proper Purpose
Directors must exercise their powers for a proper purpose. Any use of director’s powers that are not undertaken for the benefit of the company are an improper use of their powers. For example, a proper purpose may be the issuing of shares includes raising capital, while an improper purpose includes diluting the shareholding of a particular shareholder or class of shareholders.
Duty to Prevent Insolvent Trading
Directors should prevent the company from trading when it is insolvent. Failure to do so may result in the director(s) being held personally liable for the debts of the company.
If directors breach their statutory duties, civil penalties may apply. Penalties may include a pecuniary penalty which is where the directors are required to pay money to the Commonwealth. Disqualification is another type of penalty banning a person from being a director of a company for a certain period of time. A director may also face a compensation order if the company has suffered a loss resulting from breaches of the director’s duties.
The Director of Public Prosecutions (Cth) can bring the action for criminal breaches of director’s duties. It is important to remember that a director may be dealt with both criminally and civilly regarding the same conduct. However, not all breaches of director’s duties may result in criminal action.