What are director duties?

What are director duties?

Who is a director?

Person will generally be considered a director of a company if they formally accept such a position. However, if a person exercises sufficient influence over a company or acts as a director they may considered a “shadow director” and attract all of the duties and liabilities attached to formal directors (see section 9 of the Corporations Act 2001 (Cth)).

Even though actively involved in a company, a person will not be deemed to be a shadow director by reason only that the other directors may have acted on advice given by that person in a professional capacity. It is necessary that the whole board of directors act under the direction of the person, or feel compelled to follow their advice or influence. Therefore, so long as the directors execute, exercise their judgement independently, a person will not be deemed to be a shadow director.

What are director duties?

Directors have a duty to act in good faith and in the best interest of the company as a whole. Courts will consider whether the director actually gave proper consideration to the company’s interest (in other words in the mind of the director) and if the actions were reasonable in the eyes of an objective bystander (see Whitehouse v Carlton Hotel Pty Ltd 1987) (162 CLR 285).

The general duties of a director include:
• The duty to exercise power with care and diligence, including taking steps to ensure that the director is properly informed about the financial position of the company and ensuring that the company does not trade whilst insolvent.
• The duty to not misuse their power to gain an advantage other than for the company
• The duty to not improperly use information obtained through their position to gain an advantage for themselves or someone else or cause detriment to the company
• The duty to keep adequate financial records, to correctly record and explain transactions and the company’s financial position and performance.

Key Stakeholders

A director’s primary duty is to the shareholders of the company. However, if the company is insolvent, or if there is a real risk of insolvency, the director’s duty may extend to include creditors such as suppliers and employees with outstanding entitlements.

Shareholders

In considering the interests of the company, a director should have primary regard to the shareholders as a collective group. Majority shareholders may expect or demand that the company’s’ affairs be conducted in a manner most beneficial to them, even if that is detrimental to other minority shareholders.

While minority shareholders often have no ability to influence the affairs of the company, directors must nonetheless act fairly to ensure that their decisions provide for the interests of shareholders generally, not just the majority or risk oppressing minority interests (see section 232 of the Corporations Act 2001).

Creditors and Employees

A director’s primary duty is to shareholders, however if the company faces insolvency the director is required to give consideration to the interest of other creditors. A director needs to show that they have properly considered the interests of creditors, for instance when deciding whether or not to take upon new debts in times of financial stress.

Recent Developments in Australia

We have seen a greater emphasis on actively prioritising creditors’ interests when a company is experiencing financial difficulty. For example, restructuring financial arrangement thereby limiting the pool of assets available to creditors upon liquidation was held to constitute a breach of a director’s fiduciary duties in the case of Westpac Banking Corporation v Belgroup (2012) 89 ACSR 1.

It is therefore prudent for a director to always err on the side of caution and give proper consideration to creditors’ interest in such cases.

What happens if a director breaches their duties?

There are range of penalties under the corporations act should a director fail to act in the best interests of the company or creditors. The director may be personally fined or even barred from acting as a director for some serious breaches (see part 9.4B of the Corporations Act;  ASIC v Vines [2006] NSW C 760).

In the most extreme circumstances a director may be held criminally liable for recklessness or for being intentionally dishonest in discharging their duties or failing to act in the best interest of the company (see section 184 of the Corporations Act).

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