Directors duties

Directors duties Australia

In Australia, directors duties are governed under the common law and reflected in the Corporations Act 2001 (Cth).

Fiduciary duties of directors

The particular fiduciary duties of directors depend on the circumstances and their relationship with the organisation.  Fiduciary duties are typically owed to the company but can also extend to beneficiaries of corporate trustees as well as individual shareholders.  Creditors can also be owed duties as discussed below.  If the director is a director of a number of companies within the same group, then consideration needs to be given to each entities’ interests.

Directors duties and responsibilities under the general law

These are broadly as follows:

1. Act bona fides in the interests of the company as a whole
2. Avoid conflicts of interest
3. Act with due care and diligence
4. Not act for an improper purpose / improperly use their position
5. Retain discretion
6. Not make personal profit from their position.  In tandem is the duty not to abuse their position or confidential information to gain opportunities for themselves

Corporations Act duties of directors

The duties in the Corporations Act enhance those under the general law and add to them.  The Act also provides for various other remedies available from directors.

In addition to those listed above directors must:

1. Act in good faith and disclose material personal interests
2. Comply with the business judgement rule.  This enhances the duty to act with due care and diligence.
3. Only rely on others where it is reasonable to do so.  This is not so much a duty but rather a defence potentially available.

See Chapter 2D for details of the duties as codified in the Corporations Act 2001 (Cth).

Directors duties to shareholders

Directors generally owe duties to the company as a whole which means the shareholders as a general class of persons rather than any specific shareholder.  However in appropriate circumstances the duties can extend to individual shareholders depending on the circumstances and the transaction in question. 

Shareholders do however have rights for example to commence actions on behalf of the company where for example there are breaches of directors duties or seek remedies from the Court where oppression or unfair prejudice is present.  These are two quite different remedies and care should be taken when relying on one or the other.  Note also that shareholders can also be creditors depending on the circumstances 

Directors duties to creditors

Directors have an important duty to prevent insolvent trading and if the company is on the verge of insolvency or in financial trouble they have an obligation to consider the interests of the creditors of the company.  If they fail to do so and for example trade whilst insolvent, they might be pursued by the liquidator and this type of action can be funded by third party litigation funders if the prospects of success and recovery are good.  We can assist you to obtain funding.

Breaches of directors duties

There are a number of different remedies depending on the circumstances.  Directors can be made to compensate the company, compensate a creditor, account for profits, be disqualified from managing corporations, pay penalties and even subject to criminal prosecution under the Corporations Act 2001 (Cth)