In Australia, directors’ duties are primarily governed by the Corporations Act 2001 and common law principles. They may also be regulated by the company’s constitution and by shareholder agreements. Directors duties exist to promote good governance of companies and ensure that directors act in the best interests of the company and its shareholders. This page provides a summary of some key aspects of directors’ duties in Australia.
Appointment of directors
Public companies must have a minimum of three directors and at least two of them must reside in Australia. A proprietary company must have at least one director who resides in Australia.
Directors must be over the age of 18.
Directors are generally appointed by the board of directors at a board meeting. However, in some situations, a person who has not been formally appointed as a director may be deemed to be a director because of the level of control and influent they have over the affairs of the company. These are known as shadow directors or de facto directors.
Duty to act for a proper purpose
Under section 181 of the Corporations Act 2001, directors must act honestly, in good faith, and in the best interests of the company as a whole. They must vote in the company’s interests and not to give themselves a personal advantage.
Duty to act in good faith
Directors must also act in good faith. This means they must act honestly, responsibly and ethically and must genuinely believe that their actions are in the best interests of the company.
Use of position
Under section 182 of the Corporations Act 2001, directors must not use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.
Use of information
Under section 183 of the Corporations Act 2001, directors must not use information they have gained because of being a director to gain an advantage for themselves or for someone else or to use detriment to the corporation.
Duty to exercise care and diligence
Directors must exercise the care, skill, and diligence that a reasonable person would exercise in their position. This duty includes the responsibility to stay informed about the company’s affairs and to actively participate in decision-making.
Duty to avoid conflicts of interest
Directors must avoid situations where their personal interests may conflict with the interests of the company. If a conflict arises, directors must disclose it to the board and, in some cases, seek approval from the shareholders or the board.
Duty to prevent insolvent trading
Directors have a duty to prevent the company from trading while insolvent. Insolvent trading occurs when a company cannot pay its debts as they become due. Breach of this duty can result in personal liability for the director, including fines and disqualification from serving as a director.
Duty to not improperly use information or position
Directors must not improperly use their position or company information to gain an advantage for themselves or someone else or to cause detriment to the company.
Duty to act in the best interests of creditors
If a company is insolvent or approaching insolvency, directors have a duty to act in the best interests of the company’s creditors as a whole, rather than just the shareholders.
Duty to maintain financial records
Directors are required to ensure that the company maintains accurate financial records and financial statements that comply with accounting standards.
Duty to disclose interests in contracts
Directors must disclose any material personal interests they have in transactions or contracts entered into by the company.
Duty to avoid reckless trading
Directors must not engage in reckless trading or conduct that could harm the company’s financial position.
Penalties for breaching directors’ duties
A director who breaches their duties may face criminal penalties of a fine of up to $999,000 or three times the benefit derived or the detriment avoided by the breach, imprisonment for up to 15 years, or both.
Breaches of directors’ duties may also result in civil penalties of up to $1,110,000 or three times the benefit derived, or the detriment avoided by the breach.
They could also face civil actions initiated by the company, by the shareholders, or by the company’s creditors, and disqualification from directorship.
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