Directors' Duties

Company directors’ duties are contained in the Corporations Act 2001. The law requires directors to carry out their governance duties and obligations with due diligence. Directors must, at a minimum, become familiar with the fundamentals of the business, and monitor the company’s activities and finances.

Director duties

The Act imposes four main duties on directors at sections 180-183:

1. To exercise care and diligence. The standard is that which a reasonable person might be expected to show in the role.
2. To act in good faith and for a proper purpose. The director must act in the best interests of the company, avoid conflicts of interest, and disclose and manage them should they arise.
3. Not to improperly use their position. A director must not use their position to gain an advantage for themselves or others, to the detriment of the company.
4. Not to improperly use information. A director must not improperly use information they acquire in their role to gain an advantage for themselves or others, to the detriment of the company.

Other significant duties and responsibilities include:

• A duty to ensure the company does not trade while insolvent;
• Taking reasonable steps to ensure the company complies with its statutory obligations for financial record-keeping and reporting;
• Disclosing any material personal interest in company affairs;
• Lodging information with the Australian Securities and Investments Commission (ASIC);
• Continuous disclosure to the market of information not generally available.

There are also director responsibilities found in legislation that governs areas such as taxation, workplace health and safety, financial services, environmental matters and trade practices.

Consequences of breaches

If a director breaches a duty or fails to meet an obligation, proceedings against them can be brought by a range of parties including the company itself, shareholders, regulators, third parties and creditors.

There can be severe penalties including hefty fines if a director fails to comply with the Act. For example, a maximum penalty of 15 years imprisonment applies if a director:

• is reckless or dishonest and fails to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose;
• uses their position, or information gained in their position, dishonestly, to gain an advantage directly or indirectly for themselves or others, or cause detriment to the corporation.

ASIC and the courts can disqualify directors for long periods for failure to comply with the Act, and shareholders or creditors can take civil action.

A breach can cause serious reputational damage and market repercussions, and lead to greater scrutiny by investors and regulators.

What needs to be proved

The elements that need to be proved depend on the offence. For instance, to prove a charge of trading while insolvent, it needs to be shown that:

• The director was a director at the time the debt was incurred;
• The company was insolvent or became insolvent as a result of the debt;
• There were reasonable grounds to suspect the director knew of the insolvency or a reasonable person in that position would have known;
• The director did not stop the company from trading.

It is important to consider whether certain actions of the director were authorised by the company’s constitution, company members in a general meeting, or the company’s board.

Defences

The defences available depend on the particular charge. For instance, to defend a charge of trading while insolvent, defences may include that the director:

• had a reasonable belief the company was solvent;
• relied on information from a reliable and competent person;
• did not take part in management of the company at the time of the offence;
• took all reasonable steps to prevent the company from incurring the debt.

Cases

The following two cases are examples of prosecutions of insider trading and providing false or misleading information.

R v Ho [2020]

Between 2016 and 2018, investment analyst Ho used three brokers and seven trading accounts to buy and sell shares and options in Big Un Limited, investing about $1.6 million. He had inside information at the time and communicated this information to an associate. Ho voluntarily reported his involvement in insider trading to ASIC. Big Un was placed in a trading halt and eventually went into liquidation.

Ho pleaded guilty to 5 counts of insider trading, and 1 count of communicating inside information. He was sentenced to an aggregate prison sentenced of 3 years, to be served by way of an intensive correction order. He was also ordered to perform 250 hours of community service.

R v Ferguson [2018]

Ferguson was CEO and company secretary of Australian Bight Abalone Ltd (ABAL), which managed investment schemes involving off-shore farming of abalone in cages. Ferguson was told by ABAL’s operations manager that that most abalone in the company’s 2005 scheme had died or were missing. Ferguson told the manager not to disclose this information to anyone and thereafter knew reports to the board and investors about mortality rates for, and financial performance of, the 2005 scheme were false. He was convicted of 8 counts of giving false or misleading information to directors and 9 counts of disseminating false or misleading information likely to induce a person to acquire financial products. He was sentenced to 3 years and 6 months imprisonment. ABAL, which had raised about $44 million from 1400 investors over five years, went into administration in 2009.

For advice or representation in any legal matter, please contact Armstrong Lawyers.