Generally, the day to day affairs of a company are controlled by the directors, not the members. The directors must act in the best interests of the company at all times and cannot act in their own self interest at the expense of the company. Company directors have many responsibilities to the company and have received notoriety in recent years with some spectacular business failures.
Many directors do not fully understand their responsibilities. It is not possible to be a company director without being fully responsible for that company. The responsibilities and duties of company directors are contained in the Corporations Act 2001 (Cth) and in common law principles. All references in this part are to this legislation unless otherwise stated, see also corporate crime.
ASIC has some important information for prospective and current directors of companies to assist in understanding not only the obligations to the company and its shareholders, also the administrative obligations including advising of changes of address or changes to officeholders. Visit the ASIC page Running a Company - Company Office Holder Duties
Anyone who is in the management of a company may be regarded as a director, even if that person has not formally been appointed as such [Corporations Act 2001 (Cth) s 9 — definition of "director")]. If the directors of a company are accustomed to act in accordance with the instructions or wishes of a particular person, that person is also a director. However, a person does not become a director simply because the directors act on her or his professional advice.
A director automatically ceases to be a director if the person becomes disqualified from managing corporations under Part 2D.6 Corporations Act 2001 (Cth) unless ASIC or the Court allows them to manage [s 203B].Section 206B of the Corporations Act 2001 (Cth) sets out the circumstances in which a person becomes automatically disqualified which includes being convicted of certain types of offences involving fraud or the management of a company or contraventions of the Corporations Act 2001 (Cth) (and its predecessors). A person who is bankrupt or subject to an arrangement under Part X of the Bankruptcy Act 1966 (Cth) may also be disqualified from managing a corporation [s 206B(3), s206B(4)]. In addition ASIC or the Court can make an order disqualifying a person from being a director [Corporations Act 2001 (Cth) s 206C — s 206F].
The Corporations Act 2001 (Cth) requires that a company director or other officer exercise their powers and discharge their duties with care and diligence [s 180]. This duty is subject to a business judgment rule that requires a director making a business judgment to:
- make the judgment in good faith and for a proper purpose;
- not to have a material personal interest in the subject matter of the judgment;
- inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate;
- rationally believe that the judgment is in the best interests of the corporation.
In addition, directors and other officers of companies must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose [s 181]. They are prohibited from improperly using their position to gain an advantage for themselves or someone else or to cause detriment to the corporation [s 182] and are prohibited from using information obtained as a consequence of their role with the company to gain an advantage for themselves or someone else or to cause detriment to the corporation [s 183]. These last two provisions also apply to employees of the company.
All of the provisions give rise to civil obligations. They are also civil penalty provisions. In a case where a court determines that a civil penalty provision has been contravened, it must make a declaration to that effect and may order the person pay the Commonwealth a pecuniary penalty of up to $200,000 and may order the person compensate the company for any loss as a result of the contravention [Part 9.4B]. The court may also disqualify the person from managing corporations for a period the court considers appropriate [s 206C].
The Corporations Act 2001 (Cth) also sets out criminal offences where a director or other officer acts recklessly or is intentionally dishonest in their failure to exercise their powers and discharge their duties in good faith and in the best interests of the company or for a proper purpose. Similarly, criminal offences are created where a person recklessly or intentionally dishonestly misuses their position or information they have gained through their position with the company [s 184].
Directors have a duty to make full and frank disclosure of information within their knowledge to enable shareholders to make properly informed judgments on any matter [s 191].
Each decision of a director can be scrutinised against what could have been done to most benefit the company by that director. Breaches of this duty allow a company to sue the director for damages suffered. This general duty includes the following specific duties.
Directors are under a duty to exercise discretion. This means they must use their independent, informed judgment in managing a company. Directors can delegate their discretion on certain matters and delegation can be valid if done carefully in the best interest of the company.
Directors are under a duty, and have a right, to deliberate. This means they must make a positive effort to be involved in, discuss, consider and use their discretion in acting on company matters.
Directors are under a duty to exercise power for proper purposes. A power that is exercised for a wrongful purpose is invalid. For example, a director may be acting with an improper purpose if new shares are issued, the company is restructured or gifts are made from the company's resources, to increase the power of that director. Acts performed for an improper purpose may be declared invalid, for example, issuing shares to defeat a takeover or to retain control of the company.
Directors are under a duty to avoid conflict of interest. A director usually cannot use an opportunity that arises in the course of business to profit personally at the expense of the company. In addition, a director cannot compete with the company, use the company's property for personal purposes or enter into contracts for the supply goods or services for the company unless making full disclosure to the company.
A director must also avoid any appearance, or mere potential, for a conflict to be perceived or to occur. Should a conflict of interest arise, a director must disclose the interest to the company. A director who does not declare a personal interest in an issue affecting the company commits an offence. If an interest is declared, the other directors may ask that person not to vote on the issue.
A director may be personally liable while acting on behalf of a company for any injuries suffered by people. Similarly a director may personally commit a crime even though acting for a company.
Directors have particular responsibilities in situations where the company is unable to pay its debts, when the company is placed in external administration, receivership, under official management or in liquidation or where a compromise or arrangement is entered into with its creditors. These include:
- a duty to prevent insolvent trading by the company [s 588G]. Directors who breach this duty may find themselves subject to Corporations Act 2001 (Cth) the civil penalty provisions of the . In some cases criminal liability may also arise. Directors allow a company to incur a debt which would make it insolvent or who fail to prevent an insolvent company from incurring a debt may find themselves civilly liable for the debt. A director's civil liability to pay the debt needs to be proved on the balance of probabilities. A director has a defence if it is proved that when the debt was incurred, the director had reasonable grounds to expect and did expect that the company would be able to pay all its debts as and when they became due.
- duties to assist external administrators by providing a report as to affairs and books and records of the company and other information as requested. Failure to comply with these requirements may be an offence under various provisions of Part 5.8 of the Corporations Act 2001(Cth) depending on the circumstances, including s 590 which makes it an offence to fail to deliver up property of the company or to fraudulently conceal property or a debt due to the company or to fraudulently dispose of property.
- Fraudulent incurring of debts or entering into a contract for the purpose of defrauding creditors is an offence [s 592]. The court may order the person to be personally responsible for payment of the debt [s 593].
There are many offences under the Corporations Act 2001 (Cth). The following is a list of the most common types of offences:
- failure by companies to file the appropriate returns ASIC
- failure by directors to disclose any conflict of interest they may have involving transactions of the company
- improper use of position by a director or officer of the corporation (for example, the secretary) to gain an advantage for her or himself or to a person other than the corporation
- dishonest conduct on the part of a director or officer of the corporation with respect to the discharge of her or his duties
- managing a corporation whilst disqualified from doing so under the Corporations Act 2001(Cth)
- misleading or false statements by promoters of companies to potential investors or failure to disclose information in accordance with the Corporations Act 2001(Cth) requirements
- share hawking by an unlicensed person
- failure of a securities or investment adviser to act honestly and in the best interests of the client
- market manipulation in relation to securities traded on the Australian Stock Exchange
- insider trading, that is dealing in securities whilst in possession of price sensitive information that is not generally available
Most of these breaches attract significant penalties under the Corporations Act 2001 (Cth) . Whilst there is some overlap between of breaches of the Corporations Act 2001(Cth) and the Criminal Law Consolidation Act 1935 (SA), a prosecution will be usually be brought under only one Act, not both.
In addition, certain contraventions, such as the failure by a director of a company to take all reasonable steps to ensure that their company keeps proper accounting records and directors failing to prevent their company trading whilst insolvent, constitute civil contraventions for which a court may impose a pecuniary penalty of up to $200 000, prohibit the person from managing a corporation and order he person to pay compensation.
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