Directors’ Duties in Australia

>> Liabilities and Penalties in Australia

As a director, you should exercise your responsibilities carefully as the penalties for failure to do so can be severe.

Breach of directors’ duties under the Corporations Act (Civil penalties):

  • you could receive a monetary penalty imposed by the Australian Securities and Investments Commission (maximum A$200,000) for breach of duties

Breach of directors’ duties under the Corporations Act (Criminal penalties):

  • misuse of information, misuse of position and failure to act in good faith
  • Criminal liability applies where a director’s breach of duty is reckless or intentionally dishonest and you could receive a term of imprisonment of  up to 5 years and/or up to A$360,000   (2,000 criminal penalty units, currently at A$180 per unit, effective from 31 July 2015, subject to indexation every 3 years)
  • failure to prevent insolvent trading
  • Criminal liability also applies where a director’s failure to prevent insolvent trading is dishonest. The sanction for such conduct is a term of imprisonment of up to 5 years and/or up to A$360,000 (2,000 criminal penalty units, currently at A$180 per unit, effective from 31 July  2015, subject to indexation every 3 years).

Director’s duties are provided for in statute and therefore cannot be contracted out of. The ambit of its application cannot be limited or restricted.

There are defences which directors could rely upon at general law, one such defence being the Business Judgement Rule. This defence creates a “safe harbour” for directors taking or omitting to take action, however this only applies to the duty of care and diligence. This rule provides a “checklist” defence which is detailed below, pursuant to which a director is taken not to have breached their duty of care and diligence if they have acted accordingly:

  • makes the judgment in good faith for a proper purpose
  • does not have a material personal interest in the subject matter of the judgment
  • informs himself or herself  about the subject matter of the judgment to the extent he or she reasonably believes to be appropriate
  • rationally believes that the judgment is in the best interests of the corporation

The other defence is where a director can show that in taking or omitting to take action they have placed reasonable reliance on information or advice provided by others.

However, the extent to which you are able to rely on these director defences is questionable, and recent court cases in which directors have sought to rely on them have proven less effective.  In particular, directors facing personal penalties for failing to ensure that their company complies with the law (under section 180(1) of the Corporations Act, i.e. the ‘stepping stone’ approach) may not be able to rely on the ‘Business Judgement Rule’ in these cases.

Either the breach of duty itself, or the imposition of one of the sanctions described above, may lead to disciplinary action being taken against you and/ or limitations upon you being able to continue in your role.

While a company can indemnify a director against the legal costs or damages associated with a civil action brought by a third party, under Part 2F.1A of the Corporations Act 2001 (Cth), a derivative suit can be brought by a shareholder against a director for breach of their duties.

Furthermore, the director, or directors, of a company can become jointly and severally liable for the actions of a company in certain circumstances. This includes becoming jointly liable for debts incurred by a company that trades while insolvent.

Indemnity

In some circumstances a company’s constitution may provide an indemnity to a director. However it is usually preferable, if a constitution takes a permissive approach to indemnification, for a director to enter into an agreement with the company to provide the indemnity. The agreement sets out the basis for the company to indemnify the director for personal liabilities and associated legal costs which result from their role as director. Deeds of indemnity also commonly deal with matters such as access to document and insurance. A Deed of Indemnity should be supported by a Directors’ and Officers’ insurance policy in respect of the directors’ liability.

Section 199A of the Corporations Act places certain restrictions on the scope of any directors’ indemnity, prohibiting indemnification for some liabilities including:

  • a liability owed to the company (i.e. for a breach of a duty owed to a company)
  • a liability for certain pecuniary penalty orders and compensations orders
  • a liability that is owed to someone other than the company that has arisen as a result of fraudulent, dishonest or criminal behaviour, or conduct involving lack of good faith
  • liabilities for legal costs relating to the above matters, where the director does not successfully defend the claim A company can advance costs to a director to defend claims alleging these matters, provided that these costs are repaid if the director is unsuccessful in defending the claim. Companies can also pay premiums for insurance related to many of these liabilities.

Delegation of Authorities

A company’s constitution may provide that directors may delegate some or all of their powers (other than powers required by law to be dealt with by the directors as a board) to any person (i.e. a managing director), or to a committee or committees. The terms and conditions of such appointments is usually determined by the Board.

Section 198D of the Corporations Act also provides that, unless the company’s constitution provides otherwise, the directors of a company may delegate any of their powers to:

  • a committee of directors
  • a director
  • an employee if the company
  • any other person

The delegation must be recorded in the company’s minute book, and the directors may provide directions in relation to the exercise of powers to be complied with by a delegate, Under the Corporations Act, if the directors delegate a power under section 198D of the Corporations Act, a director is responsible for the exercise of power by the delegate as if the power had been exercised by the directors themselves. This responsibility is subject to certain exceptions contained in section 190(2) of the Corporation Act, such as where the director believed on reasonable grounds, in good faith and after making proper inquiry that the delegate was competent and reliable in relation to the power delegated.


Latest version updated 21st March 2018

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