Directors’ Duties in Australia

>> Powers and Duties in Australia

In Australia, directors’ duties arise under legislation (in particular the Corporations Act), under an extensive body of case law and less commonly (and, if applicable, typically to a less important extent) under the company’s constitution.

Directors are fiduciaries meaning they owe special and very stringent duties to the company including, without limitation, the duty: to act honesty

  • to exercise care and diligence
  • to act in good faith in the best interests of the company and for a proper purpose
  • not to improperly use their position or company information
  • to disclose their material personal interests and avoid conflicts of interest

Duties – Skill and Care

When exercising directors’ powers, you are required to exhibit ‘such a degree of skill as may reasonably be expected’ from a person with your knowledge and experience.

You will be taken to have fulfilled the requirements of the duty of care, diligence and skill if you make ‘business judgments’: in good faith and for a proper purpose

  • without material personal interest in the subject matter
  • after informing  yourself of the subject matter to a reasonably appropriate extent
  • that you rationally believe to be in the best

interests of the company

Duties – General

When exercising directors’ powers, you are As a director of a company, you must act in a way that you think is most likely to promote the success of the company.  You need to consider a number of statutory factors relating to corporate requirements, including the long term consequences of your decisions, the company’s reputation, and the interests of other stakeholders such as employees, customers and the community.

You must exercise your powers and discharge your duties in good faith in the best interests of any company to which you are appointed as a director and for a proper purpose. Accordingly, you must take care not to be involved in actions which can be construed as not being in good faith or not being for a proper purpose.

You must not improperly use information obtained in your position, or otherwise improperly use your position to gain an advantage for yourself or someone else, or cause detriment to the company.

You must prevent the company from incurring a debt, where you are aware that at that time there  are grounds for suspecting,  or a reasonable person in a similar position in the company’s circumstances would be so aware, that the company is insolvent or will become insolvent as a result of incurring the debt.

You must exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are properly informed about the financial position of the company, ensuring that the company meets its legal obligations (known as the ‘stepping stone’ approach) and ensuring the company doesn’t trade if it is insolvent.

A person in the position of director will be in possession of, or have access to information which is “inside information”, being information regarding the company that is not generally available, or if the information was generally available, a reasonable person would expect it to have a material effect on the price or value of the company.  Alongside your duty not to misuse your position and information, you must not (directly or indirectly) communicate or cause the communication of inside information to another person, if you know or ought reasonably to have known, that the other person would or would be likely to apply for, acquire or dispose of (or procure another to apply for, acquire or dispose of) shares in the company.

Duties – Other

There are many other areas of law that impose duties on directors and senior managers.  Matters likely to be of particular relevance, depending upon the nature of the entity and its activities, are set out below.

  • as a director you can be liable for failure to ensure corporate filings are made on time and for failure to maintain company books and registers, including the register of members. You must also ensure that you notify the authorities (ASIC, in particular) of any changes to the entity such as;
    • personal details of newly appointed directors and secretaries and changes to the details of office holders
    • changes to the registered address
    • changes to details of members and
  • as a director you must also take reasonable steps to comply, or to ensure compliance with, the financial reporting and audit requirements of the Corporations Act, including the requirement to keep proper books and records. This involves ensuring that appropriate accounting policies and appropriate controls are put in place to maintain complete and accurate financial records
  • like all employees, you must also comply with Anti-Bribery and Corruption legislation, including the UK Bribery Act and the US Foreign Corrupt Practices Act, and must understand, follow and promote the internal policies and procedures
  • in Australia the Criminal Code Act 1995 (Cth) imposes criminal liability on a person if they are found guilty of bribing a Commonwealth public official or bribing a foreign public official for the purpose of obtaining or retaining a business advantage
  • you must comply with all competition law and regulations. This includes ensuring that the company does not make false or misleading representations in respect of the supply or the possible supply of goods and services. Under Australian Consumer Law, a director can be held personally liable for representations made in contravention of the Competition and Consumer Act (2010) (CCA) and cannot be indemnified against pecuniary penalties that are ordered against them personally
  • the CCA also imposes criminal and civil sanctions attached to directors engaging in cartel conduct; price fixing; restricting outputs in the production and supply chain; allocating customers, suppliers or territories; and bid rigging. There are also laws that impose pecuniary penalties for conduct constituting misuse of market power and resale price maintenance
  • the Australian Consumer Law which forms a schedule to the CCA regulates general standards of business conduct, prohibits unfair trading  practices, provides basic consumer guarantees for goods and services, and  regulates the safety of consumer products and product-related services. Directors can be held liable for failing to prevent conduct in breach of this law
  • you must comply will all areas of tax law and regulations. In particular, as a director you can be personally liable under the Director Penalty regime for unpaid and unreported Pay As You

Go (PAYG) withholding or Superannuation

Guarantee Charge (SCG) Amounts

  • you must ensure that the company does infringe intellectual property rights. Directors having control of a company that infringes copyright or other intellectual property (i.e. patents) may be liable for the authorisation of the infringement

Financial reporting

  • you are required to have a degree of financial literacy in order to discharge your duties
  • a company’s financial statements (and notes to the statements) must give a true and fair view of the financial position and performance of the company (or consolidated group). It is a director’s duty to ensure that the company meets its obligations under law, including

in relation to the preparation of financial statements

Environmental

You can become personally liable for activities of the company which breach relevant environmental protection regulations. In Australia, environmental protection laws are legislated at State and Territory level. However by way of example, in New South Wales, there are a number of environmental protection laws which create liability for directors, including the Protection of the Environment Operations Act 1997 (NSW) (POEO Act), which creates personal liability for corporate officers, including directors, for the commission of an offence by the company.   Certain environmental offences under the POEO Act, attract individual fines of up to $250,000 and a penalty of $60,000 for each day the offence continues, this includes the following offences:

  • carrying out of scheduled development works without a licence
  • failure to comply with clean up notices or prevention notices
  • providing misleading information about waste

Increasingly, there is also suggestion that directors who fail to properly consider the impact of foreseeable climate change risks on their business could be held personally liable for breaching the duty of due care and diligence they owe to their companies. As a matter of Australian law, directors should therefore now actively engage with the impacts of climate change-related risks on their operations and strategy in order to satisfy their duty of due care and diligence under section 180 of the Corporations Act.

Health and Safety

In an attempt to harmonise the various State and Territory laws legislation was developed, consisting of a model Work Health and Safety Act

2011 (Cth) (WHS Act), model Work Health and Safety Regulations 2011 (Cth) (WHS Regulations) and model Codes of Practices and a National Compliance and Enforcement Policy.

To date, the model WHS Act and WHS Regulations have been implemented by the Commonwealth, the Australian Capital Territory, New South Wales, the Northern Territory, Queensland, South Australia and Tasmania.

Under the WHS laws, a director can be held personally liable for a company’s failure to exercise all due diligence to prevent contravention of the laws. The maximum penalty that can be imposed on a director is AU$600,000 or 5 years imprisonment, or both. The WHS Act and WHS Regulations impose personal liability on directors for failure to exercise all diligence.

Due diligence at its simplest, requires an officer to concentrate on managing the work health and safety risks of the business.  This reflects the fact that an officer (including a director) is in a position to influence business affairs of a company, and governs and makes management decisions for the company.

The following is a non-exhaustive list of examples of reasonable steps that directors must take to ensure they are exercising due diligence:

  • acquiring and keeping up to date with knowledge of work health and safety matters
  • gaining an understanding of the company’s business operations and the associated hazards and risks
  • ensuring the company has available for use, and uses, the appropriate resources and processes to eliminate or minimise risks to health and safety
  • ensuring the company has appropriate processes for receiving and considering information regarding incidents, hazards and risks and responding in a timely way to that information
  • ensuring the company implements processes for complying with any duty or obligation under the WHS Act and WHS Regulations
  • verifying the provision and use of resources and processes required for compliance

Data Privacy

In Australia, privacy law generally relates to the protection of individuals’ personal information. The principal legislation in Australia is the Privacy

Act 1988 (Cth), which, following amendments in

2013, lays down 13 Australian Privacy Principles (APPs) which regulate the way that entities collect, use, disclose, secure, provide access to and correct personal information.

The sanctions for failure to comply are directed at entities with powers of enforcement residing in the Office of the Australian Information Commissioner.

Although private rights of action for privacy- related acts are currently limited, rights may arise through recourse to other causes of action, including where an entity has engaged in misleading or deceptive conduct by failing to comply with the entity’s privacy policy.

Directors can be liable under this section to penalties including injunctions, damages and compensatory orders.

 


Latest version updated 21st March 2018

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