Directors – Duties and Obligations
Becoming a director of an Australian company involves taking on many duties and obligations. This article briefly explores some of those.
Corporations Act 2001
General Duties
The Corporations Act imposes a number of duties on directors including:
1. Section 180 the duty to exercise care and diligence.
2. Section 181 the duty of good faith.
3. Section 183 the duty to not to improperly use their position.
4. Section 183 the duty not to improperly use information obtained.
Breach of any of these civil obligations may lead to the Court making a “declaration of contravention” according to section 1317E.
ASIC (the authority governing corporate behaviour) may then ask the Court to impose a fine of up to $200,000 on the director if the breach materially prejudices the interests of the company or its shareholders, materially prejudices the company’s ability to pay its creditors or is serious pursuant to section 1317G.
The Court may also order the director to compensate the company for any damage suffered by the company as a result of the breach according to s1317H. In addition, ASIC may ask the Court to disqualify the director from managing companies for a period the Court considers appropriate if the Court is satisfied that the disqualification is justified in accordance with section 206C.
Section 184 also imposes criminal liabilities on directors if they
(a) are reckless or intentionally dishonest and fail to act in good faith in the best interests of the company or fail to act for a proper purpose;
(b) use their position dishonestly with the intention of gaining an advantage for themselves or someone else or with the intention of causing detriment to the company;
(c) use their position recklessly so that the use may result in themselves or someone else gaining an advantage or may result in causing detriment to the company;
(d) use information they have obtained through their position dishonestly with the intention of gaining an advantage for themselves or someone else or with the intention of causing detriment to the company; or
(e) use information they have obtained through their position recklessly so that the use may result in themselves or someone else gaining an advantage or may result in causing detriment to the company.
Directors guilty of an offence under section 184 face a maximum penalty of 2,000 penalty units (currently $220,000), 5 years imprisonment or both.
Duty to Prevent Insolvent Trading
The Corporations Act imposes a strict duty on directors to prevent insolvent trading. Section 588G imposes a civil obligation on a director to prevent the company from incurring a debt when he or she is aware that there are grounds for suspecting, or a reasonable person in a similar position in a company in the company’s circumstances would be aware, that the company is insolvent or would become insolvent by incurring the debt. If a director breaches this duty, the Court may make a “declaration of contravention” and impose a fine or disqualification period if ASIC so requests.
Further, Division 4 of Part 5.7B of the Act imposes personal liability on the directors for insolvent trading. For example, section 588M provides that the Court may order the director, following the company’s winding up, to pay an amount equal to the amount of the loss or damage to the creditor, on the request of the creditor or the liquidator.
Extended Definition of “Director”
It should be noted that section 9 of the Corporations Act extends the definition of a director to include a person
(a) who is appointed to the position of a director irrespective of the name given to the position;
(b) who is appointed to the position of an alternate director and who acts in that capacity, irrespective of the name given to the position;
(c) who acts in the position of a director even if the person is not appointed as a director; or
(d) whose instructions or wishes the directors of the company are accustomed to acting in accordance with, even if the person is not appointed as a director, unless the person advises the directors in the course of his or her professional capacity or business relationship with the directors or the company.
Other Acts
A number of other laws impose duties upon directors of companies. Some of the relevant Acts include:
Occupational Health and Safety Act 2000 (NSW) – This Act aims to secure the health, safety and welfare of persons at work. For example, section 8 requires employers to:
(i) ensure that any premises controlled by the employer where employees work are safe and without risks to health;
(ii) ensure that any plant or substance provided for use by employees at work is safe and without risks to health when properly used;
(iii) ensure that systems of work and the working environment of employees are safe and without risks to health;
(iv) provide such information, instruction, training and supervision as may be necessary to ensure employees’ health and safety at work; and
(v) provide adequate facilities for the welfare of employees at work.
Section 26 provides that if a company contravenes a provision of this Act, each director is taken to have contravened the same provision. Where a director breaches section 8, the maximum penalty for the first offence is 500 penalty units (currently $55,000). If the director has previously offended, the maximum penalty increases to 750 penalty units (currently $82,500) or 2 years imprisonment or both.
Taxation Administration Act 1953 – section 8Y similarly deems a director to have committed a tax offence where a company does or omits to do an act or thing the doing or omission of which constitutes a tax offence. The director may then be penalised according to the provisions of the tax offence. In addition, the Court may order that the director compensate the Commissioner of Taxation for any loss suffered or expense incurred as a direct result of the offence, including any unpaid taxes (section 21B of the Crimes Act 1914). For example, a company director who was fined $500 for each of 13 sales tax offences under section 8Y was also required to pay the company’s sales tax debt of $250,000 (Bonham).
Part VI Division 9 also imposes a personal liability on directors for tax deducted or which should have been deducted from amounts paid by the company (for example, PAYG income tax instalments for employees) which has not been remitted to the Commissioner of Taxation. The director however is entitled to be indemnified by the company and by other directors.
Trade Practices Act 1974 – This Act aims to promote competition, fair trading and consumer protection through measures such as
(i) prohibiting trade practices that substantially lessen competition (Part IV);
(ii) prohibiting conduct that is unconscionable or unfair (Part IVA); and
(iii) protecting consumers from, for example, misleading or deceptive conduct, false or misleading representations and unsafe products (Part V).
Whilst this Act is primarily aimed at the conduct of companies, directors may be held liable if they are involved in a breach of the Act. Section 75B considers a person to be involved when he or she has
(a) aided, abetted, counselled or procured the breach;
(b) induced, whether by threats or promises or otherwise, the breach;
(c) been in any way knowingly concerned in, or party to, the breach; or
(d) conspired with others to effect the breach.
If a person is found to be involved in a breach of the Act, he or she may be ordered to pay up to $500,000 for each breach according to section 76. In addition, a Court may order that he or she indemnify a person who has suffered or is likely to suffer loss or damage through his or her conduct pursuant to sections 82 and 87.
Fair Trading Act 1987 (NSW) – This Act aims to regulate the supply, advertising and description of goods and services and is in many ways similar to the Trade Practices Act. The Fair Trading Act also imposes personal liabilities on persons involved in breaches of the Act under section 61. Section 62 provides that a person may be fined up to 200 penalty units (currently $22,000) for a first offence. For a second or subsequent offence, a maximum term of 3 years imprisonment may be imposed as an alternative or in addition to any monetary penalty.
For further information please contact David Beale on (02) 9957 3685 or dbeale@rbhm.com.au.
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