A company director governs a company on behalf of the shareholders (or members) of that company. Directors have a duty to ensure compliance with general and specific laws and to exercise their powers and discharge their duties with the degree of care and diligence of a reasonable person in the same circumstances.
Who Can be a Director in Australia?
Section 201B of the Corporations Act 2001 (Act) states a director must:
- be an individual;
- be at least 18 years of age and consent to taking on the role in writing prior to appointment; and
- not be disqualified from managing corporations under Part 2D.6 unless the appointment is made with ASIC’s permission as provided for under section 206F of the Act or leave is granted by the Court under section 206G of the Act.
Proprietary companies must have at least one director, who must ordinarily reside in Australia. (For more information on proprietary limited companies, please refer to A Proprietary Limited Company in Australia). Public companies have a minimum of three directors, at least two of whom must ordinarily reside in Australia.
Duties of Directors
Directors’ duties in Australia are governed by:
- the common law (case law);
- statute, primarily the Corporations Act 2001 (Cth); and
- the company’s governing rules, being the Constitution, and, where applicable, a Shareholders Agreement.
The key duties of directors in Australia include:
- Acting in good faith and in the best interests of the company – a director must to act in good faith in the best interests of the company and for a proper purpose (section 181 of the Corporations Act). This includes avoiding conflicts of interest (refer to point 3), and revealing and managing conflicts if they arise.
- Acting with care and diligence – a director must act with the degree of care and diligence that a reasonable person might be expected to show in the role (section 180 of the Corporations Act).
- Avoiding conflicts of interest – Directors should disclose matters relating to the affairs of the company in which they have a material personal interest (section 191 the Corporations Act).
- Not to improperly use information or their position – These duties require directors to not improperly use their position (section 182 of the Corporations Act) or information they gain during their directorship (section 183 of the Corporations Act) to gain an advantage for themselves or someone else, or to the detriment to the company.
- Not to trade whilst insolvent – A company is insolvent if it is not able to pay all of its debts, as and when they become due and payable. Directors must ensure the company does not trade if insolvent (s588G of the Corporations Act). A director who breaches this duty may be ordered by a court to pay civil penalties or incur criminal penalties.
Consequences for Breaching Directors’ Duties in Australia
There are potentially severe legal consequences if a director breaches their duties under Australian law. These consequences vary depending on the type and the severity of the breach. Examples include:
- criminal sanctions and penalties, including imprisonment;
- civil sanctions and penalties; and
- disqualification from being a director.