Taking Care of Business: Directors’ Duties Today

You probably saw Steve Vizard on the news the other day, after he was banned from being a company director for ten years and fined $390,000 for improperly using his position as a director to gain an advantage for himself.

Not long ago, a number of the former directors of collapsed insurance company HIH were in the headlines, accompanied by photographs of them leaving court looking downcast. After pleading guilty, some directors received jail terms of up to four years.

Even if you’re not messing around with millions, directors’ duties are serious stuff. Increasingly, corporate regulators are demanding that someone be called to account – even those below board level. Here’s a rundown of the current laws surrounding directors’ duties, with an eye to some recent developments.

The basic idea:

Directors have a number of legal duties to their company. Because they are not (in theory, at least) personally liable for the company’s acts, but the fortunes of shareholders and/or creditors depend on them, they have been placed in a special position of trust and confidence.

The main duties:

Duty to act in the best interests of the company: Probably the most fundamental duty is that directors mustexercise their powers and discharge their duties in good faith in the best interests of the company - Section 181 of the Corporations Act.

Duty to act honestly: This includes not making improper use of the position or any information acquired while in that position to gain an advantage or to cause detriment to the company – Sections 183 and 184 of the Corporations Act. By exploiting confidential boardroom information to trade in shares, Steve Vizard was found to have breached this provision.

Duties of care and skill: Directors don’t have to be demonstrably brilliant businesspeople, but they are required to apply the judgment that would reasonably be expected of a person of their knowledge and experience. Similarly, the law frowns on so-called “sleeping directors” – directors are expected to actively take responsibility for the affairs of their company and ignorance or passivity is no excuse. These are duties at common law and under Section 180 of the Corporations Act.

So you only have to keep in mind the best interests of the company, whatever that is?

At the moment, that essentially means the interests of shareholders in the company. If the company is on the brink of insolvency, then it can encompass the interests of creditors, although to a lesser extent.

But the Corporations and Markets Advisory Committee (CAMAC) has been requested to investigate the extent of directors duties in Australia, including whether the Corporations Act should be amended to require directors to take into account the interests of groups other than just shareholders.

And these duties apply only to directors?

Currently, yes. But, managers, don’t think that you’re off the hook. Those busy people at CAMAC have issued a discussion paper entitled Corporate duties below board level .

Because managers rather than directors are responsible for the everyday management of companies, especially big corporations, CAMAC wants the corresponding duties to be extended. In the paper, CAMAC proposes to extend directors’ duties to any person who 'takes part, or is concerned, in the management of that corporation'.

Another thing to keep in mind is that the chairman of a company may have greater obligations than the other directors – as was found in ASIC v Rich in the NSW Supreme Court, which is yet to be tested in the High Court.

What happens if you don’t observe them?

Breach of these duties can expose directors to civil and or criminal penalties. The former, as those faced by Steve Vizard, can lead to a ban on company involvement and a fine. The court can also order the director to pay compensation to the company, an accounting of profits, or the director’s dismissal. As the experience of the HIH directors demonstrates, criminal penalties are far more serious: you can end up in jail.

The corporate regulator, the Australian Securities and Investments Commission (ASIC), is primarily responsible for investigating corporate misbehaviour by directors and bringing charges if it believes there is a case. Whether ASIC decides to bring civil or criminal proceedings depends firstly on a number of factors, including the severity of the offence, the available evidence, and whether there are provisions for civil or criminal proceedings for that offence in the Corporations Act.

Conclusion

As you can see, directors need to take a lot of care with their business. You need to concentrate on your company, rather than worrying about impending developments in the law of directors’ duties. That’s where a solicitor can help. Geoff Bartels Business Lawyer can advise you about complying with the law, and can inform you of any changes when they occur.

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