Directors’ Duties

18 December 2020

One of the most common reasons for setting up a company is to allow the company to own and operate a business to limit the personal liability of the people running the business (namely, the directors).

Whilst this is in large part true, directors who breach their duties in common law, equity and under statute may be pursued personally by liquidators if the company becomes insolvent.

The Duties

Act in Good Faith: Whilst many judgments have commented on this duty, the NSW Court adopted the following list of more specific requirements of the duty outlined by the Western Australian Supreme Court:

  1. act in the interests of the company, and not misuse or abuse directors’ powers;
  2. avoid conflict between personal interest and interests of the company;
  3. avoid using position to make secret profits; and
  4. do not misappropriate company’s assets for themselves.

Act for Proper Purpose: Central to this duty is that the director does not act in their own interest which includes gaining a personal advantage, disadvantaging the company and improperly using company information.

Act with Care and Diligence: This duty requires a director to take reasonable steps to manage and monitor the affairs of the company such as attending board meetings, understanding the company’s financial position and reviewing and maintaining current financial records.

Interconnected with the above duties is the protection afforded to a director by the business judgment rule. In order for the rule to apply a director must have made a business judgment, in good faith, for a proper purpose and being aware of the company’s current circumstances.

Lastly, a director is required not to trade a company while it is insolvent, subject to certain provisions of the Corporations Act 2001 (Cth), namely the safe-harbour provisions.

Please contact Walker & George to either discuss how we may assist your company or advise you in your capacity as director.