Overview of Directors
There are many different types of directors, such as executive and non-executive directors, managing director, independent directors, shadow directors, alternate directors, de facto directors, and nominee directors. In this article, we will address directors of Australian small-medium companies, who are registered as Office Holders with the Australian Securities and Investment Commission (ASIC), often referred to as De Jure Directors, especially in the UK and US.
As a director, you must govern a company on behalf of the shareholders and ensure that a company operates at the highest possible standards and complies with the relevant governing legislations.
Australian companies are primarily governed by the Corporations Act 2001 (Cth) and regulated by ASIC. ASIC is responsible for bringing civil or criminal proceedings against companies, the directors, and the officers for breach of duties, depending on the nature of the alleged breach.
Sources of Directors Duties
Directors owe duties under the general law and statutes, governed by:
- Statute, primarily under the Corporations Act
- The Common law (also referred to as the fiduciary duties)
- Taxation Acts
- Competition and consumer Act 2010 (supersede Trade Practices Act 1974 (Cth))
- Workplace Health and Safety (WHS) legislation
- Environment legislation
- Anti-bribery and corruption legislation
- Lastly, directors’ duties are also governed by the company’s own governing rules, being the constitution, and the shareholders
Directors duties under the Corporations Act
The statutory duties of directors are contained in Chapter 2D Part 2D.1 of the Act, to:
- Act with care and diligence in discharging their duties
- Act in good faith and for proper purpose (in the best interest of the company)
- Not improperly use their position, power, or privileged information to gain an advantage for themselves, someone else, or cause detriment to the company
- Not act recklessly and dishonestly
The Act further imposes a few additional duties on directors, including:
- Duty to disclose any conflict of interest s191 of the Act
- A duty to prevent insolvent trading. Under s588G of the Act, a director, or directors jointly, can be held personally liable for the debts of the company if they allow it to continue trading whilst it is insolvent or insolvency would objectively have been suspected
- The duty and obligation, per s 344 of the Corporations Act, to take all reasonable steps to comply, or secure compliance, with Pt 2M.3 (which deals with the preparation of company financial reports, directors’ reports, audit, reporting to members and lodgement with ASIC). As well as the duty with respect to maintaining the company financial records which the entity must keep under Pt 2M.2 of the Corporations Act.
Directors duties under common law (fiduciary duties)
Under the common law, directors owe a duty of care to their company. This is reinforced by s 180(1) Corporation Act. Furthermore, under equity law, the relationship between director and company is a fiduciary relationship with a high standard of loyalty. These are reflected in a number of duties:
- to act in good faith and in the best interests of the company
- to act for proper corporate purposes
- to give adequate consideration to matters for decision
- to keep discretions unfettered
- to avoid conflicts of interest in various kinds
Penalty for breach is levied on the company with the directors jointly and severally liable for the penalty
Directors liability under taxation legislation
The director penalty regime (DPR) allows the Commissioner of Taxation to make directors of a company personally liable for specified taxation liabilities of their company. These include:
- unpaid PAYG withholding amounts
- unpaid GST amounts (from 01 April 2020)
- unpaid super guarantee charge (SGC) obligations applicable from and including 30 June 2012 (that is, the June 2012 or later quarters).
the Commissioner may commence an action against any or all of the directors in an attempt to recover an amount equivalent to the underlying company’s liability.
Newly appointed directors must check if the company has any unpaid or unreported PAYG withholding, GST or SGC liabilities. As a new director, you have 30 days, starting on the day of your appointment, before you become liable to director penalties to all of the company’s unpaid PAYG withholding liabilities, GST, luxury car tax, wine equalisation tax, and SGC liabilities, unless all the liabilities are paid in full, or an administrator is appointed per s436 of the Corporations Act.
These liabilities are set out in various legislation, including the Income Tax Assessment Act 1936, Taxation Administration Act 1953 and the Corporations Act.
It is worth noting that where a corporation commits a taxation offence, a person who takes part in the management of the corporation (such as a director) may be considered to have committed the taxation offence and may be punishable accordingly.
Directors liability under the Australian Consumer Law (ACL)
The ACL imposes personal liability on directors for misuse of market power and product safety breaches. Additionally, the ACL enables ASIC and the Australian Competition and Consumer Commission (ACCC) to seek orders against directors and senior management for company breaches of consumer protection provisions including:
- Unconscionable conduct
- False representations in relation to the supply of goods
- Unsolicited agreements
- Breach of certain consumer safety provisions, including notification requirements
- Failure to comply with a substantiation notice.
Directors duties under workplace health and safety
Under the Work Health and Safety Act 2011 (Cth) (WHS Act), directors have a duty of due diligence and must exercise “reasonable and practicable” steps to mitigate WHS risks. Under the Act, directors have the obligations to:
- Ensure WHS and legal compliance
- Facilitate consultation on WHS issues
- Acquire and update his/her knowledge of WHS matters
- Understand the operations and the hazards and risks associated with the operations
- Monitor information on incidents, hazards and risks
- Ensure use of appropriate resources and processes to eliminate or minimise WHS risks
It is critical to note that under the WHS Act, the definition of ‘worker’ has been expanded to include contractors and other individuals carrying out work in any capacity, whether paid or as a volunteer. In Baiada Poultry Pty Ltd v The Queen, the High Court found the principal was not liable for the death of a contractor’s employee. However, the High Court made it clear the use of contractors does not necessarily clear directors from their WHS obligations.
Directors duties under environmental legislation
Environmental compliance processes should be adapted for each jurisdiction in which the business operates as environmental regulation is largely governed by state regimes. The duties imposed on directors vary state by state and each jurisdiction seeks to ensure directors are held personally liable for a company’s breach of environmental compliance.
Directors may claim defence if the court can be satisfied that:
- The business has a compliance system is in place and directors and officers regularly review the environmental compliance reports
- That the business has precautions in place to prevent specific and likely risks arising from operations, as well as a pollution prevention system that is supervised, inspected and improved over time
- Reasonable precautions were taken beforehand to prevent the incident
- The officers immediately and personally react when they have noticed the system has failed
Directors liability under Anti-Bribery and Corruption Legislation
Regulators and governments, in Australia and around the world, are becoming more aggressive and cooperative in investigating and enforcing anti-bribery and anti-corruption laws. Australia implemented the OECD Anti-Bribery Convention in 1999 by enacting anti-bribery and anti-corruption provisions in the Criminal Code.
Corruption is the misuse of a position for private gain and includes accepting bribes.
Bribery is an offence under both Commonwealth and State law and includes:
- Bribery of a Commonwealth or foreign public official. The Criminal Code prohibits providing a benefit not legitimately due to another person with the intention of influencing a foreign public official to obtain business or a business advantage. The meaning of a “benefit” is very wide and can include gifts, entertainment, or hospitality of any value.
- Bribery of state and territory public officials
- Bribery of agents and other fiduciaries in the private sector
Moreover, companies conducting international business, such as with the US or UK, must also be aware of the laws under the US Foreign Corrupt Practices Act 1997, and the United Kingdom Bribery Act. Jurisdiction and related parties under these laws can extend to co-conspirators regardless of whether they have entered the US or UK or not.
Directors should be alert to the risk that a failure to take reasonable steps to prevent, investigate and respond to potential bribery issues may constitute a breach of their duties.
In Summary
Whilst navigating the array of laws and regulations that impact on every facet of your company’s business can be a minefield, the fiduciary duty owed by a director to a company is absolute. It is a director’s job to guide, monitor and oversee all aspects of the company to ensure he or she acts in the best interest of the company.
“…what each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her…”
Justice Middleton J ASIC v Healey & Ors [2011] FCA 717
We hope that this guide provides you with a broad overview of the duties of directors of Australian companies. It is not intended, however, to be an exhaustive analysis of all relevant legal requirements. If you are uncertain about any of the issues raised in this guide or require further details or assistance, please do not hesitate to contact us.
By Gregory Atamian JJN Associates – Accountants Tax Advisors
The content and the references made in this article are correct as at the publication date and are for general information and should not be relied upon as advice. If you wish to seek particular advice, call us on 02 9997 4000.