Duties of directors

Top Tips

1. A director must exercise their powers and discharge their duties with the degree of care and diligence that a “reasonable person” would be expected to exercise. The ‘business judgment rule’ recognises this risk and protects directors against breaches of their duty of care and diligence.
2. A director of a company must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.
3. It is crucial to understand that directors or officers can't use their position or confidential information to gain an unfair advantage for their company or anyone else.

Introduction

The Corporations Act 2001 (Cth) (Act) regulates companies in Australia. It also imposes duties and responsibilities on directors and officers of companies. The Australian Securities & Investments Commission (ASIC) is an independent Australian government body that regulates and enforces the Act.

In addition to statutory duties, the duties and responsibilities of directors are governed by the common law, equity and a company’s constitution.

In the third episode of our Director Information Series, we outline the requirements under the Act for directors to exercise care and diligence, and act in good faith.  We also consider what constitutes improper use of position or information.

Duties of directors

Care and diligence

A director must exercise their powers and discharge their duties with the degree of care and diligence that a “reasonable person” would be expected to exercise in the circumstances.[1] The reference to reasonable person indicates an objective standard of care.  A breach of s 180 gives rise to civil liability only and not criminal liability.

Sometimes, a director’s well-intentioned decision can lead to a poor outcome. The ‘business judgment rule’ recognises this risk and protects directors against breaches of their duty of care and diligence.

The Act states that a director has fulfilled their responsibility of care and diligence, regardless of the outcome, if they meet the below criteria.:[2]

• make a business judgment in good faith and for a proper purpose; and
• do not have a material personal interest in the subject matter of the judgment; and
• inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
• rationally believe that the judgment is in the best interests of the corporation.

The business judgment rule was introduced into the Act in 2000. Since then, it has only been successfully utilised as a defence to a breach of s 180 on a few occasions.[3]

Directors should be aware that breaching their duty of care and diligence could result in significant civil penalties from ASIC.[4] In addition, they may face claims for damages from the company or become defendants in shareholder class actions.

Good faith

A director of a company must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose, as referenced in s 181 of the Act.[5] This includes avoiding conflicts of interest and revealing and managing conflicts if they arise.

In practice, this means that a director must act in the interests of the shareholders of the company as a whole. The duty does not extend to a wider range of stakeholders (for example, customers or creditors).[6]

This is a civil penalty provision[7] but the Act also creates a criminal offence for the same conduct.[8] The fault elements of the criminal offence are dishonesty and recklessness and must be proven beyond a reasonable doubt.

Improper use of position or information

A director must not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the company.[9] A director may be found to have contravened this duty regardless of whether the advantage or detriment actually occurs.

A director must not improperly use the information obtained as a director to gain an advantage for themselves or someone else or cause detriment to the company.[10] A director may be found to have contravened this duty regardless of whether the advantage or detriment actually occurs.

Each of these duties is a civil penalty provision but the Act also creates criminal offences for the same conduct. The fault elements of these offences are intention and recklessness.[11]

It is crucial to understand that directors or officers can't use their position or confidential information to gain an unfair advantage for their company or anyone else. This is considered an offence and using such information or position to gain an advantage won't be accepted as a defence in court proceedings.[12]

Case study

ASIC v Star Entertainment Group Ltd

In December 2022, ASIC launched civil proceedings against 11 current and former directors and officers (the Defendants) of the Star Entertainment Group (Star) for alleged breaches of their statutory duty of care and diligence (s 180 of the Act).

The pleadings alleged that Star’s directors and officers should have taken meaningful action to respond to material risks of criminal association and money laundering in the period 2017-2020. ASIC sought declarations that the Defendants breached their duty as well as for the imposition of civil penalties and disqualification orders against them.

The allegations concern the following circumstances:

• Star approved dealings involved with certain individuals with reported criminal links and did not address the money laundering risks by inquiring into whether Star should be dealing with the individuals.
• Star did not take steps to make further enquiries of management when provided with information about money laundering risks and that this was a breach of their director’s duties.
• Star did not adequately address the money laundering risks that arose with certain individuals, as well as continuing to deal with the individuals despite becoming aware of reports of criminal links.
• Officers failed to escalate money laundering issues to the Board.

The case serves as a reminder for all directors and officers that ASIC expects boards to adopt an active role, especially with respect to risk management. 

It is also the first time that ASIC has sought to pursue an entire board for alleged breaches of their director’s duties related to non-financial risk management.  Any judgment is likely to impact future corporate governance standards in this area.

[1] Act, s 180(1)

[2] Act, s.180(2)

[3] ASIC v. Rich [2009] NSWSC 1229 and ASIC v. Mariner Corporations Ltd [2015] FCA 589

[4] Act, s 1317E

[5] Act, s.181

[6] Australian Securities and Investment Commission v Maxwell and Ors [2006] NSWC 1052 at [107 - 110]

[7] Act, s 1317E

[8] Act, s 184(1)(c)

[9] Act, s.182

[10] Act, s.183

[11] Act, ss.184(2) and 184(3) 

[12] Act, ss.184(2A) and 184(4)

Source – Sparke Helmore Lawyers by Scott McDonald and Jocelyn Sutcliffe