1. What general duties are owed by directors?
2. What is a fiduciary relationship?
3. What constitutes duties of loyalty and good faith?
4. What constitutes duties of care, skill and diligence?
5. What is the statutory business judgment rule?
6. What are the limitations of the statutory business judgment rule?
7. What are the legal consequences of breaching directors duties?
1. What general duties are owed by directors?
- Directors owe duties of good faith and loyalty as well as duties of care, skill and diligence, primarily because they are in a fiduciary relationship with their company.
2. What is a fiduciary relationship?
Generally speaking, a fiduciary relationship is one where:
- A person is appointed to or assumes to act;
- For the benefit of another person (in this situation, the company, or more specifically the general body of members);
- In circumstances where the appointment confers power to the appointed person that could be abused in a way that detrimentally affects the company.
3. What constitutes duties of loyalty and good faith?
When exercising their discretions, directors must show qualities of fairness and loyalty. For example, they cannot take advantage of their position to benefit themselves, at the company’s expense, except with the company’s full knowledge and consent.
There are four sub-duties that constitute duties of loyalty and good faith:
- The duty to act in good faith in the interests of the company as a whole;
- The duty to exercise one’s powers for proper purposes as opposed to improper or collateral purposes;
- The duty not to fetter one’s discretion; and
- The duty to avoid actual or potential conflicts between one’s personal interests and those of the company.
4. What constitutes duties of care, skill and diligence?
- The duty to exercise reasonable care, skill and diligence in the performance of functions and the exercise of the powers which form part of the director’s office; and
- The duty to prevent insolvent trading by the company.
However, this duty is balanced by the statutory business judgment rule.
5. What is the statutory business judgment rule?
Pursuant to Section 180(2) and (3) of the Corporations Act 2001, a director satisfies the requirements of exercising their powers with due care and diligence, if they:
- Make the judgment in good faith 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 director’s or officer’s belief that the judgment is in the best interests of the corporation is rational one unless the belief is one that no reasonable person in their position would hold.
“Business Judgment” means any decision to take or not take action in respect of a matter relevant to the business operations of the corporations.
6. What are the limitations of the statutory business judgment rule?
- The business judgment rule only applies to breaches of the statutory duty of care in section 180(1) of the Corporations Act 2001 or the equivalent equitable or common law duties, not to other directors’ duties.
- Secondly it is only limited to “business judgments”, that satisfy Section 180(2) and (3) of the Corporations Act.
7. What are the legal consequences of breaching directors duties?
Legal action can be brought against a director for breach of his or her duties under either;
- The general law; or
- Part 2D.1 of the Corporations Act; or
- Both (that is, a director may be sued for breach of both general law and statutory duties in the same proceeding).
A director who breaches his or her duties may be sued by:
- The company;
- The liquidator, whilst acting on behalf of the company;
- A creditor;
- A shareholder;
- ASIC.
The court can make orders against a director committing a breach of his or her duty. There are two broad kinds of orders;
- Remedies; and
- Penalties.
Remedies are court orders whose object is to correct or remedy the state of affairs caused by the breach of duty. Penalties are orders made by the court or administrative orders made by ASIC.
