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Directors duties: Taking it back to basics

Directors duties: Taking it back to basics

Hoda Nahlous and Michael Chin argue the need for clarity regarding directors duties and obligations.


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Directors with puzzle pieces above their head

Amongst the changing governance landscape with respect to directors’ duties and liabilities, it is important to remember that the general duties of directors are owed to the company for which they are a director.

The Australian Securities Exchange (ASX) consultation process currently underway to update the ASX Corporate Governance Council’s Principles and Recommendations attempts to expand the demographic for whom directors must have regard to in order to preserve their organisation’s “social licence to operate”. For this purpose, the ASX suggests that an entity’s board must consider the views and interests of other stakeholders, such as customers, suppliers, consumers taxpayers and others.

Although well-intended, and aligning with the public desire that continues to build momentum for corporates to operate having a greater sense of social responsibility, this has added to the confusion as to for whom directors owe their key duties.

Directors' key duties in brief

In performing their role, directors are subject to certain duties and obligations under the Corporations Act 2001 (Act), the common law, and the company’s constitution. In brief, the key duties for directors are to:

  • exercise their powers and discharge their duties for the purpose for which they were conferred and act with reasonable care and diligence (Section 180 of the Act) - one of the key duties of directors is to act with care and diligence (also known at common law as the duty to act with “care, skill and diligence”). An objective test is applied to measure the reasonableness of actions by directors (both executive and non-executive directors). However, a director’s position and specific responsibilities are relevant when applying the objective test.  Importantly, a director who makes a “business judgment” is taken to satisfy their duty of care and diligence in respect of that judgement. A “business judgement” must be a conscious decision by a director to either, take, or not to take, any relevant action.
  • exercise powers and discharge duties in good faith in the best interests of the company and for a proper purpose (Section 181 of the Act) ­-  the duty to exercise powers for a proper purpose and the obligation to act in good faith are separate duties. 
  • not improperly use company information or position to gain advantage for themselves or someone else or to cause detriment to the company (Sections 182 and 183 of the Act) – this prohibition comes from the fiduciary duty to prevent conflicts arising between a director’s private interest and the company’s interest and the obligation to act only in the best interests of the company.
  • prevent insolvent trading (Section 588G of the Act) – directors have a duty to prevent the company from insolvent trading. Certain defences exist to civil claims for insolvent trading. In addition, there is also the “safe-harbour” carve out in Section 588GA – directors are protected in relation to debts the company incurs in connection with developing and taking a course of action that is reasonably likely to lead to a better outcome for the company (than proceeding immediately to voluntary administration or winding up).

Civil vs Criminal penalties

Sections 181-183 are civil penalty provisions. Section 184 operates to convert Sections 181 – 183 to criminal offences where dishonesty or recklessness are present.

Importantly, no suggestion was made by the Taskforce into the Australian Securities and Investments Commission (ASIC) enforcement regime that any changes were required with respect to the workings of these provisions (other than with respect to increasing certain penalties).

This is a high-level summary of those key directors’ duties that have been the subject of current discussion. KPMG Law would be pleased to discuss these duties in detail, as well any other current live issues concerning directors.

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