Director Duties: The Basics

What are the key duties of a director of a company?

As a director of a company, you will be asked to make many decisions in relation to the conducting of the company and any transactions it may enter into. When making these decisions, it is important to consider how your decision corresponds with the provisions of the Corporations Act 2001 which stipulate the duties to be exercised by a company director:

• Duty to act with care and diligence;

• Duty to act in good faith in the best interests of the company and for a proper purpose;

• Duty to not use their position to gain an advantage for themselves or someone else or cause detriment to the company; and

• Duty not to use information gained as a result of their employment to gain an advantage for themselves or someone else or cause detriment to the company.

• Criminal sanctions may apply for contravention of the duties to act with care and diligence, to act in good faith in the best interests of the company and for a proper purpose and to not use position to gain an advantage or cause detriment to the company;

The case of ASIC v Adler, involving a HIH director, is a perfect example of the importance of ensuring an effective method of corporate governance is in place, whether it be a corporate constitution or memorandum of association.

In this case, Adler was a director of HIH Insurance. In issue was a payment of $10 million dollars by a subsidiary of HIH to a company of which Adler was the sole director. Some of this payment was used to make loans to entities which were associated with Adler. This occurred without board or member approval and there was no collective disclosure to the board. The loans were given without proper documentation or security being sought and payment was made so that it would be hidden from other directors.

The method of corporate governance in place at your company should be designed to safeguard a company from the improper conduct of directors and should have sufficient protection so that the system cannot be overlooked.

In this regard, you may wish to:

• Introduce a reporting structure for all directors’ decisions;

• Ensure that checks and measures are in place requiring that all legal documentation is in place and correctly completed for any transactions the company enters into. An example of this may be a requirement that all contractors are informed that any contract must be in writing and requires the signature of at least two directors.

If you, as a company director, are involved in a transaction in which you may be perceived as having an interest or as breaching your duties, it would be prudent for you to:

• Fully disclose your interest;

• Abide by the reporting structure of the company;

• Ensure that you act at arm’s length in any transaction by having in place the adequate legal documentation and security; and

• Ensure that conflicts and potential conflicts of interest are avoided.

What to do next: If you are looking to establish a company or are currently involved in a company and need some advice on the role and duties of a director or on corporate governance, call Joe Kafrouni on 07 3121 3177.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Company directors should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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