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Summary of Australian Statutory & Common Law Directors’ Duties 2015

24th Oct , 2017

Summary of Australian Statutory & Common Law Directors’ Duties 2015 1

Company 1

Director 1

Director’s Duties 1

Statutory Duties 2

Section 180(1) – Care & Diligence 2

Section 181(1) – Duty to Act in Good Faith 2

Section 182(1) – Use of Position 2

Section 183(1) – Use of Information 2

Section 191(1) – Disclosure of Interest 2

Duty to Avoid a Conflict of Interest 3

Duty to Exercise Power for a Proper Purpose 3

Duty to Retain Discretion 3

Insolvent Trading 3

Recovery action by the Australian Tax Office (ATO) 4

Defrauding Creditors 4

Trade Practices Act 1974 (Cth) (‘TPA’) 4

Environmental Protection Act 1970 (Vic) (EPA) 5

Occupational Health & Safety 5

Company

A Company is an association of a number of people with a common object. It is owned by Shareholders & managed by Directors. Once created the company is an entity in its own right & has a legal personality to do what a natural person can do. For example, a Company can own property, & sue & be sued in its own right.

Director

A Director is a person employed as an officer of a company & has a duty to perform the duties of management of the business of the company.

Director’s Duties

Below are the several main directors’ duties found at Common Law & in the Australian Corporations Law.

Directors’ duties derive from three potential sources: –

  •  Statute, primarily the Corporations Law;
  •  Those developed by the Courts, particularly those duties arising from a director’s fiduciary position; &
  • Those that may be expanded upon or shaped by the particular circumstances of a company, primarily by a Company’s Constitution or Replaceable Rules & other contracts such as Shareholders’ Agreements.

The Constitution or Replaceable Rules that apply to the Company have effect of a Contract between the Company & each member, between the Company & each director & company secretary; and between a member & each other member, under which each person will observe & perform the Constitution & Rules insofar as they apply to that person.

Statutory Duties

[N.B. these statutory duties can extend to beyond those with the official title of ‘Director’.]

Section 180(1) – Care & Diligence

“A director or other officer of a corporation must exercise their powers & discharge their duties with the degree of care & diligence that a reasonable person would exercise if they:

  1. (a) Were a director or officer of a corporation in the corporation’s circumstances; And
  2. (b) Occupied the office held by, & had the same responsibilities within the corporation as, the director or officer.”

Section 181(1) – Duty to Act in Good Faith

“A director or other officer of a corporation must exercise their powers & discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.”

Section 182(1) – Use of Position

“A director, secretary, or other officer or employee of a corporation must not improperly use their position to:- gain an advantage for themselves or someone else; or cause a detriment to the corporation.”

Section 183(1) – Use of Information

“A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: gain an advantage for themselves or someone else; or cause detriment to the corporation.”

Section 191(1) – Disclosure of Interest

“A Director who has a material personal interest in a matter that relates to the affairs of the company must give notice of the interest”

There are various exceptions to this rule.

Common Law – Fiduciary Duties

Duty to Act in Good Faith
The duty of good faith is owed by each director & is owed to the company itself, as a whole. Directors are required to act in what they honestly believe to be the interests of the company. In considering what is in the interests of the company’, a director must have regard to the interests of the shareholders of the company & the interests of the company as a commercial entity. The courts have also considered it proper to take into consideration the interests of the company’s creditors.

Duty to Avoid a Conflict of Interest

A director has a duty to avoid conflicting his or her own interests with the interests of the Company. A director is liable to account to the Company for any profit derived or to indemnify the Company from any loss arising from the director’s action. Additionally, the Company can choose to void any contract that the director entered into as a result of the conflict.

Duty to Exercise Power for a Proper Purpose

A director must exercise their powers conferred on them under the Company’s Constitution or the Act for a proper purpose. Powers must not be exercised for an ulterior purpose or for manipulating voting power.

Duty to Retain Discretion

Generally, a director cannot contract as to how they will vote at a future board meeting. A director can however, having entered into a contract on behalf of the Company in the bona fide exercise of his or her duties, agree to take certain action at a board meeting that is necessary to carry out the contract.

Insolvent Trading

Directors are now under a positive duty to ensure that the Company does not incur a debt while insolvent.

It will be the liquidator, rather than individual creditors, who will have the primary right to sue directors for insolvent trading with money recovered by the liquidator being available for all unsecured creditors on a pro rata basis.

Directors can also be criminally liable under the insolvent trading provisions of the Corporations Law.

Section 588G(3) of the Law provides that a person commits an offence if:

  • The person is a director of the Company when it incurs a debt; &
  • The Company is insolvent at that time, or becomes insolvent by incurring that debt, or incurring at the time debts including that debt; &
  • The person suspected at the time when the Company incurred the debt that the Company was insolvent or would become insolvent as a result of incurring that debt or other debts (as paragraph (1) (b)); &
  • The person’s failure to prevent the Company incurring the debt was dishonest.

Recovery action by the Australian Tax Office (ATO)

The ATO has made Director Penalty Notices (“DPN”), issued pursuant to section 222AOE of the Income Tax Assessment Act 1936, part of their enforcement activities. Directors of a Company, which fails to pay its tax as it becomes due & payable, are liable to pay to the Commissioner of Taxation a penalty equivalent to the unremitted amounts.

Prior to recovery of that penalty from the directors, the Commissioner of Taxation must issue a written notice requiring the directors of the Company to cause the company to do one of the following things within fourteen (14) days, namely:

  • Remit the group tax or prescribed payments;
  • Enter into & comply with a payment agreement in relation to the company’s liability with the ATO (upon default of which, the current directors are personally liable for the Company’s obligations under the agreement);
  • Appoint an administrator to the Company under Part 5.3A of the Corporations Law; or
  • Begin to be wound up under the Corporations Law.

Directors of the Company will become personally liable even if they were not appointed at the time the liability was incurred.

Defrauding Creditors

Directors’ criminal liability for corporate actions leading to the defrauding of creditors can be broken down into two parts:

  • Criminal liability under State Crimes Act; &
  • Criminal liability under the Corporations Law. Criminal liability under Crimes Act 1958 (Vic):- s81 – obtaining property by deception
  • s82 – obtaining financial advantage by deception
  • s83 – engaging in false accounting
  •  s84 – Where an offence committed by a Company under section 81, 82 or 83 is proved to have been committed with the consent or connivance of any Company director, manager, secretary or similar officer, or any person purporting to act in any such capacity, he as well as the Company shall be guilty of that offence & punished accordingly.
  •  s85 – directors intend to deceive creditors by false or misleading statements &/or publication

Penalties may include imprisonment

Trade Practices Act 1974 (Cth) (‘TPA’)

The TPA provides for directors to be criminally liable for the actions of their corporations by virtue of Section 75B which acts as a ‘secondary liability provision’. Essentially this Section provides that a person, which would include a director, commits an offence under the TPA if they are in any way directly or indirectly knowingly concerned in, or party to, the commission of an offence against the statute.

There are two requirements for a person to be ‘knowingly concerned’ in a contravention.

They must

  1. Have the requisite knowledge, &
  2.  Be concerned in the contravention.

Environmental Protection Act 1970 (Vic) (EPA)

Under Section 66B of the EPA, a director is liable if their Corporation contravenes, whether by act or omission, any provision of the EPA.

Thus, as soon as the Corporation breaches the EPA, the directors are also criminally liable. It is possible, under the legislation, for the director to be prosecuted but not the Corporation. However, the general practice to date has been to charge the Corporation & the director with the proceedings heard together.

Given that liability for directors under the EPA is strict, the key to the Victorian legislation is in the defences available to a director for contravention of the EPA. These are contained in Section 66B(1A), namely:

  • The Corporation’s contravention occurred without the director’s knowledge;
  • The director was not in a position to influence the Corporation’s conduct in relation to the contravention; or
  • The director, being in such a position, used all due diligence to prevent the contravention.

Occupational Health & Safety

Crimes (Workplace Deaths & Serious Injuries) Bill 2001 creates new offences & penalties for Criminal Manslaughter.

Corporate Manslaughter can result in substantial fines.

  •  Directors & senior officers can be imprisoned & also receive a fine.

A further offence of negligently causing serious injury is prescribed in the Bill.

  •  A Corporation can be fined & directors & senior officers may be imprisoned & fined $120,000.

David Cartney 2015, InternationalBusinessMentors.com

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