What Can Happen If There Is A Breach Of A Director’s Duty?
This resource explains what legal implications a breach of a director’s duty can have on you or your organisation.
Remember, a company’s director is not only a business leader, but they have responsibilities and are held accountable within the organisation.
Holding a leadership position often comes with a number of duties and obligations that help maintain effective business governance and ensure these individuals act in the company’s best interest.
If you are a director of a business or considering becoming one, you’ll need to have a good understanding of these duties and obligations to ensure you are aligned with the company’s guidelines.
Breaching one more of the director’s duties can have serious and unnecessary ramifications for both the business and the individual.
Types of a company director
From voting to power-of-declaration and delegation, Directors have access to various powers within an organisation. So, it’s important to first define who a Director is.
There are five main types of director roles.
An executive director is someone who is involved in the daily affairs of the business. They are typically involved in the decision-making that affects various areas in the business.
In contrast, a non-executive director is not involved in running the business on a daily basis. They are usually required to provide an independent perspective in the decision-making process. Non-executive directors are normally experts in the industry and offer invaluable advice on various aspects of the business but don’t have the power to make or enforce the decisions.
The Managing Director
A managing director is appointed by the rest of the directors and is ultimately responsible for daily company operations. They are otherwise known as the Chief Executive Officer.
Since some directors may not be attending to all business matters on a daily basis, they appoint a managing director to oversee the business in their absence.
De Facto Director
A de facto director is someone who has not been officially appointed as a director but who acts in place of a director with similar responsibilities and liabilities as an official director.
Similar to a de facto director, a shadow director does not have an official title. However, they do have a level of influence on the decision-making process.
It’s important to note that if you are exercising the same powers and carrying out the same functions as a company director would, you will have the responsibilities and duties of being a director.
Key responsibilities of company directors
As a company director, you are responsible for overseeing the affairs of the company.
Under the Corporations Act 2001, you must comply with a number of legal obligations as a director. Even if you appoint an agent to oversee the company’s affairs, you are still bound by these duties and obligations.
Being Up To Date
As a director, you must always be on top of what your company is doing, including its financial performance, business decisions, corporate governance, social responsibility, recruitment, etc.
In addition, you should keep meeting minutes of director meetings to document discussions and decisions being taken in these meetings. Importantly, you should always maintain open and transparent communication with your employees to get a deeper understanding of how the business is going.
Must Not Misuse Your Position
The number one rule of being a Director is that you should always put the company first. You must not use your position of power as a director of a company in a way that might harm the company or give you a personal advantage in other matters.
When making a decision or advising the business to make a decision, you must ensure that you adhere to the following guidelines:
- make all decisions in good faith based on the best interest of the business;
- do not make decisions based on material personal gains;
- ascertain how these decisions will impact your company’s business performance and reputation;
- bring trusted experts and professionals to advise when you need help to make an informed decision and
- provide full transparency and disclosure about any personal interests (if any exist).
Additionally, as a director, you have other general obligations such as:
- to ensure the company does not trade while insolvent;
- to ensure the company keeps financial records;
- to lodge certain information to ASIC and
- to ensure the company fulfills its tax obligations
To get more information on your duties, check out the Corporations Act 2001.
How to know if there’s a breach of a director’s duty
Sometimes, a breach of duty is loud and clear. However, on many occasions, it’s not so straightforward.
Determining whether there is a breach of a director’s duty will depend on the specific situation itself. And so, it’s typically a case-by-case process.
The first step is to consider whether the actions the company director have taken are authorised by:
- the company constitution;
- the company’s board of directors or
- decisions taken in company meetings
If the action was made in accordance with these areas, then it’s unlikely there was a breach of duty.
What happens if a director’s breach occurred?
As mentioned earlier, breaching your director’s duties can have serious consequences on your business. These will vary based on what duty has been breached and what complications resulted due to the breach.
There are three main consequences.
A disqualification means that you will no longer (temporarily or permanently) be able to manage the company in your capacity as a company director. Both the court and ASIC have the power to disqualify company directors.
Personal liability means that you will be personally liable for losses or damages that occurred to the company due to the breach. This can include civil penalties, financial compensation, losses and tax obligations.
In extreme cases, you may face criminal charges. In these cases, a director must have seriously breached their duties, have intentionally caused damage to the business or acted in bad faith.
Has there been a breach and need assistance?
If you believe that you’ve been involved in a breach, it’s important to speak to an independent business lawyer as soon as possible. Speaking to a lawyer will help you mitigate your personal liability and risk and determine the next step to take.
Or alternatively, if you believe there has been a breach by a director in your company, it is important to understand what that means before taking further action.