Director Duties and Liabilities
Directors’ duties are imposed by the Corporations Act 2001 (Cth) (the Act). The Act prescribes a number of general duties on directors, including:
- duty to exercise powers and duties with the care and diligence that a reasonable person would have, which includes taking steps to ensure the director is properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent;
- duty to exercise the director’s powers and duties in good faith in the best interests of the company and for a proper purpose;
- duty not to improperly use the director’s position to gain an advantage for the director or someone else, or to cause detriment to the company;
- duty not to improperly use information obtained through the director’s position to gain an advantage for the director or someone else, or to cause detriment to the company; and
- duty to avoid and disclose conflicts of interest.
Directors’ duty not to trade while their company is insolvent
In addition to the above directors’ duties, directors also have a specific duty to ensure that their company does not trade whilst insolvent or when they suspect it might be insolvent. A company is generally insolvent if it is unable to pay all its debts as and when they are due.
Specifically, a director must prevent the company from incurring a debt if:
- the company is already insolvent at the time the debt is incurred; or
- by incurring that debt (or that debt amongst others), the company becomes insolvent, and at the time of incurring the debt, there are reasonable grounds for suspecting the company is already insolvent, or would become insolvent by incurring the debt.
If you are a director of a company, you should constantly be aware of the company’s financial position each time the company is considering incurring a debt.
If you breach your duty not to trade insolvently, then there are two standards of liability depending on the circumstances of the breach as follows:
- the civil penalty standard applies in situations where there were grounds for suspecting insolvency. Under this standard, the Court may order any one, combination or all of the following:
- compensation order to pay compensation equal to the amount of loss suffered as a result of your failure to prevent the company from incurring debts while insolvent;
- pecuniary penalty order to be paid to the Commonwealth of up to $200,000 if the Court finds that the director’s failure to prevent insolvent trading is serious or materially prejudices the interests of the company or the company’s ability to pay its creditors; and/or
- disqualification from managing a corporation for a period of time considered appropriate by the Court in the specific circumstances of the breach.
- the criminal penalty standard applies where a director suspects the company is insolvent at the time of incurring the debt (or would become insolvent upon incurring the debt) and the failure to prevent the company incurring the debt involved dishonesty. Under this standard, the Court may order one or both of the following as appropriate in the specific circumstances of the offence:
- penalty order of up to $420,000; and/or
- imprisonment for up to five years.
If you are a director of a company and you would like advice on your duties, then our experienced Litigation + Dispute Resolution team can assist.