“A board of directors who is not capable to produce reliable audited financial statements for at least seven years does not deserve to remain in office”.
The companies in Australia are regulated by the principal legislation of Corporations Act 2001. The formation and operational work of the company with fundraising, takeovers and duties of officers is regulated by the authorisation and enforcement of this act. The Australian Securities and Investments Commission (ASIC) is responsible for the administration of Corporations Act. The preparation and lodging of financial reports is done under the authorisation and implementation of this act in order to meet requirements of disclosures or deadlines. The regulation of financial markets, corporations, products and services with its conduct, licensing, disclosure and financial product advice are provided under the Corporations Act, 2001.
The directors under the Corporations Act are required to conduct the following things as the main requirement of the act which are mentioned below:
- Act with care and diligence.
- Act in good faith for a proper purpose.
- Avoid improper use of position.
- Avoid improper use of information.
- Disclose certain interests.
Section 181 of Corporations Act, 2001 states that:
Directors must exercise their duties for the benefit of the company rather than their own benefit. They must work for the benefit of the company rather than the interest of third party or their own. They must not misuse their powers or use their authoritative position for their own benefit or to cause any harm to the company. S. 181(1) of the Corporations Act states that:
A director must exercise their power and discharge their duties:
(a) in good faith in best interest of the company;
(b) for a proper purpose.
It sets out the duties that are to exercised by the directors and other officers of the company. These officers must discharge their duties for a proper purpose in order to act in good faith for the best interest of the company. Directors and other company officers cannot take advantage of their position in order to cause any harm or injury to the company.
S.181 (1) is a civil penalty provision by imposing of civil liability. It will be a criminal offence only when the contravention is intentionally dishonest or reckless.
These duties ensures that the directors act for the best interest of the company. The directors are not solely responsible or owe a duty towards the individual shareholders. This specifies that a company is a separate legal entity from its shareholders.
As stated in the case of Brunninghausen vs. Glavanic, the court held that if there is a personal right of the shareholder then large actions would be imposed on directors. The directors are also allowed to spend of the funds of company in order to achieve profit of long term at the cost of gain of short term. This means that directors can make their own decisions for the best interests of the corporations but not for best interest of the shareholders.
There are certain exceptions to the general rule of directors always owing to the duties of company.
As stated in the case of Coleman vs. Myers, the court held that directors owe certain duties to the shareholders due to the sharing of personal relationship among them. This addresses the dependence of shareholders on directors for the advice of investment. For example – the directors will consider the interest of creditors rather than shareholders if the company is about to be insolvent.
The directors are not bound to take the short-term interest of shareholders into account.
As stated in the case of Provident International Corporation v International Leasing Corp Ltd,the court held that the directors should consider the interest of existing as well as future shareholders. It is upon the directors to balance the short and long term interest of the company.
The duties of directors not only bound them to protect the company but also prevents them from misusing their power. The legislations of Contract, Tort, Equity make the directors liable to discharge their duties with due diligence and care. This will enable the clients to broaden their perspective about the duties of directors with exceptions of it by acknowledging the duties of directors beyond their perspective of limiting the duties of directors towards the company only.
Under Australian law, the duties of directors laid its major focus on the interest of the company. Section 181 of the Corporation Act, basically stated the duties of directors in the interest of company but the duties of directors can be in interest of stakeholders as well. The power to manage the company is granted to the directors and the power to manage the business through the power of directors has been interpreted by the court.
A director has three important legal duties such as duty of care, duty of loyalty and duty of obedience. He is personally liable, if he fails to follow any of these duties. If the court declares that the officer of company has breached any of the duties, then a financial or pecuniary liability can be imposed. The director may have to compensate to the company, if there is any order given by the court.
A director may also be disqualified for a particular period of time on the order of the court. If a director intentionally acts in a dishonest manner or acts recklessly on failing to exercise his powers and discharge their duties in good faith and in best interests of the company in order to serve the purpose, then it is a criminal offence under S. 184 of the Corporations Act 2001. If a director has obtained any kind of confidential information in course of their dishonest conduct through attaining of position in the company, then also it is a criminal offence and a person is liable towards it.
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1. What are directors duties under the Corporations Act?
The general duties of the directors under Corporations Act 2001 are:
- to act and make their judgement in good faith in order to serve the purpose.
- not to have any kind of personal interest while serving the judgement.
- to be informed about the subject matter of judgement to be executed in an appropriate manner.
2. Who can sue directors for breach of duty?
Generally, the company has the authoritative power to sue director for his breach of duty. But in some cases, the members who are part of statutory derivative action or ASIC as in other liquidator can sue director for breach of his duty.
3. What happens if there is breach of duties by the directors?
If a director breaches his duties towards the company, then legal action can be taken against by the company towards the director. This legal action is generally taken by the stakeholders of the company in pursuance of their financial loss or damage for restitution.