Director’s Duties

A director is an officer of the company and is responsible for its overall governance and strategic direction.  A director owes the company, among other things:

1. a fiduciary duty to act in the company’s best interests and for a proper purpose – that is, to act: (a) honestly; (b) in good faith; (c) with reasonable care and diligence; and (d) to put the company’s interests ahead of their own;
2. a general duty to take reasonable care in the performance of their office; and
3. a statutory duty of care and diligence.

The key statutory duties of a director are primarily set out in Part 2D of the Corporations Act 2001 (Cth) (Act), including the duties to:

1. exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in their position and the company’s circumstances would: s180(1);
2. exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose: s181;
3. not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the company: s182; and
4. not improperly use information obtained as a result of their role at the company to gain an advantage for themselves or someone else or cause detriment to the company: s183.

The standard required by the statutory, common law and equitable obligations has been held not to be materially different, see at [307] (Jackman J).  However, this standard is higher with respect to directors of a corporate trustee, particularly where the company has no assets of its own and has been created solely for the purpose of administering the single trust, see Chu v Lin, Gold Stone Capital Pty Ltd [2024] FCA 766 at [306]-[308] (Jackman J) and Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) [2017] FCA 497; (2017) 348 ALR 525 at [213] (Beach J).

In respect of the duty of reasonable care and diligence, this is also a matter of general law. A director owes the company an equitable duty (which is not specifically a fiduciary duty), and a common law duty, to exercise reasonable care and skill.  Recently, in Chu v Lin, Gold Stone Capital Pty Ltd [2024] FCA 766, his Honour Justice Jackman noted that the standard required by the statutory, common law and equitable obligations was not materially different, but the standard was higher with respect to directors of a corporate trustee particularly where the company has no assets of its own and has been created solely for the purpose of administering the single trust (at [306]-[308]). GJB Building Pty Ltd v AI & PB Property Pty Ltd [2023] VSC 782 at [2025]-[2037] (Nichols J). Drawing from the decision of GJB Building Pty Ltd v AI & PB Property Pty Ltd [2023] VSC 782 at [2025]-[2037] (Nichols J)GJB Building Pty Ltd v AI & PB Property Pty Ltd [2023] VSC 782 at [2025]-[2037] (Nichols J), the relevant principles concerning a director’s duty to exercise care and diligence were stated as follows:

1. the standard to be applied is objective, rather than subjective, to be measured in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation’s circumstances, the particular office occupied by the director, and their responsibilities within the company: at [2026];
2. non-executive directors are permitted to rely on management and other officers to an extent, but they are not excused from making their own inquiries where appropriate (that is, where a reasonable director would have made inquiries): at [2029];
3. all directors and officers have core, non-derogable duties to bring reasonable competency to their role and to take reasonable steps to place themselves in a position to guide and monitor the company’s management: at [2030];
4. the minimum standard of diligence imposed on each director or officer requires that they become familiar with the fundamentals of the business or businesses of the company, keep informed about the company’s activities, monitor generally the company’s affairs, maintain familiarity with the financial status of the company by appropriate means, including the company’s financial statements and board papers and make further inquiries into matters revealed by those documents where it is appropriate to do so, and generally maintain a reasonably informed opinion of the company’s financial capacity: at [2030];
5. in determining whether a director has breached his or her duty under s180(1), the Court must balance the foreseeable risk of harm to the company (including the nature and magnitude of the risk of harm and the degree of probability of its occurrence) against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, along with the expense and difficulty of taking alleviating action: at [2031];
6. failing to ensure that a company makes loans only in accordance with its authorised practices and failing to ensure that the company has a proper system of controls and audit in its business to avoid any defalcation by officers and employees may amount to a breach of the statutory duty of care and diligence: at [2032]; and
7. the director does not have to take a positive step to breach the duty, as the obligation is positively to exercise care and diligence and thus a failure to act at all where action is called for may breach the duty: at [2033]–[2034].

Decisions including Australian Securities and Investments Commission v Cassimatis (No 8), Australian Securities and Investments Commission v Vocation Ltd (in liq) and Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) make clear that a director’s liability may be triggered in situations where:

• a company has contravened the law; and
• the director’s failure to exercise reasonable care and diligence has caused, allowed or failed to prevent the company’s contravention; and
• it was reasonably foreseeable that such contravention might harm the company’s interest, noting that it is not necessary for the company to have actually suffered damage.

Directors are also commonly exposed to liabilities in the context of competition and consumer law, particularly in relation to allegations of misleading and deceptive conduct as in Australian Competition and Consumer Act 2010 (Cth), Schedule 2, Australian Consumer Law (ACL), s18 or unconscionable conduct [ACL s21].  For example, a person (often a director or any person in a position of authority and expressly or implicitly approves or assents to the unlawful conduct), will be exposed to pecuniary penalties if they have been in any way, directly or indirectly, knowingly concerned in, or party to, the unconscionable conduct [ACL, s224(1)(e)]. In that regard, the recent decision of the High Court of Australia in Productivity Partners Pty Ltd v Australian Competition and Consumer Commission; Wills v Australian Competition and Consumer Commission [2024] HCA 27 found that ‘knowingly concerned’ only required knowledge of the essential circumstances, matters or facts of the principal’s conduct and not knowledge that the conduct could or would be characterised as unconscionable conduct at law (see the reasons of Gageler CJ & Jagot J at [71]-[84] and the reasons of Beech-Jones J at [339]-[370]).

The consequences of a director breaching their statutory duties include declarations of contraventions [s1317E], pecuniary penalty orders [s1317G], disqualification orders [s206C] or compensation orders [s1317H].

In certain circumstances, a breach of a director’s duty may also constitute a criminal offence.  For example, section 588G of the Act imposes a statutory duty on a director to prevent insolvent trading by the company.  If the director’s failure to prevent the company from incurring the debt was dishonest, the breach may also be a criminal offence for which criminal penalties (including imprisonment) would apply.