Understanding your duties as a director

According to the Australian Securities and Investments Corporation (ASIC), Australia’s integrated corporate, markets, financial services, and consumer credit regulator, as of December 2021 there were 2,995,143 companies registered in Australia.

For a country with a population of nearly 26 million people those figures are significant.

Generally, companies are either Proprietary Limited (Pty Ltd), Limited (Ltd) or No Liability (NL) and must have at least one director responsible for that company.

Proprietary Limited (Pty Ltd)

This is the most common type of company and accounts for the majority of companies that are registered each year in Australia.

The main features of this type of company are they:

• must have at least as one director;
• have at least one shareholder/member;
• have at least one director who resides in Australia
• are limited by shares;
• limit their shareholders financial liability to the amount unpaid on their shares;
• can have no more than 50 non-employee shareholders; and
• can’t make share offers to the public

There are two categories of proprietary companies, large and small.

A company is a large proprietary company if it satisfies at least two of the following criteria: 

• Annual revenues of $10 million or more
• Assets of $5 million or more
• 50 or more employees

Large proprietary companies are required to lodge their annual accounts with the ASIC.

Limited (Ltd)

This is a public company which may be listed on the Australian Stock Exchange (ASX).

Both a listed and unlisted public company has some level of ownership by the public without the restrictions placed on proprietary companies in regard to share offers.

All public companies must lodge their annual accounts with the ASIC.

No Liability (NL)

This is a type of public company created specifically for the Australian mining industry.

A shareholder with partly paid shares is not required to pay any calls for unpaid capital, but if they fail to do so they forfeit their shares.

They can be listed on the ASX but don’t have to be.

What is the role of a director in a company?

A company has two groups that are relevant, the shareholders and the directors.

A shareholder who can also be referred to as a member sometimes is a person, company, or organisation that owns at least one share in the company.

A director, or in the case of more than one being a board of directors, is responsible for managing the company’s business, ensuring statutory compliance, determining the strategic direction and operational decisions of the company.

An officeholder includes a secretary of a company as well as the directors.

Directors must exercise their business judgment when exercising their duties and must:

• make and exercise that judgment in good faith and for a proper purpose
• not make decisions where they have a material personal interest in the matter
• ensure they properly inform themselves about matters relating to the company when they make decisions or judgments
• ensure that any decision or judgment in relation to a matter relating to the company is in the best interests of the company.

In Australia chapter 2D of the Corporations Act 2001 (Cth) (Act) outlines the general duties of directors and company officeholders.

Company officeholders include the Secretary of the company.

Section 180 sets out the general rule that a director must exercise their powers and discharge their duties with care and diligence.

Sections 181 to 183 indicate that directors:

• must act in good faith in the best interests of the company and for a proper purpose.
• are prohibited from using their position to gain an advantage for themselves or someone else.
• not cause detriment to the company.
• cannot use information obtained in their role to gain an advantage for themselves or someone else.

The obligations outlined are civil obligations and can incur civil penalties.

Generally, action will be taken by ASIC against a company director for any breach of their duties.

Section 184 of the Act makes it a criminal offence for a director to act recklessly or is intentionally dishonest in their failure to exercise their powers and discharge their duties in good faith and in the best interests of the company or for a proper purpose.

It is also a criminal offence where a director recklessly or intentionally dishonestly misuses their position or information they have gained through their position with the company.

Section 588G of the Act imposes a criminal penalty where a director who permits a company to trade whilst insolvent.

Section 206C permits a court to disqualify a director from managing companies for a period of time.

In recent times the duty of a director to act in the best interests of a company was examined in detail in the Financial Services Royal Commission.

Whilst the law in Australia is clear that a director must act in the best interests of shareholders, does it mean that they must exercise that power without regard to stakeholders?

In a recent practice statement, the Australian Institute of Company Directors (AICD) considered this issue.

The courts in Australia have considerable discretion when it comes to directors in identifying the “best interests” and will not second guess business decisions unless they are manifestly unreasonable.

In the AICD practice statement, it stated that directors have discretion to determine:

• what are the best interests of a company;
• over what time horizon those interest are to be assessed; and
• the precise nature of interests that are to be advanced or protected – whether they be purely financial, reputational, or otherwise

The law does not assume that shareholder or member interests are served best by having no regard to other stakeholders and over the longer term.

It is important to note that in the case of not-for-profits and charities these stakeholders’ interests may be a significant consideration when a director is exercising their duty.

Are you unsure of your duties as a director?

At FC Lawyers, our business and corporate team has experienced lawyers who have acted for companies, directors, shareholders/members in both public and provide companies together with not-for-profits and charities in a range of legal matters including civil, regulatory, and criminal matters.

Contact our team to discuss your needs and any aspect of directors’ duties.