HOMEWhat you need to know about Director’s Duties
Corporate management is a complex area and directors may be held to be personally liable if they fail to uphold their fiduciary duties to the shareholders. As fiduciaries, directors are held to a high standard of conduct when acting on behalf of the corporation. This means that they have to act in the best interests of the corporation with due care and diligence, and avoid situations where their personal interest conflicts with their duties to the company. Directors also owe a duty of care and duty to act in good faith with respect to his or her management. For example, directors are required to attend and participate in meetings, make reasonable inquiries with respect to the corporation’s operation and keep corporate transaction records.
Furthermore, directors cannot improperly use their position or information obtained through their position to gain an advantage for themselves or someone else, to the detriment of the company. For instance, directors cannot steer contracts to relatives for personal benefits at the expense of the corporation. If directors infringe their fiduciary duties, they may be liable for the corporation’s loss of profits due to their wrongful conduct and any punitive damages may have incurred. Let’s visit a real life example where a director failed to avoid a conflict of interests. In the case of ASIC v Adler (2002), Williams who was a managing director for both HIH and its subsidiary company HIHC failed to properly safeguard the interests of HIHC before granting a loan to PEE. As a result, HIH incurred significant loss since this activity occurred without HIH’s board approval and there was no collective disclosure to the board or the investment committee. Therefore, Adler was found to have failed his fiduciary duties as a director due to this related party transaction. This case serves as a clear reminder that corporate directors must ensure that an effective and transparent corporate governance framework is maintained.
In order to determine whether directors have violated their fiduciary duties, the Courts will examine whether the director acted in good faith in accordance with what was reasonably believed to be in the best interest of the corporation, and acted in the same manner as a reasonably prudent person in a similar situation. With this said, directors are not personally liable for the corporation’s loss as the result of their decisions if they conducted the business affairs in a proper manner. As an example, let’s visit the case Daniels v Anderson (1995) where a company suffered substantial losses as neither the general manager or finance manager have any experience with foreign currency transactions. In this case, it was held that it would be unreasonable to expect every director to have equal knowledge and experience with respect to every aspect of the company’s activities. However, a director cannot proceed on the basis that ignorance and a failure to make inquiries are a protection against liability for negligence. As a general rule, directors should have at least a rudimentary understanding of the company’s business operations. Given that the director can prove that he or she acted in good faith and in the best interest of the corporation, as well as making reasonable inquiries whilst exercising due care and diligence, the director cannot be said to have breached his or her fiduciary duties even if the company has incurred a loss.
Commercial Law at Austin Haworth & Lexon Legal (AHL Legal)
Austin Haworth & Lexon Legal (AHL Legal) is a firm that has achieved a lot of leading precedents and has experience assisting clients with corporate matters throughout all jurisdictions in Australia. Corporate law is amongst the most established areas of legal service provided by Austin Haworth & Lexon Legal (AHL Legal). In addition to disputes surrounding directors’ fiduciary and statutory duties, our lawyers are more than happy to assist our clients with liquidation and insolvent company debt recoveries, as well as providing personalised legal advice based on their best interests in order to protect their businesses and assets from the potential consequences of non-compliance. Austin Haworth & Lexon Legal (AHL Legal) also specialises in commercial disputes, family law, migration law and litigation. Please contact our office should you require any legal assistance.
