What are the duties of directors?

Duties of Directors

Directors govern a company on behalf of the shareholders of that company. The Corporations Act 2001 states in s 198A (1) that ‘The business of a company is to be managed by or under the direction of the directors’. All directors have certain basic legal duties and responsibilities. The duties and responsibilities imposed on directors under the Corporations Act 2001 apply to many different organisational structures, such as public companies, proprietary companies, etc.

Who are Considered to be Directors?

The term “director” is defined in s 9 of the Corporations Act 2001 to mean:

  • A person validly appointed as a director or an alternate director;
  • A person, even though not validly appointed as a director, if that person acts in the position of a director (‘de facto’ director);
  • A person, even though not validly appointed as a director, if the directors are accustomed to act in accordance with that person’s instructions or wishes (‘shadow director’). For simplicity, the term ‘director’ will be used in this Director Q&A to refer to all those who are considered to be directors.

What are the Four Basic Directors’ Duties?

The Corporations Act 2001 specifies four main duties for directors:

  • Care and diligence - to act with the degree of care and diligence that a reasonable person might be expected to show in the role (s 180). The same duty is imposed on directors at common law. The business judgment rule (discussed below) provides a "safe harbour" for a director in relation to a claim at common law or under s 180;
  • Good faith - to act in good faith in the best interests of the company and for a proper purpose (s 181), including to avoid conflicts of interest, and to reveal and manage conflicts if they arise. This is both a duty of fidelity and trust, known as a ‘fiduciary duty’ imposed by general law and a duty required in legislation;
  • Improper use of position - to not improperly use their position to gain an advantage for themselves or someone else or to the detriment to the company (s 182);
  • Improper use of information - to not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else or to the detriment to the company (s 183).

Are There Directors’ Responsibilities Under Other Laws?

Every company is involved in activities which are regulated by other laws (e.g. hiring and firing people, renting an office, marketing). There are over 600 of these laws (Federal, State and Territory) under which a director can be personally liable. Examples of these laws include competition law, occupational health and safety, environmental law and taxation. There will also be specific industries which have very specialised laws (e.g. aviation).

How Many Directors are Needed?

The Corporations Act 2001 requires public companies to have at least three directors, two of whom must ordinarily reside in Australia. Proprietary companies must have at least one director who must ordinarily reside in Australia (s 201A).

For proprietary companies with a sole director who is also sole shareholder, a second director can be appointed by the original director recording the appointment and signing the record (s 201F).

Find out more...