Duties of directors

Directors' liability for company actions

For the most part, directors' duties fall under the Corporations Act 2001 which sets out the way in which the company is run – that is, proper financial accounts, decisions being made with due care and diligence and in good faith, no improper use of a director's position or information, and providing strategic guidance.

However, there are also a significant number of federal, state and territory laws which make directors liable for the actions of their companies.


General duties of directors

The role of a company director is to govern a company on behalf of the shareholders or members of that company.

The Corporations Act 2001 specifies four main duties for directors.


Insider trading

Directors should be aware of the Corporations Act 2001 provisions (Part 7.10, Division 3) prohibiting insider trading.

Insider trading is the trading of securities or a wider set of financial products while in possession of information:

  1. which is not generally available;and
  2. if it were, would be likely to have a material effect on the price or value of the security.

Insolvency safe harbour

The following company director guide contains suggested steps the AICD considers likely to be relevant when pursuing a restructuring plan and attempting to trigger the safe harbour protection from civil liability for insolvent trading provided in s 588GA(1) of the Corporations Act 2001 (Cth).

Please note that these steps are intended by the AICD to be a helpful guide only, and should not be read or interpreted as an exhaustive list of factors which will need to be considered by directors in attempting to use the safe harbour protections, or as a supplement for legal advice. In the event of a company being in financial distress, directors should obtain legal advice from an appropriately qualified legal practitioner.


Insolvent trading

'Solvency' is defined in s 95A (1) of the Corporations Act 2001 as the ability to pay all debts as and when they become due and payable.

A person or organisation who is not solvent is 'insolvent' (s 95A(2)). The Corporations Act 2001 does not provide any guidance on how to assess whether debts can be paid by the corporation.


Position description for a non-executive director

Once the board has determined a need to appoint a non-executive director (NED), the next step in the recruitment process involves developing an NED position description.

A key factor in developing the position description is to identify the specific characteristics, skills and experience needed for the position.


Position description for an executive director

Once the board has identified a need to appoint a new executive director, the next step in the recruitment process involves developing a position description for the role.

Executive directors have a dual role: that of company employee, usually a senior executive, and that of board member.


Rights of directors

The rights of company directors centre on enabling a director to effectively perform their duties whilst a director of a particular company, and defending themselves in legal proceedings after ceasing to be a director of that company.

Who are considered to be directors? The term “director” is defined in s9 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 (also known as a ‘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 (also known as a ‘shadow director’).

For simplicity, the term ‘director’ will be used in this document to refer to all those who are considered to be directors.


Role of the company secretary

The importance of the company secretary’s role has increased over the years.

No longer the person who merely keeps the minutes of the board and handles board correspondence, the company secretary role can now include administering the affairs of the company and managing/supporting the business of the board.


Work health and safety

Directors have a direct legal duty to implement and monitor systems which ensure safe working conditions in their workplaces as far as reasonably practical.

In nearly all Australian jurisdictions, there is a positive obligation on directors to exercise due diligence in relation to work health and safety. Directors can be personally liable for breaches of this duty and the penalties can involve imprisonment and very substantial fines.


Deed of indemnity

A deed of indemnity is a contractual agreement between a company and a company director.

A deed of indemnity can help to indemnify a director against liabilities or legal costs incurred in his or her professional capacity as a director of the company. It also commonly deals with matters such as access to documents and insurance.


Who can be a director?

There is no requirement in the Act that a director must hold shares in his or her company.

The constitution of a company however may specify that a person has to hold a certain number of shares before being appointed a director.