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DIRECTORS DUTIES & RESPONSIBILITIES

CORPORATE GOVERNANCE IN MELBOURNE

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Directors Duties & Responsibilities

CORPORATE GOVERNANCE

Office holders such as directors and employees in management are subject to legal duties and responsibilities under Corporations Law to the company and public.

The stricter Corporate Governance requirements in Australia and overseas, such as Sarbanes Oxley in the USA, highlight both the governments’ desire and investors’ needs to safeguard the public when dealing with companies and their management. Because of growing concerns by shareholders, creditors, and employees, directors and employees in management are more accountable for their governance style and behaviour.

The Corporations Act 2001 sets the legal framework for the duties and responsibilities of directors and employees in management. The legislation gives greater powers of investigation, prosecution for breaches and wider powers to the courts to penalize more severely for breaches.  

PERSONAL LIABILITY

Courts do not entertain excuses of ignorance about management’s duties and responsibilities. Directors have a positive obligation to inform themselves about the company’s affairs and where necessary obtain proper advice; otherwise, apart from penalties, they face personal liability for the company’s debts and liabilities. When examining whether a director has breached his duties and responsibilities, the court sets certain standards expected of directors. Failure to consider the following issues will give rise to personal liability:

a)   When appointed to management, did the director examine past financial statements of the company?

b)   Did the director frequently attend board meetings?

c)   Did the company maintain accounting records as required by law?

d)   Did the director or management verify the information provided by officers and employees?

e)   Did the director or management obtain professional advice to make an informed decision?  

ISSUES FOR CONCERN

Directors and employees in management must maintain diligent approaches to management and to their own continuing education on legal issues that affect their dealings with the public otherwise, they face personal liability. Directors and employees in management must ensure:

a)   The company does not illegally finance share transactions

b)   Proper dividend policies are in place and there are no unlawful dividend payments

c)   There are safeguards that prevent insider trading

d)   They obtain specialised advice on related party transactions

e)   They fully understand the legal relationship of any contract

f)   They comply with, and have in place compliance programs that prevent breaches of Trade Practices and Corporations laws

g)   They fully understand the nature of, and have environmental audits in place

h)   They comply with, and have in place compliance programs for specialised legislation such as Occupational Health & Safety, Equal Opportunity, etc.  

DUTIES & RESPONSIBILITIES

Directors and employees in management must comply with many common law and statutory duties and responsibilities that form the basis of their obligation to the company and its overall corporate governance. It is critical for management to know and fully understand each duty and responsibility, as ignorance will not minimise the penalty for breach.

Directors and employees in management must underpin their ongoing education, and obtain detailed advice about each duty:

a)   Duty to act in good faith in the best interests of the company (replaces duty to act honestly)

b)   Duty to act with care and diligence

c)   Prohibition against the misuse of information obtained by directors

d)   Duty to avoid a conflict in the position of a director or any interest that a director may have

e)   Duty to avoid prevent insolvent trading  

CONSEQUENCES FOR BREACHES

Directors and employees in management face personal fines and penalties, such as:

a)   Personal fines up to $200,000.00

b)   Disqualification to act as directors

c)   Imprisonment of 5 years, a fine of up to $200,000.00, or both, for insolvent trading

d)   Derivative actions by shareholders

e)   Actions by employees and creditors claiming personal liability

f)   Legal claims for damages  

CRIMINAL& CIVIL PROCEEDINGS

This legal framework increases the likelihood that affected parties will start legal action against management who breaches its duties and responsibilities or allows the company to trade whilst insolvent. Therefore, management must closely examine the company’s financial situation always looking for signs of financial trouble, which can include:

a)   Low operating profits or cash flow

b)   Inability to pay creditors on time

c)   Inability to meet loan payments on time

d)   Inability to meet taxation requirements, or employee entitlements  

COMPLIANCE WITH LEGAL OBLIGATIONS

Directors and employees in management must:

a)   Understand their common law and statutory duties under the Corporations Act; the legal duties & responsibilities and understand the consequences for breaching those duties and responsibilities;

b)   Implement compliance measures and programs for the company safeguarding themselves from personal liability and avoiding financial ruin for the company, and

c)   Keep up to date with every aspect of the Corporations Law and obtain appropriate legal advice to know and understand their duties and obligations.

NEED MORE INFORMATION

Behan Legal advises and assists clients on these important issues. For an appointment, call 03 9646 0344 .

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