M1: Learner Manual

Directors are subject to a range of legal duties including those outlined below. The core duties contained in sections 180-183 of the Corporations Act largely codify the common law on directors’ duties.

Act with care and diligence

Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if he or she were a director in the company’s circumstances and had the same responsibilities of that director.

Whether a director has exercised a reasonable degree of care and diligence is determined by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to flow to the company from the conduct in question.

In making decisions, directors must apply an enquiring mind, consider the overall position of the company, test information put before them by management and proactively consider what other information they require.

In practice, the duty requires each director to:

• become familiar (and maintain familiarity) with the fundamentals of the business or businesses of the organisation;
• stay informed and make appropriate inquiries about the organisation’s activities;
• monitor, generally, the organisation’s affairs and policies;
• maintain familiarity with the organisation’s financial status by appropriate means, including review of its financial statements and Board papers and make further inquiries into matters revealed by those documents where appropriate; and
• have an informed opinion of the organisation’s financial capacity and solvency.

Act in good faith in the best interests of the company and for a proper purpose

Directors must exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose. It is clear that the corporation (as a distinct legal and

commercial entity) is the focus of this duty, and that it requires consideration of more than financial returns or profitability over a particular period.

Not improperly use information or position

Directors must not improperly use their position, or information they obtain because they are or have been a director, to gain an advantage for themselves or someone else, or cause detriment to the company. These prohibitions stem from a director’s fiduciary duty to prevent conflicts of interests, and the obligation to act only in the best interests of the company.

Manage conflicts of interest

Directors must avoid or appropriately manage conflicts between personal interests and the company’s best interests. The first step to managing conflicts of interest is identification. Recording conflicts of interest can help to ensure appropriate oversight and transparency.

Once a conflict has been identified, the Board must decide if it can be managed, and how. For example, it may be required that the conflicted director:

• refrain from participating in any discussion about related matters;
• remove themselves from the room; or
• abstain from voting on any matter related to the conflict.

Prevent insolvent trading

Directors have a duty to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent. Directors will be personally liable for certain debts which are incurred if:

• they are a director at the time when the company incurs the debt;
• the company is insolvent at that time, or becomes insolvent by incurring that debt; and
• at that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

 Statutory duties in relation to financial record keeping and reporting

Directors have an obligation to take reasonable steps to ensure that their company complies with its obligations under the Corporations Act in relation to the keeping of financial records and financial reporting. They must apply their own minds (rather than rely solely on advice) when reviewing financial statements, and they must satisfy themselves that this information is consistent with their knowledge of the company’s affairs.

Provision of director information

Directors have an obligation to provide, to their organisation, certain information relating to themselves. In certain circumstances, directors of proprietary companies will have responsibilities to lodge information with the Australian Securities and Investments Commission (ASIC).^[1]