number of duties and responsibilities | My Assignment Tutor

SUMMARY OF DIRECTORS’ DUTIES1. Background1.1 The Corporations Act 2001 imposes a number of duties and responsibilities ondirectors and officers of companies. These duties and responsibilities are inaddition to those imposed on directors under common law (that is, judge-madelaws).1.2 A company director must observe these duties and responsibilities. It is anoffence under the Corporations Act 2001 if a director fails to do so. The AustralianSecurities and Investments Commission (ASIC) is the corporate watchdog, and isthe Government organisation that enforces compliance under the Corporations Act2001.1.3 This document summarises some of a director’s key duties andresponsibilities, and the attached document gives some further detailedinformation.2. Primary duties of directors2.1 A company director’s primary duty is to act in good faith and in the best interestsof the company at all times (rather than to any particular class of the company’smembers, even if the director has been elected by a particular class of members).3. Summary of directors’ duties3.1 This section sets out some of the key duties, powers and responsibilities ofdirectors, as set out in Part 2D.1 of Chapter 2D of the Corporations Act 2001.23.2 A director:3.2.1 must exercise his/her powers and discharge his/her duties:(a) in good faith in the best interests of the company, and(b) for a proper purpose, and(c) with care, skill and diligence,3.2.2 in making a business judgement, must:(a) not have a material personal interest in the subject matter, and (b)inform him/herself about the subject matter to the extent he/shereasonably believe to be appropriate, and (c)rationally believe that the judgement is in the best interests ofthe company; 3.2.3 must not improperly use his/her position to:(a) gain an advantage for him/herself or someone else, or(b) cause detriment to the company; 3.2.4must not improperly use information obtained because he/she is orhave been a director of the company, to: (a) gain an advantage for him/herself or someone else, or(b) cause detriment to the company.3.3 A director of a company, who has a material personal interest in a matterbeing considered at a directors’ meeting must not:3.3.1 be present while the matter is being considered at the meeting, or3.3.2 vote on the matter,except in the limited circumstances set out in the Corporations Act 2001.3.4 A director commits an offence if he/she:3.4.1 is:(a) reckless, or(b) intentionally dishonest,and fails to exercise his/her powers and discharge his/her obligations:(c) in good faith in the best interests of the company, or(d) for a proper purpose; or33.4.2 uses his/her position dishonestly:(a) with the intention of directly or indirectly gaining an advantagefor him/herself, or someone else, or causing detriment to thecompany, or(b) recklessly as to whether the use may result in him/herself orsomeone else directly or directly gaining an advantage, or incausing detriment to the company; or3.4.3 dishonestly uses the information obtained because he/she is, or hasbeen, a director of the company:(a) with the intention of directly or indirectly gaining an advantagefor him/herself, or someone else, or causing detriment to thecompany, or(b) recklessly as to whether the use may result in him/herself orsomeone else directly or directly gaining an advantage, or incausing detriment to the company.4. Further detailsAttached to this document, is a document which sets out in more detail, the duties ofdirectors of companies.4More details – duties of directors DutyStatuteCommonlawDuty of Care, Skill and DiligenceThe General DutySection180(1)A director’s duty of care, skill and diligence arises from the common lawand is also embodied in statute. Section 180(1) provides that as adirector you must act with the same degree of care and diligence as areasonable person with the same position in a company in similarcircumstances in carrying out your functions as director.You are likely to breach this duty by: not informing yourself about the subject matter of the businessjudgement that you make; not attending board meetings as often as is necessary to carryout your functions properly; or not actively monitoring the management of the company.Section180(2)BJRIf you can satisfy the Business Judgement Rule (BJR), you will be takento have met the requirements of this duty. The BJR essentially provides adefence to any breach if you can establish that you: made the business judgement in good faith and for a properpurpose; and do not have a material personal interest in the subject matter ofthe judgement; and informed yourself about the subject matter of the judgement;and rationally believe the judgement is in the best interest of thecompany. A belief will be rational unless it is a belief that noreasonable person in your position could hold.Reliance on AdviceA director has a duty under both common law and statute to only rely oninformation and advice when it is reasonable to do so.Section 189 of the Act provides that a director’s reliance on informationor professional or expert advice will be taken to be reasonable if: it was received from an employee whom you believed to bereliable and competent in relation the matters concerned, or aprofessional adviser or expert in relation to matters that youbelieved to be within that person’s professional competence oranother director or officer in relation to matter within thatperson’s authority; and the reliance was made in good faith and after making anindependent assessment of the information or advice.Section189Preventing Insolvent TradingThis duty arises purely from statute. Section 588G of the Act providesthat a director has a positive duty to ensure that a company is notinvolved in insolvent trading. Insolvent trading occurs where a companycontinues to trade and incur debts when the company is insolvent or onthe verge of becoming insolvent. A company will be presumed to beinsolvent if it fails to keep financial records.You will be in breach of this duty if:Section588G 5 DutyStatuteCommonlaw you are a director at the time the company incurs a debt; and the company is insolvent when the debt is incurred or becomesinsolvent by incurring that debts or debts including that debt;and at the time the debt was incurred, there were reasonablegrounds for suspecting the company is or would becomeinsolvent.Directors may have a defence in four situations: when a director had reasonable grounds for expecting that thecompany was solvent and would remain solvent; when a director has relied on information from a competentperson regarding solvency (and the belief was reasonable andbased on a competent system of monitoring); absence from management due to illness or for some other goodreason at the time the debt was incurred; and when a director takes reasonable steps to prevent incurring thedebt. This includes action to appoint an administrator.A breach of this duty could result in a director being charged with anoffence under the Act and an order to pay compensation.Financial ReportingSection 292 – 318 of the Act provides that directors of public and largeproprietary companies have a statutory duty to prepare a financial reportand a directors’ report for each financial year.Sections292-318 6 DutyStatuteCommonlawDuty of Loyalty and Good FaithDuty to act in good faith and in the best interests of the companyand for a proper purposeSection181(1)This statutory duty derives from the common law duty to act in goodfaith in the interests of the company and the duty to use powers forproper purposes.Section 181(1) of the Act provides that as a director you must act: in the best interests of the company as a whole (i.e. in theinterests of the collective body of members); and for a proper purpose.Traditionally, exercising power to defeat a takeover, entrenching controlof the company or benefiting one group of members over another wereimproper purposes. However, if a director is acting in good faith and inthe company’s best interests, then it is likely that there will be no breachof the duty.Directors of wholly-owned subsidiariesA director of a company that is a wholly-owned subsidiary of anothercompany will be taken to act in good faith in the best interests of thesubsidiary if:Section187 the constitution of the subsidiary expressly authorises thedirector to act in the best interests of the holding company; the director acts in good faith in the bests interests of the holdingcompany; and the subsidiary is not insolvent at the time the director acts anddoes not become insolvent because of the director’s act.Duty not to misuse information or positionSections182-184The duty of a director not to misuse information or position is a statutoryduty that derives from the common law duty imposed on directors to usetheir powers for a proper purpose.The duty not to misuse information continues even if you cease being adirector. The duty is not limited to information which is classified asconfidential.You will be in breach of this duty where you engage in conduct with thepurpose of: obtaining a benefit for anyone; or causing a detriment to the companyregardless of whether the benefit or detriment actually occurs.Sections 182 – 184 of the Act provides that you must not improperly useyour position as director or any information you obtain because of yourposition as director to gain advantage for yourself or someone else or tocause detriment to the company. 7 DutyStatuteCommonlawDuty to Avoid Actual and Potential Conflicts of InterestThe General DutyDirectors should not allow a conflict of interest to compromise theirposition in the company, or compromise their ability to give independentconsideration. In circumstances where there is a conflict, or a realpossibility of conflict between a director’s personal interests and those ofthe company, directors, as fiduciaries, are under a duty not to promotetheir personal interest in making or pursuing a gain.Sections191-192,194-195Disclosure of Material Personal InterestIf a conflict arises, you will generally be free to pursue your personalinterests if you have the company’s fully informed consent.Obtaining the company’s fully informed consent requires you to: disclose the nature and full extent of your interest to thecompany (this may be done at a directors’ meeting or to theother directors individually in writing); give standing notice in respect of an ongoing interest whichconflicts with an interest of the company.Section191(1)Exceptions to DisclosureThere are a limited number of exceptions to the general requirement thatyou disclose any conflict of interest. These include interests: in a company held in common with the other members of thecompany; and that relate to the director’s remuneration as a director of thecompany.Section191(2)Directors of Public CompaniesDirectors of public companies cannot be present at a directors meetingwhen the matter in which they are interested is discussed or vote on thematter unless the non-interested directors resolve otherwise andindemnify the interested directors and their interest.Section195Duty to retain discretion to exercise powersThis duty derives solely from the common law. There is no equivalentduty in the Act.Directors must exercise their powers for the benefit of the company. Asa director, you cannot limit your decision making authority toaccommodate the interests of another. Therefore, as a director youcannot agree to exercise your discretion to act in a particular manner, forexample, by contracting with a third party to vote in a particular way atboard meetings. 8 DutyStatuteCommonlawPenalties for Breaching a DutyA contravention of any of these duties constitutes a breach of the civilpenalty provisions of the Act. You can be liable for substantial fines,compensation or disqualification from management.Pecuniary penalty orders: The relevant maximum amount an individualmay be ordered to pay is $200,000. A body corporate may be ordered topay up to $1 million.Compensation orders: Directors may also be ordered to paycompensation for damage suffered by a corporation. There is no specifiedlimitation on the amount of compensation payable by the director.Breaches of duties to act in good faith, not to misuse position orinformation and not to trade when insolvent also attract criminalpenalties if you intentionally or recklessly breach your duties.Part 9.4BSection1317GSection1317HSection184

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