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Director’s Duty
According to s 9, a
director of a company is defined as a person who is appointed to the position
of a director or alternate regardless of the name given to their position.
He/she must act in the best interest of the company because they owe the duties
of good faith and loyalty, as they are locked by the fiduciary relationship
with the companies. They cannot take merrily benefit of their position of trust
to take advantage of themselves at the company’s expenses without the knowledge
of the company. De facto directors are the persons who act in the position of a
director regardless of being appointed to that position: s 9. They play a role
as a director despite being appointed as a director and takes part in the
affairs of a company.
1. Duties of care, skill and diligence
Section 180(1) states that director should take
into consideration the company’s circumstances and exercise their power in the
situation deciding the care and diligence and skill. Director of a company has
their responsibility in determining the care and diligence. It is the duty of
the directors must take a rational decision to overseer and lead the management
of the company. Daniel v Anderson (1995) 35 NSWLR 438.
2. Good faith and proper care
Section 181 (1) deals the statuary duties of a
director to act in good faith and for the proper purpose. Directors are bounded
by their fiduciary duties to act upon good faith and for the growth of the
company. Directors must exercise their power with honesty, integrity, and
loyalty and without any bias and act rational. They must make proper use of
their power for the overall benefit of the company and for appropriate purpose.
3. Improper use of position
Section 182 of the
Corporation Act states that director are indulged to prevent making wrongful
advantage of their position to benefit personally or the third party or that
may produce impairment to the company. This
type of breach can be taken from the case of Fork
serve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd.
4. Proper use of information
Under s 183 of the Corporation Act, directors
should not exploit the company’s confidential information for their personal
benefit that may affect the company. They should avoid using the company’s
vital information to aid Competitor Company where the director holds or
otherwise purchase share. It is clear in Australian Securities and Investment
Commission v Vizard. Similarly s 184 states “ a director or other
officer of a corporation commits an offence if they are reckless and are
intentionally dishonest”.
5. Reliance of information or advice provided by other
Likewise, under s 189 provides defense related to
reliance that the director might trust the information upon besides the
reliance must be in good faith. Directors can delegate any of their power to
any other person, although they are not guilty if the delegate exercises the
power in compliance with the duties executed by the directors in good faith in
after making appropriate analysis.
6. Material personal interest
Under s191 directors are under fiduciary duties
to avoid conflict of interest, they should avoid consequences that would
detriment the company. They should not take up opportunities that belong to the
company. In the case Cook v Deeks, the court oversees that director
cannot act to take benefits even though the company cannot or will not take up
the opportunity.
7. Duty to prevent insolvent trading
Relatedly, director
has duty to prevent insolvent trading while company cannot pay their debt,
under s 588G. A person is said to breach the insolvent trading of s 588G if he/
she is director of the company at the time when company is not able to pay its
debts and the person is not able
to prevent the company from incurring the debt.
It can be clearly seen in the case of Metropolitan Fire System Pty Ltd v
Miller.
Consequence of insolvent trading (Penalties)
There are various
penalties for insolvent trading of a company.
Civil penalties: Civil penalties against director may cause the
director up to $200,00 monetary penalties
Compensation
proceedings: In addition to
civil penalties, a compensation order can be made.
Criminal charges: If director of the company are found liable for
fraud and dishonesty in insolvent trading, they may be subject to
criminal charges (fine up to $200,000 or
imprisonment up to 5 years or both).
Defense
1.Business
judgmental rule
However, in the defense side, the business
judgment rule facilitate defense against the breach of directors of care, skill
and diligence. However, it does not protect the director if they breach their
duty under s588G of Corporation Act to prevent insolvent trading.
2. Section 588G
Similarly, under
section s885H, a director can rely upon statutory defense only if the director
with the available information the director expects the company was solvent, if
director by some reason like illness or other reason are not able to take part
in management, and only if director takes rational process to avert the company
form incurring the debt.
Voidable transaction
If the insolvent
transaction and unfair loans are entered into during a specific period before
the presentation of the petition of bankruptcy are known as voidable
transaction. Section588FE specifies different time periods prior to the
bankruptcy period depending on the type of transaction:
Unfair preference,
if it had entered during the six months prior to the relation- back day period
Uncommercial
transaction that is an insolvent transaction. An unreasonable director-related
transaction.
An insolvent transaction for the purpose of
defeating creditors.
Application.
If the director of
the company encounters debt when the company is insolvent then this would be
called as insolvent trading. It is the duty of director to prevent trading
during the time of insolvency. According to s588G it is the directors’ duty to
prevent insolvent trading by company.
Likewise, defense
is available under s588H for the people who have breaches s588G only if the
director had the reasonable expectation.
In other words,
directors should keep an update with the company’s financial position in timely
manner. Also, directors cannot simply rely on the information provided by other
parties without focusing on the matter.
Daniels v Anderson.
A company goes to voluntary administration to
overcome its debt during the time of insolvency. It helps to resolve company’s
financial position. The main reason for the company to be insolvent can be
recognized as trading the asset of company lower than the market price.
According to the s181 statutory duties of good faith and proper care, directors
must use their power for the benefit of the company rather than their own
benefit. Fork serve Pty Ltd v Jack & Aussie Forklift Repairs Pty
