Companies and Directors Duties

The company structure has existed in law for centuries, but it wasn’t until relatively recent times that the company was considered a separate legal ‘entity’, that is, separate from those members who may own the company.

It is common, to say the least, that people establish companies to run businesses. The creation of a company, under the   Corporations Act 2001   (‘the Act’), does provide, in very general terms, some legal protections for the operators and owners of the company, for example the directors and the shareholders. A company remains in existence until it is deregistered.

As a separate legal entity companies can hold property, contract and sue and be sued in the company’s name, and there are quite a few different types of companies, for example public and private companies. When looking to utilise a company structure or become a director you need to be aware of the many and varied obligations/duties involved. Both the common law and Act impose certain duties on Directors, and these are designed to protect the company itself, its shareholders and those people dealing with the company on a daily basis.

As a Director you are in a ‘ fiduciary relationship ’ with respect to the company, and accordingly there is a duty on a director to act ‘ bona fide’   and in the best interest of the company, not to fetter discretions, exercise directors powers for proper purposes and to avoid conflicts of interest. These common law duties are in additional to others imposed by the Act.

The Act also requires Directors to:

  • Act in good faith and in the interests of the company. They must also act honestly in the exercise of powers/duties;
  • Not to use their authority/power for other than proper company purposes, nor in a manner that does not promote the objectives of the company;
  • Avoid conflicts of interest, that is, where a Directors personal interest is in conflict with the interests of the company. These can be contracting with the company, or obtaining ‘secret profits’;
  • Not use their position or company information for personal profit or in an improper manner. Any such profits would make that gains/profit the property of the company.

There are other provisions of the Act that impose liability on company officers where they have allowed the company to incur debts when the company is ‘insolvent’, or where the incurring of the debt makes the company insolvent. This is generally known as ‘ insolvent trading ’, and it can have serious consequences for the company Directors if this is proven to be the case. A Director can be prosecuted, and also be held liable for the debts incurred. A company is ‘insolvent’ if it cannot meet its debts as and when they fall due.

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