As a director of a small to medium enterprise (SME) you may be keeping your eye more closely on your duties under the Corporations Act 2001 (Cth) (the Act) in the current trading environment.
It's certainly advisable. Pandemic impacts that were cushioned by government measures are beginning to hit home increasing the risk of insolvent trading. For example, the 6-month moratorium on creditors statutory demands ended for businesses that entered the temporary relief regime at the end of March 2021. Creditors have begun calling on their debts.
Furthermore, for companies with outstanding aged taxes, the time of reckoning is coming with the Commissioner of Taxation, who has recently cranked up its debt collection engine. This coupled with ASIC taking a more aggressive attitude towards enforcement, can only lead to problems for Directors who have failed to meet their duties.
ASIC announced that it will be eyeing solvency and going concern assessments closely for the 2021 reporting period ending December 31st. This will have implications for directors of companies that rapidly become insolvent in 2022[i] as a result of government support being phased out.
But the Corporations Act 2001 (Cth) is not all that you need to cast your gaze over to protect yourself from enforcement. You also need to be aware of your duties under general law which includes common law and law in equity.
What does this mean for directors and officers of a company?
The implications for directors and company officers are twofold. Firstly, a narrow interpretation of the Corporations Act may leave you exposed if you ignore or are unaware of your duties under general law.
Secondly, directors and company officers who breach their duties under general law (fiduciary duties) expose themselves to personal liability to compensate the company for losses caused by those breaches[i].
What are directors' fiduciary duties?
Fiduciary duties arise when there is a relationship of trust in which one person (the trustee) is entrusted to act in the interest of another. A director is entrusted to act in the company's best interest and therefore has a fiduciary duty to the company. A director must [i][ii][iii][iv].
- Act in good faith and in the best interest of the company.
- Use their power for proper purpose (that is, to use a power for the purpose for which it was granted to them and not for their own benefit).
- Exercise discretion. That is, use independent, informed judgement and not improperly limit their decision making on behalf of the company.
- Deliberate, that is, to make positive effort to be involved in, discuss consider and use discretion when acting on company matters.
- Have no actual or perceived conflicts of interest or duty
- Not obtain unauthorised profit.
- Not use company property or information for their own or another's benefit without company consent.
- Not exploit or divert business opportunities from the company that is within the company's current or related future line of business.
Implications of breaches of fiduciary duties
There is an overlap between directors' duties in the Act, and directors' duties under general law[i]. Therefore, proving a breach of fiduciary duty may also prove a breach of a section of the Act if a director's conduct, or authorisation of conduct, brings risks to the company of civil penalties or other liabilities, the risks to the company are clear, and potential benefits are too small to make the risk worthwhile. This can create a personal liability for a director, for a civil or criminal offence under the Act[i].
Further, a director is personally liable for remedies for action brought against them for breaches of their fiduciary duty. Action can be brought by the company, ASIC, a liquidator or, in some circumstances, another director or a shareholder.
Remedies include[i]:
- Injunctions
- Claims for damages or compensation
- Return of unauthorised profits made by a director
- Return of company property improperly used
- An order for director's property to be held on trust for the company
- Cancellation of any contract entered for improper purpose by a director
Conclusion
It is a difficult trading environment and a challenging time to be a company director. But interpreting your duties under the Corporations Act too narrowly to skirt around insolvency issues could see you ending up with personal liabilities for breaches of your duties under general law.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
[ii] Legal Services Commission South Australia. Law Handbook (n.d.). Common Law Duties [webpage]. https://lawhandbook.sa.gov.au/ch05s04s04.php
[iii] DLA Piper (July 202). Directors duties in Australia. A guide for resident and non-resident directors.
[iv] Owen Hodge Lawyers. (n.d.). Breach of fiduciary duties. https://www.owenhodge.com.au/employment-law/breach-of-fiduciary-duties/
[v] Wood, C. (1/5/2018) Fiduciary duties. https://www.13wentworth.com.au/publications/
[vi] Legal Services Commission South Australia. Law Handbook (n.d.). Common Law Duties [webpage]. https://lawhandbook.sa.gov.au/ch05s04s04.php
[vii] Justice Ashley Black, 'Some issues in enforcement of directors' duties.' (LAW5357 Corporate governance and directors' duties, Monash University, 29 October 2020).
[viii] ibid
[ix] DLA Piper ibid
