Directors breach of duty

Directors have the power to manage a company. If directors' duties did not exist then members would be able to very little if directors engaged in self dealing or otherwise managed the company inappropriately. Find out more about the duties of directors and what happens if the obligations are breached.

• What is a director?
• Why are director’s duties important?
• What are the duties and responsibilities of a director? (aka duty of care and fiduciary duty)
• What are some possible defences to a breach of director’s duties?
• What are the liabilities of a director?
• What are the liabilities of a 3^rd party in respect of a director’s breach of duty?
• Who can sue directors for breaches of duty?
• How does Litigant help with breach of director’s duty cases?

What is a director?

1. A director is a person who is appointed as:
   • a director, or
   • an alternate director.
2. Alternatively, a director can be:
   • a de-facto director, or
   • a shadow director

Why are director’s duties important?

3. Directors are responsible for managing the company and usually this is done by way of the board of directors acting collectively.
4. Given that directors have this power it is necessary to prevent the misuse of power and to ensure that power is exercised appropriately. If director’s duties did not exist:
   • directors could self deal; and
   • manage a company poorly without regard for shareholders.

What are the duties and responsibilities of a director?

5. Once you are a director, even if you are a shadow or de-facto director, you have the obligations of a director.
6. Simplistically, the obligations of a director are owed to the company rather than to the:
   • members individually,
   • employees,
   • creditors, or
   • suppliers

           However, there may be exceptions.

7. Broadly, the duties of a director include obligations such as:
   • the director's duty of care - to exercise due care and diligence so that this is similar to a common law duty of care. An example of a breach could potentially arise when a director signs off on inaccurate accounts when that could have been discovered by the exercise of reasonable care.
   • the director's fiduciary duties - that require him or her to:
     • act in good faith and in the best interest of the company and could potentially be breached if a corporate opportunity is diverted for a personal gain
     • act for a proper purpose and could potentially be breached if shares are issued to manipulate voting power
     • avoid a conflict between the director’s duties and personal interest and this could potentially be breached if the director makes a “secret” profit.
     • not disclose confidential information.
     • not retain the discretion of a director to vote on company’s affairs and not fetter it.
   • not to dispose of assets so as to defeat the rights of creditors unless an exception applies.
   • not to incur a debt when the company is insolvent (aka insolvent trading) unless an exception applies.
   • to disclose material interests before voting unless an exception applies.
   • to withhold PAYG amounts and remit them to the ATO.
   • to remit super to the ATO
   • not to engage in conduct that is false, misleading or deceptive in trade or commerce, and
   • to comply with other relevant laws such as OH&S and Environmental Laws. 

What are some possible defences to a breach of director’s duties?

8. A great deal depends on the duty that was breached.
9. Potentially, a number of defences may apply.
10. For a breach of the duty to exercise reasonable care it may be possible to rely on:
    • the business judgment defence especially for operational matters, or
    • if the director acted honestly then potentially a statutory defence may apply.
11. For breaches of fiduciary duty there may be a defence if informed consent was obtained from the company or perhaps if the members ratify the breach (there is debate).
12. It is also important to consider that D&O Insurance may be engaged, and that could facilitate the defence if the insurer steps in under its rights to subrogate. 

What are the liabilities of a director?

13. A director who breaches the duties of a director could be personally liable to:
    • an injunction to either engage in certain acts or refrain from doing them
    • disgorge gains made
    • pay compensation to the company
    • pay compensation to creditors, where insolvent trading occurred,
    • pay civil penalties, or
    • criminally to offences that are prescribed.

What are the liabilities of a 3^rd party in respect of a director’s breach of duty?

14. A 3^rd party may be liable if they knowingly participated in a director’s breach of duty.

Who can sue directors for breaches of duty?

15. Normally, the company will sue for a breach of director’s duty.
16. However, in some cases:
    • the liquidator
    • members (as part of a statutory derivative action), or
    • ASIC

How does Litigant help with breach of director’s duty cases?

17. Litigant acts for directors or liquidators in civil claims for breaches of director’s duties where the amount of the claim exceeds $100,000.
18. Contact our commercial litigation lawyers for more information on making or defending a claim for breach of directors' duties.