What Are Director Duties? A Quick Guide to Legal Responsibilities

As a director of a company in Western Australia, you have significant legal responsibilities. These duties are imposed upon Directors and senior officers by the Corporations Act 2001 (Cth) and are designed to ensure a company operates ethically, complies with corporation law, and protects the interests of shareholders and other stakeholders. Understanding these duties is crucial to avoid legal risks and personal liability.

Key director duties

1. Act with care and diligence

Directors must act with the care and diligence of a reasonable person in a similar position. This includes staying informed about the company’s financial position, operations, and risks. Failure to exercise proper care can result in personal liability for any resulting losses.

2. Act in good faith

Directors must act in good faith in the best interests of the company and for a proper purpose, not for personal gain.

3. Not improperly use information or position

Directors must not improperly use their position or information they obtain because they are or have been directors to gain an advantage for themselves or someone else or cause detriment to the company. These prohibitions stem from a director’s fiduciary duty to prevent conflicts of interest and the obligation to act only in the company’s best interests.

4. Avoid conflicts of interest

Directors must avoid or appropriately manage conflicts between personal interests and the company’s best interests. If a potential conflict arises, directors must disclose it to the board and, if necessary, abstain from voting on relevant matters. Failing to manage conflicts of interest can lead to serious legal and financial consequences.

5. Prevent insolvent trading

Directors have a duty to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent. Directors will be personally liable for certain debts which are incurred if:

a. they are a director at the time when the company incurs the debt;

b. the company is insolvent at that time, or becomes insolvent by incurring that debt; and

c. at that time, there are reasonable grounds for suspecting the company is insolvent or would become insolvent.

6. Financial record-keeping and reporting

Directors have an obligation to take reasonable steps to ensure that their company complies with its obligations under the Corporations Act 2001 (Cth) in relation to the keeping of financial records and financial reporting

Consequences of breaching director duties

Failure to comply with these duties can lead to serious consequences, including:

• Personal liability: Directors may be held personally responsible and liable for financial losses or damages caused by their actions.
• Disqualification: Directors can be disqualified from serving in a directorial capacity.
• Criminal penalties: In cases of fraudulent or dishonest conduct, directors may face criminal charges.
• Reputational damage: When a director breaches their duties, it can tarnish a director’s reputation and future career prospects.

Directors must adhere to their legal duties to protect the company and avoid personal liability. Understanding and fulfilling these obligations is key to successful corporate governance.

If you need advice on fulfilling your director duties, contact us for expert guidance tailored to your situation.