As a director of a company, you have many duties and obligations arising from common law and statute. It is important to be aware of these duties regardless of how large the company is or how much involvement you have in the company.
The main duties of a director include:
- Duty to act in good faith
- Duty of care, diligence and skill
- Duty to avoid conflicts of interest
- Duty not to improperly use your position or information
- Duty not to trade whilst insolvent
Failing to be aware of the existence and extent of these duties can get you into trouble with, amongst others, ASIC and can cause significant personal liabilities.
This article addresses the duty not to improperly use your position or information. Other articles on this website will address other duties.
Duty not to improperly use your position or information
As a director of a company, you have a statutory duty not to gain an advantage for yourself or another person or cause detriment to the company by:
- improperly using your position as director; or
- improperly using information obtained by virtue of your position as director.
You also have a duty not to exploit or divert a business opportunity from the company.
What do I have to do?
Breaches of this nature will often occur where a director acts with knowledge of a company’s struggling financial situation. It is important to constantly be aware of what knowledge you might have, influence you may wield because of your position as a director, and you should always protect the interests of your company.
It is important to realise you will be liable for a breach of this duty even if you don’t actually manage to obtain any advantage or cause any detriment to the company. The intention to cause these results is enough to breach the duty.
Similarly, if a business opportunity presents itself only because you are a director of a company, you have a duty to give your company the opportunity to benefit from that opportunity first. Only once the company has had the chance to appropriately consider the opportunity and has decided to reject it can you take up the opportunity. The clearest way the company can show this intention is by passing a resolution rejecting the offer, but you have to be very careful about how this comes about because you don't want the voting to result from you breaching the duty.
You should always protect yourself by making sure the opportunity was disclosed to the board and that the board gave informed consent. This can be problematic if you have majority voting rights and a minority shareholder suffers.
The law is complex and you should always take legal advice before you make difficult decisions.
Given the delicate nature of taking up a business opportunity outside your capacity as a director of a company (especially if the venture is successful) we would highly recommend you seek legal advice before you do it.
What happens if I breach this duty?
If you breach these duties you may be required to pay to the company all profits made by virtue of your improper use of your position, use of information or the diversion of a business opportunity.
You may also be liable for civil penalties under statute such as fines, orders to pay compensation for damage suffered by the company and disqualification from directorship.
If you have been intentionally dishonest or reckless in breaching this duty, you may be criminally liable which could entail much larger fines and even imprisonment.
If you need advice please phone us.