Director’s Duties – Duty of Care, Diligence and Skill

Date: May 01, 2014
Document Type: Article

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 the extent of your involvement 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 serious trouble with, amongst others, ASIC and can cause significant personal liabilities.

This article addresses the duty of care, diligence and skill. Other articles on this website will address other duties.

Duty of Care, Diligence and Skill

As a director you have a duty to the company to apply reasonable care, diligence and skill in the performance of your office.

Whether this threshold has been reached will depend how a reasonable person would exercise their powers if they were a director in the circumstances of the company and had the same responsibilities as the director in question.

What do I have to do?

This doesn’t mean that every decision made by a director which has negative results is a breach of the duty. The law understands that business can be risky and you have not necessarily breached your duty simply because a business venture doesn’t work out.

You will be taken to have fulfilled the requirements of the duty of care, diligence and skill if you make a ‘business judgment’ and it was:

  • made in good faith and for a proper purpose;
  • without material personal interest in the subject matter of the judgment;
  • made after informing yourself of the subject matter to a reasonably appropriate extent; and
  • rationally believe what you do (or don't do) to be in the best interests of the company.

A ‘business judgment’ is any decision to take or not take action in respect of a matter relevant to the business operations of the company. This is known as the ‘business judgment rule’.

What happens if I breach this duty?

If you breach this duty, you may be liable for civil penalties under statute such as fines, ordered to pay compensation and/or face disqualification from directorship.

Breaches of director’s duties can be very serious. You cannot assume they will not affect you because you aren’t involved in the day to day running of the company. It is safer to check your actions comply with these duties before you make decisions and exercise your powers as a director.

If you are need advice, please phone us.
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