Company directors are entrusted with important rights and responsibilities in the management of their company and are given some leeway in determining how best to use these rights. However, they are also expected to meet their responsibilities to a very high standard and breach of these standards of conduct can have very serious consequences. In some cases, directors can attract not only civil penalty but criminal charges as well. This article outlines the law under which directors can be charged with offences under the Corporations Act 2001 (Cth) (“the Act”) and how directors may avoid falling afoul of these provisions.
A. Duty to Act in Good Faith
Generally, any breach of a provision of the Act can, unless otherwise provided, constitute a criminal offence under s 1311. Under s 184, the Act proscribes a number of breaches that attract criminal charges. Firstly, where a director violates their duty to act in good faith in the best interests of the corporation or other proper purpose, they will be guilty of an offence. A director can be in violation of the provision either where they intended to act without good faith or where they acted in a manner that recklessly resulted in a breach. What is required by the duty will vary from case to case, but generally requires the director to use their position to further the interests of the company instead of their own. The duty is owed to the body of members as a whole, rather than any particular individual.
B. Dishonest Use of Position
Under s 184(2), the Act prohibits directors (and other employees) from recklessly or intentionally using their position with the company to directly or indirectly gain an advantage for themselves or another, or to cause harm to the company. In other words, the section imposes strict obligations on directors if they use their position to enrich themselves, even if this does not actually harm the company and even if the benefit to the director or another person is indirect in nature.
C. Dishonest Use of Information
Section 184(3) prohibits the use of information that has been obtained in the course of the director’s role or former role from being used in a way that would directly or indirectly benefit the director or another, or cause detriment to the company. The provision is similar in its scope to s 184(2), but adds the further dimension that it also prohibits directors from using such information even after they have left the company. The duty survives the end of the director’s employment.
D. Trading While Insolvent
Insolvent trading is a serious offence and the legislation reflects this in imposing criminal charges on directors who do so. Sections 588G to 588HA outline the duties directors hold to avoid insolvent trading as well as some defences that may be relied on. Section 588G outlines both civil and criminal liabilities. The offence becomes one of criminal liability where a director acts dishonestly by incurring a debt or allowing a debt to be incurred where the company is insolvent. Once a company is insolvent directors must act with the utmost care in insuring no further debts are undertaken so as not to incur liability or at the very least, to avoid criminal charges.
Directors owe important duties to their company and breach of these duties can result in both civil and criminal redress. It is therefore important for directors to understand the range of consequences they can face for intentional or reckless misconduct.
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This article was authorised by Warwick Heeson.