Who are considered to be directors?
The term “director” is defined in s9 of the Corporations
Act 2001 to mean:
- a person validly appointed as a director or an alternate
- a person, even though not validly appointed
as a director, if that person acts in the position
of a director (also known as a ‘de facto’ director);
- a person, even though not validly appointed
as a director, if the directors are accustomed to act
in accordance with that person’s instructions or wishes
(also known as a ‘shadow director’).
For simplicity, the term ‘director’ will be used in this
document to refer to all those who are considered to be
What are the four basic directors’ duties?
The Corporations Act 2001 specifies four main duties for
- Care and diligence – This duty requires a director to act
with the degree of care and diligence that a reasonable
person might be expected to show in the role (s 180).
A very similar duty is also imposed on directors at
common law. Recent court cases have emphasised this duty in relation to the approval of financial statements
(Centro case) and board approval of statements issued
by a company (James Hardie cases). There can also be
a breach of this duty by causing a company to enter into
risky transactions without any prospect of producing
a benefit or where a managing director fails to inform the
board of matters which clearly should have been brought
to the board's attention. The business judgment rule
(discussed below) provides a "safe harbour" for a director
in relation to a claim for a breach of care and diligence
at common law or under s180.
- Good faith – This duty requires a director to act in
good faith in the best interests of the company and for
a proper purpose (s 181), including to avoid conflicts of
interest, and to reveal and manage conflicts if they arise.
This is a duty of fidelity and trust, known as a ‘fiduciary
duty’ imposed by common law and a duty required in the
Corporations Act 2001.
- Not to improperly use position – This duty requires
directors to not improperly use their position to gain
an advantage for themselves or someone else, or to the
detriment to the company (s 182).
- Not to improperly use information – This duty
requires directors to not improperly use the information
they gain in the course of their director duties to gain
an advantage for themselves or someone else, or to the
detriment to the company (s 183).
As a general guide to fulfilling these duties, reference
should be made to the words of Professor Baxt in Duties
and Responsibilities of Directors and Officers 21e (2016)
at p 72:
"During times of difficulty and conflict, the yardstick by
which a director may safely judge their own actions is
Taking account of all the circumstances, is what I propose
to do "in my honest belief" in the best interests of all
the shareholders (present and future) of the particular
company of which I am a director?
In the case of financial difficulty, 'creditors' could and
perhaps should be substituted for 'shareholders'. If the
answer to the question is 'yes', then the director need
not fear an action for breach of duty under either the
statute or common law."
Are there additional directors’ duties under
the Corporations Act 2001?
In addition to the four basic duties discussed above,
other significant duties and responsibilities under the
Corporations Act 2001 include:
- Insolvent trading – Directors have a duty to ensure that
a company does not trade whilst insolvent or where they
suspect it might be insolvent (s 588G).
- Financial information – Directors should take
reasonable steps to ensure that a company complies
with its obligations in the Corporations Act 2001 related
to the keeping of financial records and financial
reporting (s 344).
- Disclosing directors’ interests – Directors should
disclose matters relating to the affairs of the company
in which he/she has a material personal interest (s 191),
particularly in the context of the requirement that public
companies obtain shareholder approval for related party
transactions (s 208), and disclosure of director’s interests
to the market (s 205G).
- Lodging information with ASIC (s188).
- Continuous disclosure – For listed companies,
continuous disclosure to the market of information
which is not generally available and which may affect
the company’s share price (s 674).
Are there directors’ responsibilities under
Every company will be involved in activities which are
regulated by other laws (for example, employment and
termination of employees, renting an office, marketing).
There are a significant number of laws (federal, state
and territory) under which a director can be found to be
personally liable for breach. Examples of these laws include
competition and consumer law, occupational health and
safety, environmental law and taxation. There will also be
specific industries which have very specialised laws (for
What are the consequences of breaching
directors’ duties laws?
- Criminal sanctions – There can be very severe penalties
for failure to comply with duties under the Corporations
Act 2001 or other laws governing a company’s activities.
For example, ‘cartel conduct’ under competition law can
lead to imprisonment for 10 years or significant personal
fines. It is also illegal for a corporation to indemnify its
officers against legal costs and any financial penalty
for this behaviour. Under the Corporations Act 2001,
contraventions of the duty of good faith or improper use
of information or position, if they involve dishonesty or
recklessness, can be punished by imprisonment for five
years (s 184).
- Civil sanctions – A contravention of the duties under
the Corporations Act 2001 can make a director liable to
a substantial fine. Shareholders or others (for example,
creditors) may also take action against directors who
have failed to comply with their duties.
- Disqualification – Both he Australian Securities and
Investments Commission (ASIC) and the courts have the
power to disqualify directors for long periods of time for
failure to comply with their duties under the Corporations
Act 2001 (Part 2D.6).
- Commercial consequences – The most serious
consequences of breaching directors’ duties are often not
the legal ones but the commercial ones. A corporation’s
most valuable asset is its reputation. The company will
likely be subjected to much greater scrutiny, both by
investors and regulators, where directors breach duties.
At worst, market reaction may mean the company will
cease to exist.
What is the business judgment rule?
The business judgment rule (BJR) applies to the duty to
act with care and diligence (s 180) and not other sections
of the Corporations Act 2001. This rule seeks to avoid
unnecessary restrictions on proper entrepreneurial activity.
Section 180 (2) of the Corporations Act 2001 provides
that a director who makes a business judgment is taken to
meet the care and diligence requirements in respect of the
judgment if they:
- make the judgment in good faith for a proper purpose;
- do not have a material personal interest in the subject
matter of the judgment;
- inform themselves about the subject matter of the
judgment to the extent they reasonably believe
to be appropriate; and
- rationally believe that the judgment is in the best
interests of the corporation.
The Australian Institute of Company Directors advocates
an extension of the business judgment rule to other areas
of the Corporations Act 2001 – for example, in relation
to insolvent trading.
Is there a duty to consider broader
In Australia, a director owes a fiduciary duty to the
company, that is he or she must “act honestly, in good
faith and to the best of his or her ability in the interests
of the company.” Section 181(1) requires that directors
act ‘in good faith in the best interests of the corporation’.
In practice, this means in the interests of the shareholders
or members of the company as a whole. This is not the
case in some other countries (for example, Germany,
France) where directors’ duties are owed to a wider range
of stakeholders (for example, shareholders, customers,
creditors, the local community).
There have been two Australian Government reviews
on whether Australia should adopt the ‘stakeholder’
approach of somewhere like Germany. In both cases,
the review considered that the law in Australia should
remain the same. The view was taken that, in considering
what is in the best interests of the shareholders,
Australian directors will consider broader interests (for
example, employees, creditors) in so far as these things are
relevant to the shareholders’ interests.
What duties exist in organisations not
governed by the Corporations Act?
Not all organisations are governed by the Corporations Act
- Incorporated associations such as cooperatives
– these are governed by state legislation, called the
Associations Incorporation Act in most states.
- Organisations operating under a royal charter;
- Charities – to be governed by the Australian Charities
and Not-for-profits Commission Act 2012.
- Organisations incorporated by their own act of
state or federal parliament, for example, Anglican
Church of Australia Constitution Act 1961 (NSW),
University of New England Act 1993 (NSW).
- Government bodies – regulated by their own
legislation (for example, the Commonwealth Authorities
and Companies Act 1997, State Owned Corporations Act
Most of the directors’ duties and responsibilities found
in the Corporations Act 2001 apply to these organisations
by virtue of their own legislation or the common law.
There is some debate amongst directors as to whether
directors of not-for-profits should be subject to less
onerous duties and responsibilities.
Case law has determined that there is no difference in
duties and responsibilities and the AICD believes that
all directors should be subject to the same duties and
How many directors are needed?
The Corporations Act 2001 requires public companies
to have at least three directors, two of whom must
ordinarily reside in Australia. Proprietary companies
must have at least one director who must ordinarily
reside in Australia (s 201A).
For proprietary companies with a sole director who
is also sole shareholder, a second director can be
appointed by the original director recording the
appointment and signing the record (s 201F).
What titles do directors have?
There are a number of types of directors. Commonly used
terms include non-executive director, executive director,
managing director, independent directors, shadow directors,
alternate directors, de facto directors, nominee directors,
What time commitment should a director expect?
To effectively perform the duties and responsibilities
of a director, sufficient time must be devoted to the role.
Chairs will often need to dedicate extra time as they are
the pivot point between the board and CEO. The actual
time commitment will vary according to the organisation.
Factors influencing the necessary time commitment
include the company size, complexity of structure and
operations, whether it is listed or unlisted, the company’s
stage of growth or expansion, and whether it is undergoing
This document is part of a Director Tools series prepared by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a
starting point for undertaking a board-related activity. It is not designed to replace legal advice or a detailed review of the subject matter. The material in this document does not constitute
legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied
representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for
professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage
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