Scenario:
Fred and Jane are looking at purchasing a small business and their business lawyer has asked them to consider, among other alternatives, a private company as the appropriate business structure to purchase and operate the business. Fred and Jane remember friends of theirs also in business and operating via a company structure saying that they must be careful and diligent about their directors duties in relation to a company. Fred and Jane seek the advice of their business lawyer in relation to their legal duties as directors of the intended company.
Guidance:
Fred and Jane, being directors of a company registered in Australia with Australian Securities & Investments Commission (ASIC) under the commonwealth legislation Corporations Act 2001 (Cth) (“the Act”), are lawfully bound by both the Act and by common law directors duties.
Directors duties are designed to ensure the loyalty of directors top their company. They are also a recognition of the fact that directors interests may sometimes differ from those of the company’s shareholders. They are a form of corporate governance.
Statutory Duties:
Under the head of Loyalty and Good Faith there are the following statutory duties:
- Requirement to disclose certain interests (s 191-196)
- Related party transactions (s Ch 2E)
- Not to misuse information or positions (ss 182 & 183)
- To act in good faith and the best interests of the company and for a proper purpose (s 181)
- Under the head of Care and Diligence there is a duty to act with reasonable care and diligence at all times in favour of the company.
Common Law Duties:
Under the head of Loyalty and Good Faith there are the following common law duties:
- To retain discretions
- To avoid conflicts of interest
- To act in good faith in the interests of the company
- To use powers for a proper purpose
Under the head of Care and Diligence there is a duty to act with reasonable care and diligence (s 180) and to prevent insolvent trading (s 588G).
Clearly for Fred and Jane it is important for them to understand that the company is a separate legal entity which is able to trade, buy/sell property and sue/be sued in its own name. In other words it is seen by the law as a person in its own right. Fred and Jane must respect that and in turn they must at all times abide by the duties outlined above in the best interests of the company itself, not their own interests.
Additional information: Blackwell Short Lawyers, ASIC, Corporations Act 2001 (Cth), ATO