copyright  |  disclaimer  |  privacy policy  |  print ready

« back

Directors' duties clarified

Excerpts from this article first published in ‘Human Resources’ Magazine, Issue 89, 20 September 2005

Company directors, like other employees, owe certain duties to their employer under the contract of employment. In addition to these obligations the Corporations Act 2001 (Cth) imposes statutory duties on company directors. A director owes these statutory duties to the company and its shareholders.

Under the Corporations Act, a director must discharge their functions with a reasonable degree of care and diligence and in good faith. A director must also prevent insolvent trading by the company. A director must not improperly use their position to gain an advantage for themselves or others. Further a director must not use information, obtained as a director, to gain an advantage for themselves or others. Breach of the above obligations carries a civil penalty.

The statutory obligations imposed by the Corporations Act were the subject matter of a recent decision of the Supreme Court of NSW in ASIC v Vines. In this case, ASIC pursued a civil penalty against three former directors of GIO Insurance Limited for breaching their statutory duties as directors.

In August 1998, AMP made a take-over bid for GIO Australia Holdings Limited, the parent company of GIO Insurance Limited. In response to the take-over bid, GIO Australia Holdings Limited issued a statement to its shareholders which identified the profit forecast for the entire group and recommended that shareholders reject the AMP bid. The profit forecast included an $80 million profit for the reinsurance division for GIO Insurance Limited.

In September 1998, parts of the USA and the Caribbean were devastated by Hurricane Georges. The substantial damage caused by the hurricane led to insurance claims. This exposed GIO Insurance Limited’s reinsurance business. ASIC claimed each of the three directors of GIO Insurance Limited had breached their statutory obligations as directors by failing to properly account for the effect of the hurricane in the profit forecast to shareholders.

The Court found that combined, the three directors had breached their statutory obligation to exercise reasonable care and diligence on 28 separate occasions in relation to matters associated with the preparation of the profit forecast. No decision on penalty has been made at this stage.

HR Tip

It is common practice for companies to provide information and instruction to employees about their statutory obligations. For example, companies often provide employees with OH&S and EEO training. As part of good corporate governance, companies should also consider providing directors with information and instruction on their duties as directors.

Jason Donnelly
Senior Associate
Australian Business Lawyers