A director is defined in the Corporations Act 2001 (Cth) (Corporations Act) as a person officially appointed as a director, a person acting as a de facto director, or a person in respect of whom the directors are accustomed to following instructions (also known as a shadow director).

Boards of directors are responsible for governing and guiding a company’s overall direction and performance while ensuring compliance with the company’s objectives. Directors must act in the company’s best interests, avoiding conflicts of interest, and must not use their position or any information obtained for personal gain.

Summary of directors duties

The core directors duties are outlined in the Corporations Act and include:

• Acting with care and diligence: Directors must exercise their powers and duties with the level of care and diligence expected from a reasonable person in the same position.
• Acting in good faith for company’s best interests: Directors must act honestly, in good faith, and for the company’s benefit, considering not only financial returns but also the shareholders’ interests and company’s sustainability.
• Not improperly using position or information: Directors must not use their position or any information obtained as a director to gain personal advantage or cause harm to the company.
• Managing conflicts of interest: Directors must identify and appropriately manage conflicts between personal interests and the company’s interests, including recusal from discussions or voting on related matters.
• Preventing insolvent trading: Directors must ensure that the company does not trade while insolvent especially as they can be held personally liable for debts incurred if certain conditions are met.

It is important to remember that directors are also subject to obligations under various other laws, such as competition and consumer law, workplace health and safety, privacy law, environmental law, and tax.

Apparent or ostensible authority

Even persons with apparent or ostensible authority who act on behalf of a company, but who are not officially appointed as a director, can be bound by directors duties if they meet specific criteria.

The test for apparent authority is whether a reasonable person believes that the supposed agent had authority to act. This will largely depend on the circumstances which give rise to the transaction being entered into. For apparent authority to exist, the following must generally occur:

• a representation to the other contracting party that the supposed agent has authority;
• the representation must derive from the company;
• the other contracting person must have relied on the representation.

Consequences of breach

Breaching directors duties can lead to criminal and civil sanctions, including substantial fines and potential imprisonment. In addition, directors may face disqualification by the Australian Securities and Investments Commission or the courts, and their actions can have severe commercial consequences damaging the company’s reputation and value.