Legal duties of directors and other officers

Why legal duties exist

Corporations rely on people to do things on their behalf. Members give directors and other key decision-makers a significant level of control and responsibility for a corporation. So, directors and other key decision-makers directly influence the corporation’s success, legal compliance and reputation. 

The duties keep directors loyal and accountable to the corporation. The duties are designed to make sure directors and other officers: 

  • always act in the best interests of the corporation, rather than their own
  • govern the corporation effectively to achieve its purpose and meet its legal obligations. 

Duties evolve over time. This often happens in response to major critical failures in companies that revealed problems in the way directors and staff govern and manage companies, corporations and other entities. There are now corporate governance principles and standards, and in many countries, the duties are written into law. 

Who legal duties apply to

The legal duties apply to any person:

  • who participates in making decisions that affect the whole, or a substantial part, of the business of a corporation; or
  • who has the capacity to significantly affect a corporation’s financial standing.

The CATSI Act says that all the duties apply to directors and some of the duties apply to the corporation’s other officers and employees.

Directors

Directors are the people appointed as a director or as an alternate director acting in that capacity. The term also includes a person who is not validly appointed as a director but: 

  • acts as a director (a de facto director)
  • whose instructions or wishes the appointed directors are accustomed to following (a shadow director).
Other officers

Other officers of a corporation are any people who are involved in making decisions that affect the business of the corporation. They include:

  • CEOs or general managers
  • secretaries of large corporations
  • chief financial officers (CFOs)
  • special administrators and liquidators 

The CEO or general manager is usually the most senior employee. The board of directors appoints them to look after or manage the practical day-to-day business of the corporation, including its property and financial administration.

Duties apply individually 

The duties apply individually. This means that every director, officer, or employee to whom they apply is personally responsible for meeting them. 

If a director fails to follow their duties, they can be held personally liable in certain circumstances. Not knowing the duties is not an acceptable excuse.

Many corporations write the duties into their rule books to help everyone remember them.

Duties are owed to the corporation

The whole point of having duties is to support and protect the corporation. Directors, officers and employees are engaged to serve the corporation. Therefore they owe their duties to the corporation, which means being answerable to the membership.

Where the legal duties come from

In Australia, legal duties of directors and other officers come from common law and statutory law. Some of the duties have similarities. 

  • Common law is the law developed by judges through their decisions. Common law imposes a fiduciary duty on all directors and other officers of corporations.
  • Statutory law is legislation made by governments. Statutory law also provides specific duties for directors. Some of these duties also apply to officers. There are 5 legal duties in the CATSI Act. 

Fiduciary duty

Fiduciary duty comes from common law. Fiduciary duty is your duty of loyalty, honesty and care as the trusted custodian for the corporation during your term of appointment as a director.

It means the interests of the corporation always have to come first in all your decisions and actions as a director.

Duties under the CATSI Act

These duties apply to directors and other officers:

1. You must exercise your powers and discharge your duties with care and diligence. This means that you:

  • make decisions in good faith and for a proper purpose
  • do not take part in a decision if you have a material personal interest in the matter being decided
  • get to know the subject of the matter being decided
  • believe the decision is in the best interests of the corporation. 

2. You must carry out your role in good faith and for a proper purpose. In good faith means that you:

  • sincerely and honestly believe your actions put the corporation’s interests first
  • are responsible and ethical towards stakeholders, such as customers, employees and funders. 

For a proper purpose means that what you are doing is part of your director role in the corporation. 

This duty applies to directors, other officers and employees:

3. You must not use your position or any information you get as part of your role, to get an advantage for yourself or someone else, or cause harm to the corporation. This means that you must do your job and use any information from your job properly and ethically.

These duties only apply to directors:

4. You must disclose to the other directors any material personal interest that relates to the corporation’s business. 

You must also manage any conflicts. For example, by not being involved in decisions related to that interest.

5. You must not allow the corporation to trade if you suspect it is insolvent.

RNTBCs and legal duties

The CATSI Act makes sure that duties of directors, officers, and employees of registered native title bodies corporate (RNTBCs) under native title legislation do not conflict with their duties under the CATSI Act. So, if a director of a RNTBC acts in good faith and believes that what they are doing is necessary to comply with native title legislation, they will not be in breach of duties that apply under the CATSI Act or equivalent common law.

Consequences for breaching director duties

  • Action by the corporation
  • Civil penalty proceedings by the Registrar
  • Disqualification
  • Criminal prosecution

Fact sheet

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