Corporations Law and Directors Duty Disputes

A fiduciary duty exists when one person (the fiduciary) owes legally binding obligations to another (the principal or beneficiary). They exist to provide legal protection to parties in relationships of trust and where vulnerability may exist, such as a financial advisor and a client, or a director and their company.

Where a fiduciary relationship exists, fiduciary duties define how the fiduciary must not act against the best interests of the principal.

These duties include: 

• to avoid a position of conflict or self-interest; 
• not to make a profit from the principal’s trust; and 

• not to act for one’s own personal benefit or for the benefit of a third party without the consent of the principal.  

There are a set of fiduciary relationships that are generally recognised by the court. However, the court can also determine that a fiduciary relationship exists if one party has agreed to act in the best interests of the other – this is known as an ‘ad hoc’ fiduciary relationship.

Australian Consumer Law (ACL) establishes that businesses must not engage in conduct that is likely to lead another party into an error (mislead), or deliberately leads another party into an error (deceive). There are harsher penalties for conduct that is deceptive.

Section 18 of the ACL states that “a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Misleading or deceptive conduct can arise in a wide range of commercial circumstances, such as through: 

• Negotiating a contract with another business 
• Failing to disclose information to regulators 
• Packaging or labelling of products 
• Marketing or advertising of goods and services 
• The sale of goods and services to customers 
• Failing to provide relevant information to customers 
• Making misleading predictions and opinions

Yes. Silence can be deemed as misleading or deceptive. If you omit information that someone ought to have known, you may be in breach of the ACL.

For example, in the sale of a business, neglecting to disclose the existence of an important debt can be considered misleading or deceptive, even if the majority of other debts and financial information are disclosed.

Yes.  A claim can be made within six years of the occurrence of misleading or deceptive conduct.

If it is established that a breach of directors’ duties has taken place, consequences for the director can include:  

• Civil action brought by the company, or its creditors, seeking compensation orders against directors who have breached their duties 
• Both ASIC and the Courts have the power to disqualify directors from their position 
• Civil penalties under the Corporations Act 2001 (Cth), such as fines 
• Criminal sanctions under the Corporations Act 2001 (Cth) such as significant fines and/or imprisonment 
• Broader commercial and financial consequences such as through damage to the business’s reputation and relationships

Whilst directors are separate entities to companies, there are circumstances in which directors can becoming personally liable for company debts and losses.

These include: 

• Insolvent trading: continuing to incur debts or trade whilst the business is unable to pay its debts as and when they fall due. 
• Causing loss through breach of duties: acting in breach of civil and criminal provisions of the Corporations Act 2001 (Cth) which causes the company to suffer loss 
• Failing to meet tax obligations: if you fail to ensure that the company’s tax and super obligations are reported and paid on time, the ATO can take action to recover this debt through its director penalty regime. 
• Debts incurred by companies acting as trustees, if the trustee company breaches the terms of the trust, acts outside its scope of powers, or the terms of the trust deny/limit the trustee company’s rights to be indemnified against the liabilities. 
• Illegal phoenix activity, which occurs when a company is liquidated, wound up or abandoned to avoid the repayment of its debts and a new ‘phoenix’ entity is started to continue the same company activities without the liabilities of its predecessor. 

Note also that as a director, your obligations to the company can continue even after the company has ceased trading or is deregistered. 

A ‘shadow director’ is someone who has not been officially appointed to directorship, but on whose advice or instructions other directors or board members are accustomed to acting. 
 
A ‘de facto director’ is someone who has not been officially appointed to directorship, but effectively acts as if they were in the position, such as by making top-level management decisions.  

If the court takes the view that you are a shadow or de factor director, then you are subject to obligations under the Corporations Act 2001 (Cth) as if you were a director and can face the same consequences for breaching those duties.

If a company’s director/s are absent, it may be appropriate to appoint a temporary (or ‘alternate’) director to fulfil their role for a set period of time, such as by attending board meetings. The appointment of an alternative director must take place in writing and notification be provided to ASIC. The appointing director may cancel the alternate’s appointment at any time. 
 
When acting as an alternate director, you are subject to obligations under the Corporations Act 2001 (Cth) as if you were a director and can face the same consequences for breaching those duties.

The safe harbour provisions allow directors of companies experiencing financial hardship alternative options to the appointment of an administrator or liquidator.

In 2017, amendments were introduced to the Corporations Act 2001 (Cth) to protect directors from the attraction of personal liability for taking on debts whilst insolvent if they are in the course of pursuing a course of action that is reasonably likely to lead to a better outcome for the company and its creditors.  
 
The safe harbour protections only include debts incurred in relation to this restructuring/ turnaround period and carry other requirements under s 588 of the Corporations Act (Cth), such as continuing to meet tax reporting obligations. Ensure that you understand the extent of these obligations before relying on the safe harbour protections.