Director Disputes

A director is the person responsible for managing the company. Larger companies have multiple directors working as a collective, referred to as the board of directors.

A director must always act in the best interests of the company. At times this can include considering the interests of other parties, such as individual members, creditors, employees and wholly owned subsidiaries.

The Corporations Act 2001 (Cth) (the Act) imposes four main duties on a director:

• To exercise care and diligence. The standard is that expected of a reasonable person in the director’s position.
• To act in good faith and for a proper purpose. This involves avoiding conflicts of interest, and disclosing and managing conflicts of interest if they arise.
• Not to improperly use their position. A director must not use their position to advantage themselves or others or to cause detriment to the company.
• Not to improperly use information. A director must not use the information they learn in their role to gain an advantage for themselves or others or to cause detriment to the company.

Other significant duties and responsibilities include:

• ensuring the company does not trade while insolvent;
• ensuring the company takes reasonable steps to comply with laws for financial
• record-keeping and reporting;
• disclosing any personal interest in company affairs;
• supplying information to the Australian Securities and Investments Commission (ASIC); and
• continually disclosing information to the market that is not generally available.

There are also director responsibilities listed in legislation that govern areas such as trade practices, workplace health and safety, taxation, financial services, and the environment.

If a director breaches a duty or fails to meet an obligation, they can be subject to criminal and civil sanctions.

They can be taken to court by a range of parties including the company itself, shareholders, regulators and creditors.

There can be severe penalties if a director fails to comply with the Act. For example, a maximum penalty of 15 years imprisonment applies if a director:

• is reckless or dishonest, and fails to exercise their powers and discharge their duties in good faith or for a proper purpose;
• uses their position, or information gained in their position, dishonestly:
• to gain an advantage directly or indirectly for themselves or others; or
• to cause detriment to the company.

ASIC and the courts can disqualify a director for failure to comply with the Act, and shareholders or creditors can take civil action. A director can be held personally liable for any company losses that result from their breach of duty.

A breach of duty can also damage reputations and cause serious financial repercussions, including greater scrutiny by investors and regulators.

If you have been accused of breaching your duties as a director, you should seek legal advice immediately to protect your rights and limit your liability. Call Gibbs Wright today for a confidential consultation.

Whether you’re a director, shareholder or third party involved in a dispute with a director, there are several ways to resolve it:

Negotiation and mediation

The parties should first attempt to resolve the dispute within the company. A meeting could be called to lay out all the issues and desired outcomes. Gibbs Wright can help parties work through their grievances and reach a compromise or resolution.

Shareholders’ agreement

A shareholders’ agreement can contain procedures for dealing with a director dispute. It can include, for example, penalties for breaches of directors’ duties. Penalties can include that a director resign for certain breaches, such as creating a rival business, or engaging in criminal conduct such as fraud or theft from the company.

Resign or sell

A director can consider resigning from the role if the dispute cannot be resolved easily. If the director is also a shareholder, they could also sell their share. Alternatively, the director could consider buying out other shareholders and remaining in the company.

Voluntary administration

When a dispute between directors and shareholders is intractable and causes significant damage to the company, it may be necessary to place the company into voluntary administration. The decision will be based on the financial strength of the company and shareholder attitude.

Court

If all other resolution attempts have failed, a court proceedings may be an option. The type of court action will depend on the nature of the dispute and the remedies sought.

If you are involved in a director dispute, acting quickly can help lessen the impact the dispute can have on you and the company. Seek legal advice from the experienced team at Gibbs Wright.

An “alternate director” is appointed when a director knows they will be absent for one or more board meetings due to, for example, illness, holiday or jury duty.

This substitute director has the same powers, duties and responsibilities as a director and can be appointed for a set period or until the director can return to duties. The Corporations Act 2001 (Cth) governs the appointment of alternate directors and the Australian Securities and Investments Commission enforces those laws.

A director can be removed if they have committed a serious breach of their duties, or for other reasons such as poor performance or personal conflicts.

If a company has a constitution or shareholders’ agreement, these documents will set out the procedure for removing a director.

If there are no such documents, the process outlined in the Corporations Act 2001 (Cth) applies.

A “shadow director” is a person who has not been officially appointed as a director but on whose instructions or wishes board members are used to acting. A shadow director can face the same penalties as an officially appointed director.

A “de facto director” is a person who has not been officially appointed a director but who acts as one. It can also refer to a person who has been officially appointed as a director but uses another title or job description in practice.

A director can be held personally liable for company losses that result from their breach of duty.

An example is when a company incurs debts while being unable to pay its debts as and when they fall due. In other words, the company is operating while insolvent. If a director allows a company to trade while insolvent, they may be acting illegally and may be subject to criminal and civil penalties.

A director can also be personally liable if they cause the company to suffer loss. In this situation, they may be acting illegally and may be subject to criminal and civil penalties, such as the payment of compensation.

A director can also be personally liable for losses incurred because of a breach of other legislation, in areas such as taxation, and workplace health and safety.

A director’s duties may continue even after the company has stopped trading and been deregistered.

Yes. A director can choose to hold shares in a company but generally, there is no requirement. However, a company’s constitution can dictate that a director must hold a specific number of shares, either before an appointment or within a certain period after the appointment.

It is common in smaller companies for a director to also be a shareholder. A small company may have one director who is also the sole shareholder.

A shareholders’ agreement is a contract between the shareholders and the company that sets out rules for the structure, ownership, management and direction of the company.

It may contain information such as:

• Dispute resolution procedures and penalties for breaching duties;
• How shareholders can acquire or dispose of shares;
• How the company is to be funded;
• The frequency of meetings; and
• The process for selling or winding up the company.

This type of agreement clarifies the responsibilities and obligations that affect the shareholders in the company. It also signals to potential investors that the company is well-managed and accountable.