Company directors play a central role in guiding the direction of a business. Along with that authority comes a range of legal responsibilities designed to ensure companies are managed carefully, transparently and in the interests of shareholders and stakeholders.
Australian law places clear expectations on directors when it comes to decision-making, financial oversight and risk management. They are expected to actively engage in the governance of the company rather than relying solely on others to fulfil these obligations.
Where directors fail to meet these duties, they may face serious legal consequences, including findings that they have breached their statutory duties, personal liability for losses suffered by the company, financial penalties and in some cases disqualification from managing corporations.
Several court decisions have reinforced these principles, demonstrating that directors may be held personally responsible when they fail to properly oversee business operations or approve important documents without sufficient understanding.
The responsibilities of company directors
Under the Corporations Act 2001, directors are required to act with care and diligence in the decisions they make and the way the company is run.
Key duties include:
Care and diligence: decisions must be made with reasonable care, attention and an understanding of the company’s circumstances.
Good faith and proper purpose: actions must be taken in the best interests of the company rather than for personal advantage.
Proper use of position and information: positions and confidential information cannot be used to obtain personal benefits or cause detriment to the company.
Oversight of financial and operational matters: leaders must remain informed about the organisation’s activities, risks and financial position.
These obligations require active engagement in managing the company’s affairs. While advisers and management may provide guidance, responsibility for key decisions cannot be delegated.
Managing business risk: lessons from ASIC v Cassimatis
The case of ASIC v Cassimatis (No 8) illustrates the consequences when directors fail to properly manage business risks.
The proceedings arose from the collapse of Storm Financial, a financial advisory company that promoted a highly leveraged investment strategy. Clients were encouraged to borrow heavily, often using their homes as security, to invest in the share market. When the global financial crisis caused markets to fall, many investors suffered significant financial losses.
The Federal Court found that the directors had allowed the strategy to continue despite the foreseeable risks it created. The Court held that they had breached their duties under the Corporations Act by permitting the company to provide financial advice that exposed both clients and the company to serious harm.
The decision confirmed that directors may be personally liable where they allow a company to operate in a way that creates clear risks of legal breaches.
Understanding financial information: the Centro decision
Another well-known decision reinforcing directors’ responsibilities is ASIC v Healey.
The case arose after the directors of Centro approved the company’s financial statements, which incorrectly classified more than $1.5 billion in short-term liabilities as non-current liabilities.
The Federal Court found that the directors had breached their duty of care and diligence by approving the accounts without properly reviewing and understanding them. The Court held that the error should have been apparent to a reasonably diligent director.
Several directors were ultimately declared to have breached their duties under the Corporations Act and became subject to regulatory action by ASIC.
Importantly, the Court confirmed that directors cannot rely solely on management or external advisers when approving financial statements, as they remain legally responsible for the reports they approve. Directors must personally read and understand the documents and make reasonable enquiries where issues arise.
Practical implications for directors
These decisions illustrate the practical consequences when oversight breaks down and highlights the importance of directors maintaining a clear understanding of the company’s position.
In practice, this means ensuring that key information is properly reviewed, questioning matters that appear unclear and taking reasonable steps to prevent the company from engaging in conduct that could breach the law.
Maintaining strong internal processes and regularly engaging with management can help ensure potential risks are identified early and addressed before they lead to regulatory action or significant financial loss.
Where directors fail to properly oversee the affairs of a company, the consequences can be significant.
If you require advice on directors’ duties, corporate governance or managing business risk, the team at Aubrey Brown Lawyers can assist. Contact us on (02) 4350 3333 or visit aubreybrown.com.au to arrange an appointment.
