Directors Duties

The recent findings surrounding Mineral Resources Managing Director, Chris Ellison are a timely reminder to company directors that adherence to their duties is vital, and failure of complying with them, can result in significant consequences.

It has been found by their own internal investigation that whilst acting as managing director of Mineral Resources, Mr Ellison:

1. Failed to be as forthcoming with the board of Mineral Resources as he should have been;
2. Has not acted with integrity;
3. Did not appreciate the importance of transparent and timely disclosure of matters that may give rise to a potential (or actual) conflict of interest;
4. Did not place sufficient separation between his personal interests and the interests of Mineral Resources; and
5. Used company resources for his personal benefit.

Mineral Resources’ board has ordered Mr Ellison to pay $8.8 million in financial penalties and has decided not to pay almost $10 million in planned executive remuneration.

In light of this, we have decided to breakdown below, for those who are new to becoming directors of a company, or those who have not familiarised themselves with their duties, what duties are required by directors and what the possible sanctions for breaches of those duties are.

Directors duties

In Australia, directors of companies have a range of duties and responsibilities to ensure that they act in the best interests of the company, its shareholders, employees, creditors, and other stakeholders. These duties are primarily governed by the Corporations Act 2001 (Cth) (“Corporations Ac”), along with common law principles. In Australia, directors of companies have the following duties they must adhere to:

1. Duty to act for a proper purpose – Directors must not misuse their position to gain a personal benefit or cause harm to the company. This includes:
   1. Using information obtained through their role as a director to benefit themselves or others improperly.
   2. Not exploiting their position for financial gain or personal advantage.
2. Duty to act with care and diligence – Directors must exercise their powers and discharge their duties with care and diligence. This duty is subject to a business judgment rule that requires a director making a business judgment to:
   1. make the judgment in good faith and for a proper purpose
   2. not to have a material personal interest in the subject matter of the judgment
   3. inform themselves about the subject matter of the judgment to the extent they believe to be appropriate
   4. rationally believe that the judgment is in the best interests of the corporation.
3. Duty to act in good faith – Directors must act in good faith in the best interests of the company and for a proper purpose. This includes:
   1. Acting in the best interests of the company, not for personal gain or the interests of any particular shareholder or group.
   2. Exercising powers for their intended purpose, not for an improper or collateral purpose.
4. Duty to avoid conflicts of interest – Avoid situations where their personal interest’s conflict, or may conflict, with the interests of the company. This includes:
   1. Disclosing any personal interest in matters related to the company to other board members.
   2. Not using their position to gain an advantage for themselves or others or to disadvantage the company.
5. Duty to prevent insolvent trading – Directors must ensure that the company does not trade insolvent. A director breaches this duty when:
   1. the person was a director at the time of the relevant debt;
   2. the company is or becomes insolvent because of that debt;
   3. at the time of the debt, a reasonable person would have grounds to believe that the company is, or would, become insolvent or aware that it is likely; and
   4. the person fails to prevent the debt.
6. Administrative duties – Directors also have administrative duties in managing a company, including:
   1. ensuring that their company keeps adequate records of financial information, minutes, resolutions, books and accounts;
   2. maintaining the company’s registers (members registers, options registers, etc.);
   3. maintaining the company’s ASIC register. For example, lodging Form 484s for changes to the company’s members, address, directors, etc.;
   4. ensuring the company holds a shareholder annual general meeting; and
   5. ensuring that any meeting is called and held in accordance with the terms of the constitution or Shareholders Agreement.

Directors owe a fiduciary duty to their company. Fiduciaries are individuals who must put their beneficiaries needs ahead of their own, for example in this instance, directors must adhere by the duties outlined above to ensure they are acting in the best interests of the company and shareholders they serve. Fiduciary duties are an important responsibility, and therefore, to ensure that these are adhered to, there are significant penalties that can be handed down to directors who fail to uphold this standard.

Penalties

Contravention of certain duties under the Corporations Act or other laws constitutes a criminal offence. For example, under the Corporations Act, contravention of the duty of good faith or improper use of information or position, if it involves dishonesty or recklessness, is punishable by substantial fines and potential imprisonment for up to 15 years. It is also illegal for a corporation to indemnify its officers against legal costs and any financial penalty for this behaviour.

A contravention of the duties under the Corporations Act can make a director liable to a substantial fine by ASIC, shareholders or others (for example, creditors) can take action against directors who have failed to comply with their duties. Chris Ellison will be closely watching ASIC over the next several months to see if he is prosecuted for breaches of his duties to Mineral Resources and its shareholders.

Both ASIC and the courts have the power to disqualify directors for long periods of time for failure to comply with their duties under the Corporations Act (Part 2D.6). Directors are automatically disqualified on conviction of certain serious offences or an undischarged bankruptcy.

About the Authors: This article has been co-authored by Chanelle Kane and Steven Brown. Chanelle has been in the industry since 2013 and graduated with a Bachelor of Laws in 2020. Chanelle completed the Graduate Diploma of Legal Practice with the College of Law in 2020 and was awarded the 2020 PLT Professional Excellence Award for the cohort.  Chanelle was admitted to practice in the Supreme Court of Western Australia in November 2020 and to the High Court of Australia in January 2021. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.