- The Accountant
- ABC Accounting Services
- Address
- John Smith
- Crazy Crown Enterprises Pty Ltd
- Address
- October 15, 2012
Dear Sir,
Duties of a director
Mr. Smith, this is to clarify to you the duties of company directors as stipulated in the Corporations Act 2001. Directors are responsible for decisions about how a corporation should be managed. However, if the directors are not legally made responsible for their actions, they are bound to put the organization in jeopardy. Therefore, the state has come up with guidelines that restrict the actions of directors to ensure that the interests of shareholders are safeguarded. These guidelines are contained in the Corporations Act 2001.
The duties of a director can be divided into two groups: the common law and statutory law duties. The statutory law duties are contained in the Corporations Act 2001 and besides explaining what is expected from a director, they detail which laws lead to a criminal offence when breached and which ones attract a civil suit. Moreover, a director is expected to act in accordance with the stipulations of the company’s constitution, which the director is supposed to read and internalize before signing a contract (Fu 2010).
As far as the common law is concerned, a director is expected to act in good faith and in the best interest of the corporation. Therefore, a director is supposed to execute his or her powers in what is beneficial to the corporation. The duty is subjective because it allows a director to make a choice of what is in the best interest of the corporation, and one’s decision may not be similar to another person’s (Baxt B & Baxt R 2005). However, the court has powers to intervene if the actions taken by a director are not what a responsible director will consider as being in the best interest of the corporation.
Furthermore, directors are expected to avoid conflict of interests in the course of their duties. This means that directors are expected to perform the functions of the corporation first, notwithstanding what they want to gain (Horrigan 2010). In addition, directors are not supposed to perform their duties or use the powers of their position in a manner that may benefit them or third parties. On the same note, directors are not supposed to have vested interests in actions that are within the scope of their duties as directors of a company. It is also expected that in avoiding conflict of interests, directors will safeguard the assets of the corporation and not use them for their personal gain or that of a third party. It is important to note here that some of the above duties can be contravened if and only if the corporation gives fully informed consent (Keay 2007).
In section 183, the Corporations Act 2001 states that the directors have a duty not to use a company’s inside information for their benefit. It stipulates that the directors should not use any information gained by them for inside trading. In the line of duty, a director can come across information about the probability of a rise in the price of shares in the future, due to the good end-year results about to be announced. The director can buy or advise the third party to buy shares at the current lower price and sell them later when prices have gone up, hence making huge profits for the director. This is against what is expected of directors and has a penalty according to the law (Wells & Fisse 2011).
In section 184, the Act states that a director of a company should not use the information dishonestly or recklessly in a manner that is aimed at being advantageous to the director, a third party, or cause damage to the company. In committing the above act, the director will not have executed his or her duties in good faith, for proper purposes within their mandate, or in the best interest of the company (Fu 2010).
Moreover, directors are expected to apply due diligence, care and skill in the execution of their duties. In this regard, directors are to apply enough care that they, or any other person, would have applied if they were acting in their own interest (Adams 2005). For a case where a director has sufficient evidence that the other director is well experienced and has proper knowledge concerning a certain matter, then he or she is allowed to rely on the information given by the said director. In section 189 of the Corporations Act, it is elucidated that a director is allowed to rely on professional advice from both a fellow director and an expert in the field in question; provided that the director believes that the person is competent (Tomasic, Bottomley & McQueen 2002). The reliance is also supposed to be made in good faith and after making a personal investigation about the information. On the same note, the director should put into consideration the complexities of the company and the economic situation.
Any action taken by a director is on behalf of the company and not in the director’s personal capacity. Therefore, if in the course duty a director comes across an opportunity that is profitable to the company, the director is expected to exploit the opportunity for the benefit of the company and not for personal gain (Horrigan 2010). Therefore, collaboration with a third party to take advantage of any opportunity present or upcoming that is supposed to benefit the company is illegal, and the director should be held accountable for that.
As far as a delegation of duties is concerned, a director is expected to make inquiries if necessary, to prove that the person the duties are delegated to is qualified for the purpose, and has the interests of the company at heart (Adams 2005). It is the duty of the director to make the delegate aware of the requirements of the Corporations Act, and the stipulations of the company’s constitution in regard to the duties delegated. Otherwise, the director will be responsible for the actions of the delegate as if they were performed by the director personally (Keay 2007).
Thank you for your time,
The Accountant.
Reference List
Adams, M 2005, Australian Essential Corporate Law 2/E, Routledge, London.
Baxt, B & Baxt, R 2005, Duties and Responsibilities of Directors and Officers, AICD, Sydney.
Fu, J 2010, Corporate Disclosure and Corporate Governance in china, Kluwer Law International, Alphen aan den Rijn.
Horrigan, B 2010, Corporate Social Responsibility in the 21st Century: Debates, Models and Practices Across government, Law and Business, Edward Elgar Publishing, Northampton.
Keay, A 2007, Company Directors’ Responsibilities to Creditors, Routledge, London.
Mancuso, A 2009, Incorporate your Business: A Legal Guide to Forming a Corporation in Your State, Nolo, Berkeley.
Tomasic, R, Bottomley, S & McQueen, R 2002, Corporations Law in Australia, Federation Press, Annandale.
Wells, C & Fisse, B 2011, Australian Cartel Regulation: Law, Policy and practice in an International Context, Cambridge University Press, Cambridge.