Appointment and removal

What type of company is typically used in group structures?

In Australia, the most common type of company used in group structures is the proprietary company limited by shares with a constitution. This guide therefore focuses on the management of proprietary limited companies.

The Australian Securities and Investments Commission (ASIC) administers the company law and regulates the incorporation, operations, management and control of companies and imposes obligations on directors and other corporate officers.

What is a "director"?

There is no complete definition of the term "director" in Australian company law. Basically, the law regards someone who manages the affairs of a company on behalf of its shareholders as a director (whether they are called a director or not).

What are the different types of director?

Directors validly appointed as such are known as de jure directors and may be executive (usually employees, with an operational/executive role) or non-executive (usually not employees) - and may also be appointed to represent a particular shareholder (a nominee director). In addition, a de facto director is a person who acts as though they are a director but is not validly appointed as such and a "shadow director" is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Also, an “alternate” director is a person who is appointed by a director to act in that director’s place. In general, however, Australian company law does not differentiate between different types of director – all directors are subject to the same duties.

Who can be a director?

A director must be a natural person who is at least 18 years of age. For a proprietary company, at least one director must ordinarily reside in Australia.

Minimum / maximum number of directors

A proprietary company must have at least one director. There is no maximum. If the company's internal governing rules are set out in a constitution, the constitution may specify a greater minimum number and/or specify a maximum.

Typical management structure

For a proprietary company that has more than one director, the board is a unitary structure made up of all the company's directors acting as a board.  Broadly speaking, each director has the same obligations and accountability to the company, in that Australian law does not explicitly distinguish between executive and non-executive directors.  However, the legal tests for directors' duties can involve both subjective and objective elements, so in practice the standard of care expected of each individual director may vary based on the director's office held and their specific responsibilities within the corporation, as well as the circumstances of the corporation itself.

Directors' duties are imposed on directors individually, and Australian courts will scrutinise the conduct of directors individually in assessing whether or not each individual director has fulfilled their duties.  Nonetheless, generally accepted principles of good corporate governance in Australia favour the board striving to act as a high-performance team (subject to each director fulfilling their individual duties).

No 'supervisory board' is mandated in Australia, and employees and other stakeholders are not ordinarily represented at board level. 

However, "ESG" and "stakeholder governance" are increasingly important topics in Australian corporate governance, and many companies and boards are increasing their level of engagement with non-shareholder stakeholders. This is in addition to the expansion of Australian employment laws regarding matters such as discrimination, sexual harassment and bullying, under which directors can face personal liability and may be required to adopt a proactive rather than reactive approach.

How are decisions made by directors?

If the company has a constitution, the constitution will ordinarily regulate the manner in which directors can make decisions.  In proprietary companies, the constitution typically provides directors with flexibility to determine between themselves how decisions are made – whether by physical meeting, meeting via technology or a written resolution.  Other than single director companies, the minimum quorum for board meetings is generally two directors (although notice must ordinarily be given to all).  Unless the constitution stipulates otherwise, voting at board meetings is on a simple majority basis.  When decisions are made in writing, however, the unanimous agreement of all directors is usually required, although the constitution may specify otherwise.

Directors may exercise weighted voting rights at board meetings for incorporated joint ventures, depending on the terms of the constitution and other contractual terms (such as a shareholders' agreement or joint venture agreement).

Authority and powers

As far as third parties are concerned, directors may be able to bind the company and enter into contracts on its behalf even if there are internal limits on their power to do so (eg in the company's constitution or in internal policies and protocols).  The Corporations Act 2001 (Cth) (the Act) sets out various statutory assumptions that people dealing with companies are entitled to make.

Normally, the company's constitution gives the directors wide powers to manage its business and affairs as they think fit (although if the company is a wholly-owned subsidiary, additional decision-making powers or consent requirements may be reserved to the sole member).  Directors' powers are collective, meaning that directors should act together as a group on the company's behalf, subject to any specific delegations to individual directors, or authority that can customarily be exercised by a managing director or equivalent.

Delegation

Unless the company's constitution provides otherwise, the directors can delegate their powers to any committee or person.  However, each director retains overall responsibility for the delegate's actions other than in the circumstances specified in the Act.

What are the key general duties of directors?

Under Australian law, directors are subject to statutory duties (under a range of statutes) as well as general law duties.  There is significant overlap between these duties.

The Act sets out some of the key statutory duties of a director.  These include:

• Act with a reasonable degree of care and diligence.  There is an ongoing obligation to maintain a basic understanding of the company’s activities, size, distribution of functions and monitor its financial position to ensure that it does not trade while insolvent.
• Act in good faith, in the interests of the company and for a proper purpose. Additional consideration must be given to nominee directors in joint ventures. The relationship of wholly-owned subsidiary and corporate group is discussed below.
• Misuse of position.  Not improperly use their position to gain advantage for themselves or another person or cause detriment to the company.
• Misuse of information.  Not improperly use information to gain advantage for themselves or another person or cause detriment to the company (this duty continues after the director leaves office).
• Disclose to fellow directors any material personal interest in matters relating to the affairs of the company.  Depending on the type of company and the requirements set out in its constitution (if the company has one), a director may not be permitted to be present when a matter in which they have a material personal interest is discussed, or vote on the matter.
• Insolvent trading.  Directors have a duty to prevent insolvent trading by their company, and can be held personally liable for the company's debts if they allow the company to trade while it is insolvent or its insolvency would have been objectively suspected.  Insolvency occurs when a company is unable to pay its debts as and when they fall due. Insolvent trading occurs when a company incurs a debt whilst insolvent or becomes insolvent by incurring the debt.

In addition, directors have both equitable and common law duties, including:

• Act in good faith and in the best interests of the company.  Good faith has both subjective and objective elements, in that a director must genuinely believe they are acting in the company’s best interests and must also act in a way that an honest and reasonable director would.
• Exercise powers for a proper purpose.  In determining what is a proper purpose, the purpose motivating the exercise of power must accord with the objective purpose for which the power was granted.
• Not fetter their own future discretion.  A director must exercise active discretions and not improperly limit their decision-making authority (but this does not prevent delegation by directors).
• Avoid conflicts of interest and duty.  If a director must choose between favouring their own interests and the interests of the company, the director must usually choose the latter.  A director should avoid actual and perceived conflicts.

What are directors' other key obligations?

The Act requires every company to keep written financial records that accurately record and explain the company’s transactions, financial position and performance, and enable true and fair financial statements to be prepared and (in some circumstances) audited.  Companies must also prepare a number of reports each year, including (for most companies) a financial report and directors’ report.  Failure to comply with financial record-keeping and reporting requirements can result in civil penalties for the directors, or criminal penalties if the contravention is dishonest.

The Act requires directors of certain companies to prepare and file annual accounts and submit other information to ASIC.  Proprietary companies are categorised as either 'large proprietary companies' or 'small proprietary companies' and their reporting obligations differ.  The test is applied annually and takes into account consolidated revenue, value of consolidated gross assets and the number of employees.

Directors can also face personal liability under a range of statutes, including those relating to taxation, superannuation, workplace health and safety, environmental protection and competition laws.

Transactions with the company

All directors are subject to general law and statutory duties relating to conflicts, misuse of position and misuse of information.  In addition, a director of a public company (and the related parties of such a director) may not be given a financial benefit by the company (or a controlled entity) without prior shareholder approval, unless one of the statutory exceptions applies.

Breach of general duties

Directors ordinarily owe their duties to the company itself and not directly to the parent or other group companies, individual shareholders or creditors.  Therefore, ordinarily only the company can bring an action for breach of duty against a director.

However, shareholders and certain other persons are able to bring an action for breach of duty on behalf of the company in certain circumstances (a statutory derivative action).  Broadly, a shareholder must first obtain the court's permission to proceed with a statutory derivative action and the court will take into account a number of factors when deciding whether to grant this permission.  This includes whether it is probable that the company itself will not bring the proceedings or properly take responsibility for them, whether the applicant is acting in good faith and whether it is in the best interests of the company that leave is granted (among other factors).

A company may seek a range of remedies against a director for breach of duty, including damages or compensation, grant of an injunction, an order that property held by the director be held on trust for the company, entitlement for profits made by the director in breach of duty, and rescission of a contract entered into by a director improperly.

ASIC may also bring proceedings against a director alleging breach of certain statutory duties.  Under the Act, a director who is found to have breached their duties can be guilty of a criminal offence (resulting in fines or imprisonment), be ordered to pay a pecuniary penalty, be ordered to compensate the company or others for any loss or damage they have sustained due to the director's conduct, and be prohibited from managing companies for a specified period.

Liabilities on insolvency

A director (or directors jointly) can be held personally liable for the debts of the company if they allow it to continue trading whilst it is insolvent or insolvency would objectively have been suspected.  There are a limited number of defences, including where:

• The "safe harbour" regime applies, which provides directors with a safe harbour from civil insolvent trading provisions where they are developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment, by the company, of an administrator or liquidator.
• The director can prove that they took reasonable steps to prevent the company incurring the debt.
• The director had reasonable grounds to expect, and did expect, the company to be solvent when the debt was incurred.
• The director received adequate information as to the solvency of the company from a competent and reliable person fulfilling the responsibility to provide such information, had reason to believe that person and did believe the company was solvent and would remain solvent when the debt was incurred.
• The director was not taking part in the management of the company due to illness or some other good reason when the company traded insolvent.
• The director acted honestly and reasonably in the circumstances when the company traded insolvent.

Other key risks

Directors can face personal liability under a range of statutes.  Some statutory regimes (such as workplace health and safety laws) apply at State and Territory level and so may not be uniform around Australia, which can heighten the risks for directors of companies operating in more than one State or Territory.

How can directors be protected from liability?

• Indemnity - Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. This is usually done through an indemnity, insurance and access deed, but may also be provided for in the company's constitution (if it has one).  
• Insurance - Directors' and officers' insurance is common in Australia.  It typically provides indemnification against costs arising from defending proceedings (civil and criminal). Despite indemnification for legal costs, it cannot provide an indemnity in respect of liability arising from wilful breach of duty to the company or improper use of position or information by a director. The rising cost and increasingly onerous terms of D&O insurance remain a hot topic in Australia.
• Ratification - In limited circumstances, a company’s shareholders can ratify or relax duties owed by directors by passing a resolution at a general meeting.  This essentially authorises what would otherwise be a breach or forgives an existing breach.  Any consent given by members must be informed consent.  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).

What practical steps can directors take to avoid liability?

• Keep informed about the affairs of the company, particularly its financial position.  Directors should ensure they have access to up to date financial information, prepare thoroughly for and regularly attend board meetings and familiarise themselves with key legislation affecting the business.
• Make proper disclosure of outside positions or interests which may give rise to a conflict of interest or duty and/or if they have (or a family member or other associate has) a personal interest in any proposed or existing transaction or arrangement with the company.
• Ensure comprehensive minutes are taken, including recording the decisions made and the key information and factors that the directors took into account when making such decisions.  Directors should ensure they have considered all available options and carefully analysed their respective merits and cost. This may extend to documenting any alternative options that the board has considered in making those decisions and the reasons why particular options were preferred or discounted. The minutes must be recorded in minute books within 1 month of being passed, and must be signed. The minute books must be kept at the company's registered office or principal place of business in Australia, or at another Australian location approved by ASIC.
• Seek professional advice from lawyers, accountants and other advisors as necessary, in a timely manner.
• Maintain awareness of, and compliance with, any group-wide governance and compliance policies.  These may cover areas such as environmental protection, workplace health and safety, workplace conduct generally, ethics, bribery/anti-corruption, competition law and human rights.  Compliance with them is designed to help directors (and employees) fulfil their duties and obligations and minimise the risk of liability.  Directors should also continue to monitor legal developments and ensure that policies and protocols are updated to remain current in light of any legal, regulatory or other relevant changes.
• In corporate groups, the director's primary duty is to the company on whose board they serve, not the holding company or other group companies.  The Act permits the directors of a wholly-owned subsidiary to act in the best interests of the holding company if the subsidiary's constitution expressly authorises the directors to do so and the other conditions set out in the Act are satisfied.  However, this does not permit the subsidiary's directors to act as puppets, disregard their other duties or disregard the interests of the subsidiary's creditors (among other limitations).  Where the wholly-owned subsidiary is dependent on parental support to remain solvent, the director should also ensure that this support is ongoing and is documented appropriately.
• Seek the protection of an indemnity, insurance and access deed and ensure that there is appropriate D&O insurance cover in place to protect directors and officers.