Are You Protected as a Director?

Some of the legal obligations a director must follow include the duty to:

• Act in good faith and for a proper purpose
• use care and diligence
• avoid improper use of information
• avoid abusing the use of position
• disclose certain conflicts of interest

For a comprehensive list of directors duties, see the Corporations Act 2001.

• Consumer and competition legislation aims to protect consumers by promoting competition and fair trading and relates to almost all areas of business activity. If a provision of this Act is contravened by a company, there’s a risk that the director will be held personally liable.

• WHS legislation. Each state has their own WHS laws that businesses must follow. WHS exists to protect the health and safety of workers and members of the public. If a company is found to have contravened the Act, the director may also be held accountable unless they can prove that they undertook all necessary due diligence.

Breaches resulting in Civil Penalties

• Breach of duty of care & diligence;
• Breach of duty to act in good faith in the best interests of the company and for a proper purpose;
• Breach of duty not to misuse position or information;
• Related party rules;
• Insolvent trading;
• Insider trading;
• Breaches of continuous disclosure.

• Contravention of duties of good faith;
• Abuse of position;
• Improper use of information;
• Where there is conduct involving an element of recklessness or intentional dishonesty.

Most D&O insurance policies include a general exclusion for claims:

• arising out of director’s fraud & dishonesty;
• resulting from a contravention or prohibition of section 199B of the Corporations Act ;
• where the fines and monetary penalties arise from a reckless act or omission; and
• matters which are generally uninsurable under applicable laws.

When Indemnities for liabilities are not allowed (other than legal costs)

A company or a related company must not indemnify a person (directly or through an interposed entity) against any of the following liabilities incurred as a director of the company:

• a liability owed to the company or a related company;
• a liability to pay a pecuniary penalty or compensation ordered under the Corporations Act; or
• a liability that did not arise out of conduct in good faith.

A key concern for directors when defending an action is whether the company can assist with indemnity for legal costs. S199A(3) prohibits this in the following circumstances:

A company or a related company must not indemnify a person against legal costs incurred in defending an action for a liability incurred as a director of the company if:

• the director is found to have a liability for which the company may not indemnify them, as outlined above;
• the director is found guilty in criminal proceedings;
• ASIC or a liquidator brings the proceedings, and the grounds for making the order are established (for example actions by ASIC to disqualify a director); or
• the costs are incurred in connection with an action brought by a director for relief under the Corporations Act, and the relief is denied.

• wilful breaches of duty; or
• misuse of their position (s 182 of the Corporations Act) or misuse of information (s 183 of the Corporations Act).

In 2020 New South Wales amended their WHS Act to include the prohibition of entering into an insurance policy that intends to indemnify the person from their liability to pay a fine or an offence under the WHS Act. This law extends to insurers, making it illegal to issue a policy covering WHS breaches. Western Australia has followed suit by overhauling their Act, prohibiting insurance against WHS breaches.

WA’s Work Health and Safety Act 2020 brings with it the creation of the criminal offence, Industrial Manslaughter, which requires the following elements:

• A health and safety duty on the part of the PCBU; and
• the person engages in conduct which causes the death of an individual; and
• the conduct constitutes a failure to comply with the health and safety duty; and
• the person engages in the conduct knowing the conduct was likely to cause the death of an individual and in disregard of the likelihood.

Directors have a duty to exercise due diligence to ensure a PCBU (Person Conducting a Business or Undertaking) complies with their obligations. Basically, the director is responsible for ensuring the company is keeping its workers safe. The duty imposed is a positive duty requiring a proactive approach by directors to ensure they comply with the obligations under the legislation. Failure to comply now brings harsher consequences with the prohibition of insurance and introduction of Industrial Manslaughter, with a maximum imprisonment term of 20 years for individuals and a fine of $5M, or a $10M find for a Body Corporate.