Directors' Duties in Focus - Improper use of position
Opportunities often arise that may tempt a director to personally benefit from their position or another person.
Under s 182 (1) of the Corporations Act (‘the Act’), a director must not improperly use their position to gain an advantage for themselves, for another person or cause detriment to the company.
This is known as the duty not to make improper use of position. This duty is similar to and is related to the fiduciary duties a director owes to the company. It also sits alongside the duty not to make improper use of information obtained through your position as a director.
What constitutes improper use of position?
To be found in breach of this duty, the person involved must be a director of the company. ‘Officers’ and ‘employees’ of the company must also comply with this duty under the Act.
Following the decision in R v Byrnes (1995) 183 CLR 501, it is the 'intent' or 'purpose' of the director to gain an advantage or cause detriment to the company that is important.
It does not matter if the end result of a transaction is that the company does not suffers actual ‘damage’ or alternatively, that there are no real benefits or advantages that flow to a director.
Keep in mind that subjective intent to obtain an advantage or cause detriment to the company is not always required.
In determining whether there has been an impropriety, the Court looks to the viewpoint of a ‘reasonable person’ of a person in the same situation Forkserve Pty Ltd v Jack (2001) 19 ACLC 399; [2000] NSWC 106.
If a corporate opportunity is presented to the company, a director may not take advantage of it for personal gain, unless the company decides not to pursue it and, the director notifies the board and shareholders and is given permission participate in the transaction. Following the decision in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 whether or not the company tends to use the corporate opportunity is irrelevant.
Breach of Duty – Penalties
If a Court is satisfied that a person has contravened a civil penalty provision, it may make a declaration of contravention. Once a declaration has been made by the court, ASIC may then seek a pecuniary penalty order. A financial penalty of up to $200,000 may be payable to the Commonwealth if ordered by a Court in certain circumstances. There may be further actions that could be taken for breach of fiduciary duties.
What Should I Do Next?
Contact us if you would like further legal advice on your Duties as a Director. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.