Understanding the Criminal Consequences of Breaching a Director's Duties

Banking & Finance
2 minute read

When a person is a director of a corporation, there are certain rights and obligations that are attached to the role. Directors are required to act in good faith, not use their position improperly or exploit information gained from their position to their advantage, which may cause detriment to the company. Any breach of these duties, can result in criminal punishment.

Directors must always act in good faith

In s 184(1) of the Corporations Act (the Act) directors must always act in good faith and for the best interests of the company. The good faith and interest provisions are civil obligations as well under s 181 of the Act. However, a director or officer will be committing a criminal offence if he or she is reckless, and intentionally dishonest in the exercising of their good faith and proper purpose obligations.

Directors have a responsibility to their company and shareholders, and at all times, must honestly believe that they are acting for a proper purpose, and in the best interest of the company.

Directors (and employees) must not abuse their position

Directors, officers and employees are quite often exposed to information that can be financially lucrative if used dishonestly. Therefore, s 184(2) and s 184(3) makes it an offence for all employees of a company to use their position to recklessly gain an advantage for themselves, or another person.

All employees owe a duty to their company, and if by using information gleaned from their position causes harm to the company, can be found to be committing a criminal offence.

The criminal provisions of directors’ duties have in recent times led to the high profile convictions and imprisonment of three former HIH Insurance directors and officers. The example of HIH should serve as a warning that any breach of a directors’ duties, can result in imprisonment.