What are a Director's duties?
Australia has over 5,000 acts of legislation regulating business activities, making full compliance a complex and ongoing challenge for company directors. Breaches of these laws—whether intentional or accidental—can result in substantial financial penalties and legal costs, which may severely impact a business's viability.
Under Corporations Law, directors are subject to a range of legal duties designed to ensure responsible and ethical governance. These include:
Duty of Care and Diligence
Directors must act with reasonable care and skill, always in the best interests of the company.
Duty to Act in Good Faith
Directors are required to act honestly and for a proper purpose, avoiding any conduct that could be considered deceptive or self-serving.
Duty to Prevent Insolvent Trading
Directors must ensure the company does not incur debts it cannot reasonably repay, thereby avoiding insolvent trading.
Duty to Avoid Conflicts of Interest
Any personal interests that conflict with the company’s interests must be disclosed and managed appropriately.
Duty to Prevent Improper Use of Position
Directors must not misuse their position to gain personal advantage or to the detriment of the company.
Duty to Prevent Misuse of Information
Confidential company information must not be used for personal gain or to harm the company.
The "Stepping Stone" Approach
ASIC frequently employs a "stepping stone" approach that links corporate misconduct directly to a director's failure to adequately discharge their general duties. By failing to prevent corporate misconduct, the Directors have breached their duty to act with reasonable care, skill, and diligence.
These duties are not merely theoretical. They carry real legal consequences. Management Liability Insurance is designed to protect directors and officers from personal liability arising from breaches of these duties, ensuring that legal defence and settlement costs do not fall solely on the individual.
Statutory Liability Insurance also plays a critical role. It provides coverage for legal defence costs associated with alleged breaches of legislation, even when fines themselves may not be insurable. Notably, some Australian states prohibit insurance from covering fines related to Work Health and Safety (WHS) breaches; however, defence costs for such allegations are typically covered.
Protection for Directors
Management Liability Insurance is a critical safeguard for directors, officers, and companies operating in today's complex regulatory environment. It provides financial protection against a wide range of claims that may arise from the performance of managerial duties and the operation of the business.
Directors face personal exposure to legal claims due to decisions made in their professional capacity. A Management Liability policy typically includes:
Directors' and Officers' Liability (D&O)
Covers personal liability for wrongful acts committed in the role of a director.
Insolvency Trading Protection
Covers costs and liabilities related to insolvent trading. This coverage is not automatically provided and may require submission of financial statements.
Fiduciary Liability
Provides protection against claims for breach of fiduciary duty.
Protection for the Company
Beyond individual directors, the policy also extends to the company itself, offering protection against internal and external risks:
Employee Dishonesty
Covers financial losses due to theft, fraud, or embezzlement by employees.
Claims Against the Company
Includes coverage for lawsuits related to employment practices, product liability, and other operational risks. Policies also cover allegations such as misrepresentation, breach of contract, or regulatory violations.
Employment Practices Liability
Covers claims from employees for discrimination, harassment, or wrongful termination. Addresses claims related to workplace conduct and employment law.
Regulatory Investigations
Includes costs associated with investigations by bodies such as ASIC, ATO, ACCC, and APRA.
Shareholder Disputes
Protection against claims of mismanagement or financial loss brought by shareholders.
Tax Audit and Review
Covers costs related to responding to audits or reviews by tax authorities. Not all policies automatically include review coverage; we ensure this is included based on past experience.
Crime Insurance
Provides coverage for financial losses caused by criminal acts such as employee theft, fraud, forgery and embezzlement. Crime typically covers both internal threats (such as dishonest employees) and external threats (such as third-party fraud or social engineering scams), helping to safeguard company assets and maintain financial stability in the face of unexpected criminal activity.
Statutory Liability Insurance
Covers defence costs for alleged breaches of legislation. In some cases, it may also cover fines and penalties, subject to state laws and policy terms. The types of legislation typically covered are:
- Work Health and Safety (WHS) laws
- Consumer Protection
- Employment Practices
- Environmental Regulations
- Privacy Laws
- Chain of Responsibility (Transport Industry)
- Electrical Safety
This comprehensive coverage ensures that both individuals and entities are protected from the financial and reputational damage that can result from legal and regulatory actions.