The recent high profile decision involving the directors and senior management of James Hardie has put the spotlight on potential personal liability for individuals in relation to the actions of the companies they represent. Although the case involved a large publicly-listed company and centred around the contents of statements made to the ASX, the potential application to businesses generally should not be ignored.

Under the Corporations Act 2001 (Act) there are a number of obligations placed on “directors” and “officers” of a company. These definitions extend well beyond individuals that are formally appointed as directors to include individuals:

  • that act in the position of a director without being validly appointed;
  • who make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation;
  • who have the capacity to affect significantly the corporation’s financial standing; or
  • in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding external advisers).

These definitions potentially cover a range of individuals involved in franchise businesses, including chief executive officers; chief financial officers; general counsel; advisory board members; and senior executives. There are a range of duties imposed on directors and officers under the Act and common law, including the duties:

  • to use reasonable care and diligence;
  • to act in good faith in the best nterests of the company;
  • to act for a proper purpose;
  • to avoid any actual or potential conflict of interest;
  • to not improperly use their position to gain an advantage for themselves; and
  • to prevent insolvent trading by the company.

To minimise the risk of a breach of directors duties it is important that all directors and senior management understand the obligations imposed on them by law. In addition to general compliance training, specific training should be provided to all directors and senior management specifically in relation to their duties as directors and officers.

It is also important to review directors and officers insurance policies to ensure that they cover all the individuals they are intended to cover and that they properly protect against the risks that they are intended to protect against.