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Directors have rights too!

Posted by Karyn Wernham on 2 May 2022
Directors have rights too!

Directors have rights to access company information and to seek independent professional advice

Introduction

A Councillor who is appointed as a director of a company which is established solely with a view to the undertaking of a specified business activity of a Council will be subject to the same rights and obligations as any other director.

All directors have a wide range of legal duties under Federal legislation (such as the Corporations Act (Cwlth)) and State legislation (such as work health and safety laws).  Directors who breach these legal duties expose themselves to civil and criminal liability depending upon the breach.  As a breach of directorial duties can have serious personal liability consequences for a director, it is important for a director to remain informed about the activities and financial position of their company and, if appropriate, seek independent professional advice.

Right of access to company information

In the Final Report Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Volume 1 it is stated that: “Boards cannot operate properly without having the right information.  And Boards do not operate effectively if they do not challenge management”.

Directors have a clear general law right to access any information of the company as necessary to enable them to discharge their fiduciary and statutory obligations.  Such right of access is to all company information: confidential and non-confidential. 

This right is supplemented by Corporations Act section 198F (Right of access to company books to defend themselves in legal proceedings) and section 290 (Director access to financial records).  A company’s constitution, or a separately entered deed of access, indemnity and insurance, may give its directors broader rights to access company information than contained in the Corporations Act

Right to obtain independent professional advice

A director is entitled to obtain independent professional advice (discrete from any advice provided to the director by the company or the Board) to assist the director with satisfying their directorial duties.  In seeking that advice, the director must be acting in good faith, for a proper purpose, and must ensure that in doing so, the director maintains confidentiality obligations owed by the director to the company. 

The Australian Institute of Company Directors, in its publication entitled Directors’ Right to Seek External Professional Advice Governance Relations, recommends as follows:-

As board members act in a collective capacity where trust and confidence is valued and consensus decision making is favoured, directors should exercise any right to take individual expert professional advice sparingly and only in circumstances where the director has a legitimate and significant reservation as to the matter upon which the advice is sought, and which reservation the board and its professional advisers (as appropriate) are not able or are not willing to address to the reasonable satisfaction of the director.

Although a director, acting individually and without the authority of the Board, cannot commit the company to obtaining independent professional advice for the benefit of the individual director, arguably, a director may be able to seek reimbursement for the cost of the director obtaining such advice, as an expense reasonably and properly incurred by the director in connection with the company’s business, pursuant to replaceable rule Corporations Act section 202A(2)(c) or, if applicable, the company’s constitution.

As a means of maintaining a level of managed control over the process, and to guard against directors taking excessive, and perhaps unnecessary, costly action for which the company may be liable to reimburse, a company should consider adopting a policy which details when, and how, and the conditions under which, directors may seek independent professional advice, and whether, and to what extent, their costs are reimbursable.

For specific advice about the exercise of rights by a director, or developing a company policy about directors’ entitlement to seek independent professional advice, please email James Neilson or Karyn Wernham or call us now on (07) 3243 0000.

Karyn WernhamAuthor:Karyn Wernham
About: Karyn is a senior associate in the firm's Commercial & Advisory Group.
Tags:Local Government

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