Duty to Disclose Material Personal Interest Under the Corporations Act
We understand that balancing business and personal matters can be challenging, and sometimes the lines between the two can be blurred, especially for a director of a company.
People who you meet through business can easily become friends, or may be considered family and it is easy to forget about your duty as a director to disclose material personal interests.
No matter what the circumstances may be, being proactive is usually better than being reactive in the context of director duties, and seeking independent legal advice early can often lead to a more favourable outcome.
In any case, if allegations have been raised that you have breached your director duties, we recommend that you seek legal advice as soon as possible. Our civil litigation team and criminal solicitors are experienced and well adept at assisting with matters involving alleged breaches of director duties which may have criminal or civil penalties attached.
We offer a free and confidential initial consultation to discuss your matter. Feel free to contact us on 07 5532 3133.
This article will discuss a director’s duty to disclose ‘material personal interest’ under the Corporations Act 2001 (Cth) (‘Act’).
We have discussed other director duties which arise under the Act in our other articles:
‘Breach of Common Director Duties under the Corporations Act’
‘Duty to Prevent Insolvent Trading Under the Corporations Act’
This article is general in nature and should not be relied upon as legal advice.
Duty to disclose material personal interest
What is the Duty?
Under section 191 of the Act, a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless one of the exemptions under the Act apply.
What is a material personal interest?
The Act does not define what constitutes a ‘material personal interest’. Caselaw suggests that this may include interests which are personal, of some substance or value and must have a realistic capacity or propensity to influence the director’s decisions in relation to the company’s affairs.
In Grand Enterprise Pty Ltd v Aurium Resources Ltd Justice Barker cited Justice Murray’s judgement in McGellin v Mount King Mining NL in relation to the meaning of the expression “material personal interest” as:
”Material’ in this context, I think, means that the interest involves a relationship of some real substance to the matter under consideration or the contract or arrangement which is proposed. In that way the nature of the interest should be seen to have a capacity to influence the vote of the particular director upon the decision to be made, bearing in mind that both the article and the section are concerned with that aspect of a director’s fiduciary duties which relates to the resolution of conflict of interest which must, of itself, be of a real or substantial kind. The interest with which both the article and the section are concerned should be of a kind as to give rise to a conflict of that character. If that test is met, it seems to me not to matter that the nature of the interest may be described as direct or indirect, or vested in interest or contingent. It is the substance of the interest, its nature and capacity to have an impact upon the ability of the director to discharge his or her fiduciary duty which will be important.’
What are the exemptions for this duty?
A director does not need to give notice of a material personal interest if the interest:
- Arises because the director is a shareholder of the company and the other shareholders have the same interest;
- Relates to that director’s pay as a director of the company;
- Relates to a contract the company is proposing to enter into that is subject to approval by the shareholders and will not impose any obligation on the company if it is not approved by the shareholders;
- Arises merely because the director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company;
- Arises merely because the director has a right of subrogation for a guarantee or indemnity for all or part of a loan (or proposed loan) to the company.
- Relates to a contract that insurers, or would insure, the director against liabilities the director incurs as an officer of the company (only if the contract does not make the company or a related body corporate the insurer);
- Relates to any payment by the company or a related body corporate for indemnity permitted under section 199A of the Act or any contract relating to such an indemnity;
- Is in a contract, or proposed contract, with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the director is a director of the related body corporate; or
- The company is a proprietary company and the other directors are aware of the nature and extent of the interest and how it relates to the affairs of the company.
For one of the above exemptions to apply, generally the following conditions must be satisfied:
- The director must have already given notice of the nature and extent of the interest and its relation to the affairs of the company;
- If a person who was not a director of the company at the time when the notice was given is appointed as a director of the company – notice must be given to that person;
- The nature or extent of the interest has not materially increased above that disclosed in the notice.
A director of a company does not need to give notice of a material personal interest if the director has given a standing notice of the nature and extent of the interest under section 192 of the Act and the notice is still effective in relation to the interest.
What are the potential penalties for breaching this duty?
Breaching this duty may attract criminal penalties.
There is also a related common law fiduciary obligation for directors to avoid conflicts of interest and duty, which may attract civil remedies.
It imperative that if there is an allegation that you have breached this duty that you obtain independent legal advice as soon as possible.
Next steps
Our firm, having lawyers who specialise in civil litigation law and criminal law, are uniquely positioned to advise on both the civil and criminal aspects of any breach of director duties.
Our litigation and criminal team regularly work in tandem to protect our client’s interests and provide timely and strategic advice.
You can rest assured knowing that our lawyers will be able to deal with all aspects of your matter where there could be a cross-over between civil and criminal law.
We offer a free and confidential initial consultation to discuss your matter.
Feel free to contact us on 07 5532 3133.