Directors are expected to act honestly and appropriately at all times. They are offered protection if they face legal action.
Directors who fail in their duties may face a variety of consequences. Where a director acted honestly and properly in carrying out their duties and is faced with legal action, they may be protected by insurance or qualify for an indemnity from Government.
Action taken against a director whose actions are not consistent with their duties under the Code of Conduct for Directors is likely to range from a reprimand by the minister to a decision not to reappoint the director for another term, to possible removal as a director if legislation permits removal. Any breach of duty by a director is regarded seriously.
Breach of Duties
The Code of Conduct for Directors of Victorian Public Entities sets out the duties of a director. The duties of a director are also found in s. 79 of the Public Administration Act 2004.
A director may be liable under the Public Administration Act for a breach of these duties if the breach causes loss or damage to another person or organisation.
Directors have legal obligations and duties under common law, and under the Corporations Act 2001 (Cwlth), the public entity’s establishing legislation, the State Owned Enterprises Act 1992 and any other relevant legislation.
The government and its representatives should not advise nominees for board appointments on their personal liabilities and responsibilities, which are often complex. Instead, individuals should seek independent legal advice and obtain more detailed information from other sources.
There are a number of reasons why a director may leave a board apart from the expiration of the term, including resignation for personal reasons or a conflict of interest.
They may also leave if they are bankrupt, convicted of a criminal offence, disqualified from serving as a director or manager of a company or have failed to attend a certain number of board meetings without permission from the board or the chair (under the establishing legislation or the Public Administration Act 2004).
They may also be removed under s. 89 of the Public Administration Act if the person who made the appointment believes that they have not followed the Directors’ Code of Conduct or not fulfilled a duty or obligation under the Public Administration Act.
The board should monitor the number and frequency of departures of directors. At least annually, they should review findings to assess whether directors are finding it difficult to avoid conflicts of interest, there is a significant level of dissent among directors, or there is reduced commitment to serving on the board.
Former directors may, on request, be allowed access to board papers for meetings that took place during the time they were a director. However, they do not have legal rights to these papers. The board may decide to grant access to board papers on the basis that they cannot be published without the board’s approval.
Deed of Access
It has become common practice in Australia for companies to enter into a deed of access with their directors and officers. The deed provides the individual with access to company documents and records should a claim ever be made against them relating to their office.
Some public entities may make use of deeds of access. All public entities should consider making use of deeds of access to clarify the rights of directors to access board papers. Such deeds should be between the public entity and the director and should be signed when the director is appointed.
The board should consider including the following limitations, unless there is compelling reason to the contrary:
- the right of access does not apply to any documents over which the public entity claims legal professional privilege
- whether the right of access should be limited to a particular period after the director has ceased service, such as seven years
- the deed grants access only on an undertaking by the director to keep the contents confidential, except where they must be disclosed in court proceedings or as required by law.
Former directors must not give anyone information that they have acquired by being on a board (s. 79(2) of the Public Administration Act, which applies to public entities governed by Division 2 of Part 5 of the Act). This rule is modified if it is necessary to give out that information in exercising functions under the Act, another Act or where these Acts expressly authorise giving out the information.
A former director of any public entity must not disclose or publish any documents about the confidential deliberations of the board unless the board agrees.
A director who leaves the board must return to the board secretary all property of the public entity.
Indemnities and Insurance
The Victorian Managed Insurance Authority (VMIA) may provide an indemnity to directors of a statutory authority or a state-owned company. This deed of indemnity is similar to the directors’ and officers’ insurance policies that are available from the commercial insurance sector.
In many circumstances, directors will not need to seek an indemnity as they will be able to take out insurance to cover their potential liabilities. Some public entities take out these policies for their directors:
- In some circumstances the Treasurer may exercise a power to provide individual indemnities to eligible directors of state companies or statutory corporations, which are outside the scope of the cover offered by the VMIA (s. 40C of the Financial Management Act 1994). The guidelines state that, to date, they have been given where the board is acting on the written directions of the government. Granting an indemnity in advance of the actual performance of particular duties is subject to cabinet approval.
- Requests for specific indemnities by directors are considered on a case-by-case basis and are not usually examined until legal proceedings commence.
- It is government policy that indemnities are provided for ministers and servants of the Crown who have acted honestly and properly in connection with their duties in the course of conducting government business. The precise nature and extent of an indemnity in any particular case will depend on the circumstances involved.