Directors Defrauding

The law requires directors to carry out duties and obligations with due diligence. It is a criminal offence for a director to defraud or cheat.

Director duties

The Corporations Act 2001 imposes four main duties on directors at section 180-183:

1. To exercise care and diligence. The standard is that which a reasonable person might be expected to show in the role.
2. To act in good faith and for a proper purpose. The director must act in the best interests of the company, avoid conflicts of interest, and disclose and manage them should they arise.
3. Not to improperly use their position. A director must not use their position to gain an advantage for themselves or others, to the detriment of the company.
4. Not to improperly use information. A director must not improperly use information they acquire in their role to gain an advantage for themselves or others, to the detriment of the company.

Other significant duties and responsibilities include:

• A duty to ensure the company does not trade while insolvent;
• Taking reasonable steps to ensure the company complies with its statutory obligations for financial record-keeping and reporting;
• Disclosing any material personal interest in company affairs;
• Lodging information with the Australian Securities and Investments Commission (ASIC);
• Continuous disclosure to the market of information not generally available.

There are also director responsibilities found in legislation that governs areas such as taxation, workplace health and safety, financial services, environmental matters and trade practices.

Signs of fraud

There are common signs that a director may be defrauding a company by illegally using investors’ funds, such as when:

• it is not clear or disclosed where raised funds are being spent;
• updates are not provided on exploration or research and development;
• unusually large fees are paid to consulting or in service fees;
• there are unexplained or unusual expenses;
• loans, sales or purchase agreements have no clear business purpose.

Fraud offences

Federal, state and territory legislation contains various fraud offences, including standard and specific offences. Action taken can be criminal or civil, and the penalties vary depending on the offence, the circumstances and the jurisdiction.

For example, in NSW, section 192E(1)(a) of the Crimes Act 1900, “obtain property belonging to another by deception”, carries a maximum penalty of 10 years imprisonment. In Queensland, the corresponding offence under section 408C of the Criminal Code 1899 carries a maximum penalty of 14 years imprisonment.

Depending on the nature of the offence and jurisdiction, fraud can be investigated by governmental agencies including ASIC or the Australian Federal Police.

Consequences of fraud

If a director commits fraud, consequences include:

• severe penalties including hefty fines;
• proceedings brought by a range of parties including the company itself, shareholders, regulators, third parties and creditors;
• disqualification for long periods by ASIC and the courts;
• serious reputational damage and market repercussions, which leads to greater scrutiny by investors and regulators.

For advice or representation in any legal matter, please contact Armstrong Legal.