Evolving directors' duties: the emerging challenge for restructuring and insolvency practitioners

By Jennifer Ball and Sharon Burnett

For insolvency practitioners, this might appear to be a bit of a minefield, and they would be right to tread cautiously.

Directors are first and foremost responsible to the company as a whole and must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose. The reference to "acting in the best interests of the company" has generally been interpreted to mean the collective financial interests of the shareholders. When a company is in financial distress however, directors have a fiduciary duty to creditors (past and future) but otherwise they have no express duty in the Corporations Act to anyone outside the company, although there are specific legal obligations that are imposed upon a company by various legislation that protects the interests of a range of stakeholders such as employment laws, occupational health and safety laws, trade practices and environmental laws.

That much is true, but it is not the whole story.

In the wake of the Financial Services Royal Commission, there has been renewed discussion of the regulation and scope of directors' duties, including whether they should expressly include the interests of non-member corporate stakeholders such as employees, customers, contractors, the community and the environment.

In early March 2019, the Australian Institute of Company Directors (AICD) announced it is working on a discussion paper designed to expand directors' duties beyond shareholders to stakeholders such as customers. While the scope of the discussion paper was reduced with the launch of the AICD's forward governance agenda in April 2019, the agenda still is focused on four main areas as the governance community looks to regain trust. To address a perceived gap between what boards believe they do to consider stakeholder interests and the community’s view, the AICD intends to lead a conversation with the director community and stakeholders to test the application of the best interests duty to determine what approaches make practice "fit for purpose".

The ASX has also finalised the 4th Edition of its Corporate Governance Principles and Recommendations, which now expect directors to also consider non-financial risks.

That broader, evolving view of stakeholders and community and regulator expectations has been accompanied by a renewed emphasis on decision-making and information flows within a company. On the regulators' side, there are now increased penalties and the adoption of a "why not litigate" first approach.

It's not just directors who will have to grapple with these evolving expectations. Insolvency practitioners, who act as officers of the company if appointed as a receiver or receiver and manager, an administrator or deed administrator, or a liquidator or person administering a compromise or arrangement made by the company, are required to meet the high standards of care and diligence expected of persons paid to exercise their professional expertise. For insolvency practitioners, we see at least three main questions that they may be required to answer (or apply to the court for an answer):

  • who is a stakeholder?
  • what will be considered a breach of directors' duties?; and
  • what now is the role of the insolvency practitioner?

To understand why this is now an emerging issue, we look at the recent conversations on directors' duties, the legal framework and some specific scenarios in restructuring and insolvency.

Directors' duties and the evolution of the non-shareholder stakeholder and non-financial risk


Neither the Corporations Act nor the general law expressly impose an obligation on directors to take into account the interests of other key stakeholders (apart from creditors, present or future, when a company is in financial distress) and to date, the courts have been guarded against an approach to general law or statutory duties that borders on the inflexible, which could result in adverse consequences in confusing the primary role of directors. However, whilst a director may be at liberty to engage in entrepreneurial risk, this is to be balanced by the director's fiduciary duties for example, under section 180 of the Corporations Act, where a director and officer of a company owe a duty of care and diligence to the company which requires the director and officer to consider foreseeable risks of harm to the company. This means that non-financial risks such as social and reputational risks must be considered by directors and officers where those risks are foreseeable and may be adverse to a company's interests (ASIC v Cassimatis (No 8) [2016] FCA 1023).

The recent scrutiny of directors' duties

The Final Report on the Financial Services Royal Commission declined to recommend an expansion of directors' duties in the Corporations Act to include other key stakeholders however, it did suggest that when acting in the best interests of a company, directors should act in its best interests over a long period of time, as opposed to solely focusing on the short-term interests of the company (ie. profitability). Commissioner Hayne suggested that the interests of shareholders and other key stakeholders are likely to converge when directors exercise their powers with a view of acting in the best interests of the corporation over a longer period of time, which has the effect of creating continued long-term financial advantage for all stakeholders. This broader vision of accountability was accompanied by a call for improved information flows and scrutiny by senior management of that information, so that risks could be better understood by Boards (points also made in the CBA APRA Prudential Inquiry).

It's a view echoed by the recently finalised 4th Edition of the ASX Corporate Governance Principles and Recommendations which set out recommended corporate governance practices for ASX-listed entities.While they are not mandatory, they apply on an “if not, why not” basis. The ASX Principles identify four key messages for Boards to carefully consider (which reflect the concerns of the Commission): the responsibilities of the Board (Principle 1); culture and values (Principle 3); identification and management of risk (Principle 7); and remuneration (Principle 8). Significantly, Principle 7 identifies that the Board of a listed entity should in identifying and managing risk consider non-financial risks such as "social risks", which relates to the risk of negative consequences to a listed entity where the entity or its activities adversely affect society. 


ASIC has been using a "stepping stone" approach to litigate against directors in their personal capacity under section 180 of the Corporations Act. The first stepping stone is the commencement of proceedings against the company for breach of the law (which is not limited to breaches of the Corporations Act), which leads to the second stepping stone: proceedings commenced against the director(s) under section 180 for breach of their duty of care in exposing the company to risk of prosecution or liability and seeking to impute to the director(s) in appropriate circumstances, a civil liability or disqualification orders for the company's wrongdoing.

This approach, in recognising that acting in the interests of the company includes its compliance with the law, has been upheld by the High Court, which also found it extended to officers below Board level.

Does a broader vision of the company's role and responsibilities now mean that the interests of a multitude of stakeholders and others impacted by the firm's operations such as suppliers, customers or even community partners, should be considered as key relationships that must be preserved as part of the restructuring? Given their impact on the bottom line, this could be a challenge for any restructure that is seeking to reduce costs to improve the distressed firm's financial position.

So where does all of this leave directors and officers?

It has been articulated that the Corporations Act should be clarified and revised to uphold the interests of specific classes of stakeholders when making corporate decisions, and that directors should make decisions in good faith and for the proper purpose that benefits the community, consumers and the environment. 

Broadly, in balancing a company's interests, directors and officers by their conduct ought not simply adopt a narrow construction of the interests of the company – rather, there needs be a balancing of the identified foreseeable risks of harm against the countervailing potential benefits that could reasonably be expected to accrue to the company, so that directors and officers need consider:

  • all of the corporation's interests as being relevant;
  • harm is not limited to pecuniary loss and might extend to unlawful conduct which can cause non-pecuniary consequences for a corporation;
  • a corporation has a real and substantial interest in the lawful or legitimate conduct of its activity, especially given the importance of the corporation's reputation;
  • balancing must take place from the perspective of the corporation's circumstances and the office and responsibilities of the director; and
  • scrutinising information flowing up to Board level, which information should not be limited to information about the financial performance of the company but also about the company's compliance with legal and regulatory requirements and any material misconduct that is inconsistent with the code of conduct of the company.

Scenario 1: Restructuring

Where there is a restructure of a company which might be showing signs of financial distress, apart from its creditors, directors and officers usually will consider other stakeholder interests or key participants, such as existing senior financiers, joint venturers, existing shareholders with varying percentages, key customers, new debt or new equity participants and seek to maintain existing key agreements with key suppliers and trade creditors. In most cases, some or all of these stakeholders will be aware of the distressed nature of the company and will primarily be concerned about their own risk exposure in the event of the failure of the business of the company. Each group of stakeholders will also have different objectives and priorities.

Determining which relationships are key usually comes down to a commonsense approach based on the company's commercial dealings in effect, the stakeholders in the firm's ongoing profitability. For directors, to ensure the success of a turnaround plan, the priority is to gain the support of the stakeholders which requires careful management, seeking their engagement and involvement in the development of any restructure/turnaround plan and ultimately, their agreement and approval of the plan.

In the wake of the Royal Commission along with the erosion of trust in corporates and a lack of faith in the regulators to control or even deal with unlawful behaviours, there now exist real challenges for directors and officers in any restructure in relation to corporate governance and the need not to just consider the financial risks of those stakeholders who are already in relationships with the company, but also to take account of non-financial interests and risks which are not necessarily the same as stakeholders' interests. These non-financial risks might include, for example, those to whom the company owes a legal obligation or broader social interests that become at risk as the business deteriorates, such as the community, the customer or supplier, employees or the environment, which interests will require proper management to ensure the future success of the business' reputation and brand value, which are critical in any restructure.

Does a broader vision of the company's role and responsibilities now mean that the interests of a multitude of stakeholders and others impacted by the firm's operations such as suppliers, customers or even community partners, should be considered as key relationships that must be preserved as part of the restructuring? Given their impact on the bottom line, this could be a challenge for any restructure that is seeking to reduce costs to improve the distressed firm's financial position.

Scenario 2: Reports to ASIC of possible misconduct

Administrators, receivers and liquidators are required to report to ASIC if it appears to them that:

"a past or present officer or employee, or a member, of the corporation may have been guilty of an offence in relation to the corporation; or a person who has taken part in the formation, promotion, administration, management or winding up of the company… may have been guilty of any negligence, default, breach of duty or breach of trust in relation to the corporation" (sections 422, 438D and 533 of the Corporations Act).

This raises the question: what now has to be reported to ASIC as a breach of directors' duties? This might no longer be quite a straightforward matter. While there is a statutory obligation on the insolvency practitioner who acts on behalf of all unsecured creditors of the company to report to the regulator those company directors and officers who have not acted with integrity and honesty, in the post-Royal Commission environment is the insolvency practitioner to encompass in any report a director or officer of a company who has acted with disregard of corporate social responsibility and community interests? Should poor information flows to Boards be reported? Or a failure to consider non-financial risks? All of these could raise potentially complex questions for the insolvency practitioner.

An insolvency practitioner may now also need to investigate how corporate culture was reflected in the company and whether there has been insufficient attention given by directors and officers to the management of non-financial risks, with an emphasis on compliance risks. There may also be an examination by the insolvency practitioner as to whether adequate corporate governance systems have been put in place, to ensure that directors and staff have acted ethically and in a socially responsible manner in addition to their acting legally and in accordance with their professional obligations.

The views of regulators are highly relevant. Since the commencement of the Royal Commission and the delivery of the Final Report, the regulators' expectations are that Boards will develop and maintain a good corporate culture and will act with integrity and fairness. The regulators have become increasingly proactive in assessing and supervising corporate culture where a key message from the Royal Commission is for regulators to adopt a "why not litigate" first enforcement strategy. This has resulted in:

  • a new Corporate Governance Taskforce, whose focus, amongst other things, will be on the role of the board and the officers of a company in the oversight (and in the case of officers, the management) of non-financial risks;
  • the appointment of Commissioner Dan Crennan QC as ASIC's "chief prosecutor";
  • additional $400 million funding to ASIC (a 25% increase in its annual funding compared with 2017-2018) and an additional $150 million to APRA; and
  • new increased penalties for civil and criminal breaches.

There is a clear message that the Australian public expects that companies, especially, the large companies, will act as exemplary corporate citizens wherever they operate. There is an expectation that directors and officers will be held accountable for corporate misconduct. In preparing any report to ASIC, an insolvency practitioner needs to be alive to the greater possibility of enforcement action being taken against companies and following that, against the directors.

Tread cautiously – and seek advice

There are no clear answers at the moment to the questions asked above. What is clear, however, is that in the current post-Royal Commission climate, companies ? must be wary of acting in a manner perceived to be unacceptable because it could potentially impact unfavourably on the company's reputation and standing, and consequently on its business. This is particularly so given the impact that a large company and the privilege that the corporate veil brings, when combined with the perception that large multinational companies bring with them corporate and social responsibilities.

As for the question whether Australian law requires clarification or amendment, under the Corporations Act, specifically under section 181(1), directors and officers are authorised to take into account shareholders' interests and other stakeholders and must act in good faith and in the best interests of the company and for a proper purpose. The law therefore arguably provides for directors and officers to have regard for stakeholder interests. The current legal framework of directors' duties is supported by the AICD, which does not endorse any legislative change. It therefore remains the responsibility of the directors and officers to weigh up and balance these competing considerations they could be confronted with in any restructure and must exercise their judgment and determine what is in the best interests of the company as a whole.

ASIC's new regulatory regime, together with the regulators' (and indeed shareholders') heightened focus on the non-financial risks of a company, sends a clear message to all boards and officers of a company to carefully review their oversight and management of non-financial risks with a greater likelihood of enforcement action by the regulators. For ASX listed entities, there is guidance with the release of the 4th Edition of the ASX Corporate Governance Principles and Recommendations. In addition, where cases are brought by ASIC alleging breach of directors' duties, there is a new reality that a court may well find contravention of that duty, where there has been a failure to account for a foreseeable non-financial risk of harm to the company.

For insolvency practitioners, this might appear to be a bit of a minefield, and they would be right to tread cautiously. For the next 12-18 months at least, they should seek advice and guidance from the courts and regulators, as corporate Australia and the courts get a sense of the answers to these questions. In the meantime, keep an eye on the conversation on directors' duties, and seek guidance or legal advice where necessary.