Directors' Duties in Focus - Duty not to make improper use of information

As a director, you are given the opportunity to read highly sensitive and often confidential material relating to the business of the company. This information will often not be accessible to the general public. Your unique position allows you to gain a solid understanding of the financial status of the company. You may also be given the opportunity to read juicy material that is related to the business of another company. This places you in a very privileged position and means that you know things about the company that ordinary members of the public do not. Obviously, having access to this information allows you to use your sound judgement to make informed decisions for the company. But it also means you may be tempted to use this information to benefit yourself.

The law has recognised the issue that directors can use information gained from their position for their own personal gain. To address this problem, the result is that directors have a duty not to make improper use of information. This duty exists under both the general law and s 183 of the Act. This duty overlaps with the duty not to make improper use of position, duty to avoid conflicts of interest. Fiduciary duties to act in the best interests of the company and not to make a secret profit are also related.

Case Example:

A well-known case example that illustrates a breach of the duty to not improperly use information is ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57. Stephen Vizard was a former non-executive director of Telstra. In short, Vizard used information that he obtained through his position as a director of Telstra to buy shares in three IT companies which Telstra had also expressed interest in. Vizard admitted the breach and was ordered to pay a civil penalty of $390,000. He was also disqualified from being a company director for 10 years.

Statutory Duty

S 183(1) of the Act provides that a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

  • gain an advantage for themselves;

  • gain an advantage for someone else or;

  • cause detriment to the corporation.

It does not matter if the director actually made a profit from the improper use of information. The duty applies to ‘other officers’ or ‘employees’ of a corporation, as well as the directors. The duty continues even after the person stops being an officer or employee of the corporation.

Penalties for Breach of Duty

Similar to the other directors’ duties we have discussed, penalties for breaching the duty not to improperly use information are serious:

  • Civil penalty of up to $200,000;

  • Declaration of a contravention s 1317E;

  • Criminal liability if dishonesty can be shown;

  • Compensation for any loss suffered; and

  • Disqualification from being a director

Conclusion and Next Steps

We would like to remind our readers that each and every duty of the director is important and any transgressions or mistakes with one, can lead do confusion and complications with another. If you are ever in doubt of whether your are compliant with the obligations bestowed on you, we urge you to consult the company by-laws and constitution. In the event that you are unable to find the answer, our staff are on hand to answer any of your questions, to advise you on policy matters involving director’s duties, and provide any necessary training to your staff.

What Should I Do Next?

Contact us if you would like further legal advice on use of information.  Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

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