Guidance on the duties of directors of mutual companies

As the director of a mutual company, you must comply with a number of obligations under the Corporations Act 2001 (Corporations Act). This information sheet (INFO 231) discusses the definition of a mutual company and sets out your duty, as a director of a mutual company, to:

• act in good faith and in the best interests of the company
• act with care and diligence
• not improperly use your position or information obtained through your position
• disclose conflicts of interests.

It also covers criminal offences that apply to directors of mutual companies under the Corporations Act.

What is a mutual company?

A 'mutual company' is a cooperative or mutual that is incorporated under the Corporations Act, and may also be prudentially regulated by the Australian Prudential Regulation Authority (APRA).

In March 2016, the Senate Economic References Committee tabled its report Cooperative, mutual and member-owned firms and made 17 recommendations to support the cooperative and mutual sector. In response, the Australian Government asked Greg Hammond OAM to consult on reforms and make recommendations: see Report on reforms for cooperatives, mutuals and member-owned firms (Hammond Review), published in November 2017.

The Hammond Review considered what defines a cooperative or mutual. At paragraph 1.6 it set out three features of cooperatives and mutuals it thought were worth noting:

• The business and activities of cooperatives and mutuals are guided by an ethos of providing benefits through goods or services to members (as owners), rather than maximising profits to pay dividends or distributions to members (as shareholders) or external investors.
• Cooperatives and mutuals are democratic organisations in which members typically have equal voting rights (one member, one vote).
• Membership interests in cooperatives and mutuals are not transferable, except in limited circumstances.

We consider an organisation to have a mutual structure if the company and its members meet two tests:

• an economic relationship test, which considers the economic relationship between the company and its members and shareholders
• a governance relationship test, which considers the role members play in the governance of the company.

See Regulatory Guide 147 Mutuality: Financial institutions (RG 147) at RG 147.38–RG 147.40 for more information on these tests.

Mutual companies may be structured as:

• companies limited by shares
• companies limited by guarantee, or
• companies limited by shares and guarantee.

Regardless of the structure of the mutual company, the obligations on directors and officers under the Corporations Act are the same.

What are your obligations?

The Corporations Act imposes a number of duties on directors and officers of mutual companies.

Duty to act in good faith and in the best interests of the company

As a director of a mutual company, you must exercise your powers and duties in good faith, in the best interests of the company and for a proper purpose. This means that you must hold an honest and reasonable belief that the actions you are taking are in the best interests of the mutual company.

The courts have not interpreted this duty as requiring directors to solely focus on achieving the highest financial return for the company and its shareholders.

In a mutual company, it is possible for some members to be interested solely in achieving a financial return, whereas other members may be interested in non-financial objectives.

The High Court considered how directors of companies with shareholders with competing interests should comply with their duty to act in the best interests of the corporation: see Mills v Mills (1938) 60 CLR 150. The court in that case found that:

• the directors would not be in breach of their duties if they believed they were acting in the interests of the company, even if their decision adversely affected the interests of one class of shareholders to the benefit of another class
• if there are classes of shareholders with competing interests, the question becomes what is fair between the different classes of shareholders.

In complying with your duty to act in the best interests of the company, you should refer to the objectives set out in the company's constitution. This is of particular relevance to mutual companies – many mutual companies have constitutions that set out objectives that promote the non-financial interests of members, such as providing services to members.

Duty to act with care and diligence

Directors and officers have a duty to exercise their powers with the care and diligence that a reasonable person would use in similar circumstances. You should ensure you understand and are continually informed about the business, activities and finances of the mutual company.

Reasonable reliance defence

To meet the care and diligence duty, under the Corporations Act you are able to rely on the special knowledge or expertise of another director or officer, or an adviser or expert such as a lawyer or accountant. However, it is not enough to merely do as advised; you must inform yourself, apply an inquiring mind, and make an independent assessment of that information or advice.

Your reliance must also be 'reasonable'. The Corporations Act states that a number of sources of information or advice would be reasonable, as long as you use good faith and independently assess the merit of each source.

Business judgement rule

In providing this defence, the Corporations Act recognises that directors should be able to make decisions that involve responsible risk taking. Decisions that involve a level of risk may not always result in a benefit to the company, but that does not necessarily mean that the person has breached their duties.

To rely on this defence, you must be able to show that:

• you made a business decision in good faith for a proper purpose
• the decision didn't give rise to any actual or perceived conflicts of interest
• you informed yourself about the subject matter to an extent you reasonably believe is appropriate
• you rationally believed the decision was in the best interests of the company.

Duty to not improperly use position or information obtained through position

As a director of a company, you must not improperly:

• use your position to gain an advantage for yourself or someone else, or to cause detriment to the company. For example, you should not award a contract to a company for reasons other than merit, or
• use information obtained through your position (such as confidential information) to gain an advantage for yourself or someone else, or to cause detriment to the company.

Duty to disclose conflicts of interest

It is possible or even likely that you will come across members of your network while acting in your capacity as a director, and this is not in itself a contravention of the law. However, directors must disclose to the other directors of the company any material personal interests that they have that relate to the company's affairs. A relevant conflict of interest may be actual (where the link between yourself and the other party is clear and direct) or perceived (where a third party may consider there to be a conflict, even if you believe there is no conflict).

You must ensure that you disclose to the board any actual, perceived or potential conflicts of interest, manage the conflict by not being involved in any discussion or vote (unless the board members who do not have a conflict agree otherwise), and record in the minutes to the meeting that the conflict was disclosed.

Criminal offences

Directors of mutual companies can also be charged with criminal offences under the Corporations Act. You must not:

• allow the mutual company to operate while it is insolvent, or
• be reckless or intentionally dishonest by failing to exercise your powers and comply with your duties as a director in good faith and in the best interests of the mutual company.

Where can I get more information?

• RG 147 Mutuality: Financial institutions
• Directors' key responsibilities, which discusses how you can meet your responsibilities as a director
• What it means to be a director of a company, which covers the role of a director

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.