Director role in a co-operative

The directors of co-operatives frequently act as managers as well. A director in a small co-operative often deals with all aspects of the business, such as:

  • buying or leasing premises
  • doing the banking
  • ordering goods and services
  • operating retail outlets
  • preparing proper accounts and tax returns
  • paying suppliers and organising insurance

In larger co-operatives, employees usually manage the day-to-day work.  Directors focus on:

  • the long-term business and financial planning
  • assessing the performance aspects of the business
  • appointing executives
  • maintaining good employee relations
  • researching new opportunities
  • deciding profit distribution among shareholders

Directors and officers of co-operatives have certain obligations and duties under the  Co-operatives National Law. These include:

Acting honestly- Theft or misuse of co-operative funds and property is a serious offence.  As is making decisions knowing they could be harmful to the co-operative's interests.

Acting with care and diligence - Directors and officers should be adequately informed.  They should seek professional advice if necessary.  Directors and officers should be active at board meetings in response to directors' proposals and their effects on the co-operative.  They should be aware of management direction.

Not disclosing or misusing inside or confidential information - Officers and employees must not use their position to harm the co-operative, or to gain advantage for themselves or someone else. This includes former officers and employees.

Directors must also disclose any conflict between personal interest and duty as a director. If there is a conflict of interest, the director must not be present when the matter is discussed and decided by the board (unless the board agrees otherwise).

Ensuring the co-operative can meet its financial obligations - A co-operative director must prevent the co-operative from incurring a debt if they suspect it is insolvent, or if it would become insolvent by incurring the debt.

Personal responsibilities of directors

Director duties are imposed upon directors as individuals. Therefore each director is personally responsible for their decisions and actions as a director. As these duties stem from different sources of law, enforcing them has different consequences.

Type of DutyDescription
Fiduciaryduties are owed to the co-operative. If a director breaches a duty, the co-operative (or sometimes members on behalf of the co-operative) has the right to sue and enforce that duty by seeking compensation or injunctions against individual director(s)
Statutoryduties are enforceable by the Registrar.  Penalties for breaching them can range from compensation orders to fines and, in some cases, terms of imprisonment. Statutory duties apply usually to officers of a co-operative.  This includes directors, as well as persons engaged in the management of the co-operative and, in some cases, employees
Contractualduties that arise under the rules are duties owed to the co-operative or its members. Directors breaching these duties may be subject to legal action from the co-operative or its members

Major Categories of Director's duties

There are five major categories of director duties:

1. The duty to act in good faith (honestly) in the interests of the co-operative

The director must take into account the best interests of the co-operative and act in those interests rather than for any other motive.

2.  The duty to act with reasonable care

Directors must act with reasonable care and diligence in all aspects of their activities for the co-operative. While delegating duties is permitted in circumstances, directors are not automatically freed from responsibility for the consequences of delegated tasks. For example, delegated financial decisions to unqualified or inexperienced persons could leave director's responsible for unsound decisions or acts.

Courts have identified the following as minimum standards of care, skill and diligence expected of directors:

  • a director must get a basic understanding and be familiar with the fundamentals of the co-operatives business
  • directors are under a continuing obligation to keep informed about the activities of the co-operative
  • detailed inspection of day-to-day activities is not required.  However, general monitoring of the co-operatives business affairs such as regular attendance at board meetings is necessary
  • directors should be familiar with the financial status of the co-operative.  Directors should regularly review the financial statements. This duty is vital to maintain the statutory duty to prevent insolvent trading.

3.  The duty to act for a proper purpose

Directors must act honestly in the interests of the Co-operative. Directors are given powers and discretions to make decisions. If that power is abused or used for an improper purpose, then the director will have breached their duty. For example, a decision to schedule a general meeting at an inconvenient time or place to limit member participation may amount to an improper use of a directors' power.

4.  The duty to retain discretions

There is a duty to ensure that directors do not abdicate responsibility for decision making by simply fitting in with other persons or the majority. A director has a variety of discretions or powers to make decisions and the co-operative is entitled to have the benefit of each directors' personal effort in making that decision. This duty is closely related to the duty to act with reasonable care especially in delegating.

5.  The duty to avoid conflicts of interest

Directors must not place themselves in a position where there is an actual or substantial possibility of a conflict between personal interests and their duty to act in the interests of the co-operative. There may be circumstances where a co-operative may allow a director to proceed with a transaction or activity.  However, proper disclosure and express permission must be obtained.

Statutory duties

The Co-operatives National Law imposes statutory duties on officers (including directors) of co-operatives which mirror the fiduciary duties.  A breach of a statutory duty will expose directors to a range of civil and criminal penalties.

Insolvent trading

The most important statutory duty, in addition to the above duties, is to prevent the co-operative from trading while insolvent. This duty places directors at risk of being personally responsible for the debts of the co-operative that were entered into while insolvent. The elements of this duty are set out in the Corporations Act 2001 and are applied by the Co-operatives National Law.

Briefly, the duty requires that a director must ensure that the co-operative does not incur a debt in circumstances where:

  • the co-operative is insolvent at the time
  • the co-operative becomes insolvent by incurring the debt
  • there are reasonable grounds for suspecting that the co-operative is insolvent or would become insolvent.

Defences available to directors under this duty will be based upon what constitutes reasonable grounds and other matters.