10 Dos and Don’ts of Being a Company Director

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Table of Contents

• 1. Do Put the Company First
• 2. Do Act in Good Faith
• 3. Do Take Care
• 4. Don’t Act in Situations Involving Conflicts of Interest  
• 5. Do Keep on Top of Finances
• 6. Don’t Trade While Insolvent 
• 7. Do Maintain the Company’s Records
• 8. Don’t Miss Deadlines
• 9. Do Be Ethical
• 10. Don’t Sign Director’s Guarantees Without Careful Thought
• Key Takeaways
• Frequently Asked Questions

Being a director of a company in Australia comes with a number of legal obligations and duties. If you fail to fulfil these duties and obligations you can face serious penalties, including fines and even criminal charges in some cases. This article will set out the key considerations you should know as a director, as well as the legal risks and penalties you may face for non-compliance with your obligations.

1. Do Put the Company First

As a director, your first duty is to the company. Any decisions you make relating to the company must be in the best interests of the company as a whole and its shareholders. You must not make any decisions that specifically benefit you or another person. 

For example, suppose you are required to vote to approve a commercial transaction that will benefit you personally but is not strategically in the company’s best interests. Your decision should be against the transaction. This is because you are supposed to act consistently in the company’s best interests and not your own. 

Directors should familiarise themselves with the duties set out in the Corporations Act 2001 and the company’s constitution (if any). Legally, directors have duties to, among other things: 

• act in good faith;
• exercise care and diligence; and
• avoid conflicts of interest. 

We will discuss these duties in more depth below. 

2. Do Act in Good Faith

As a director, you must ensure that you exercise your powers in good faith in the best interests of the company. Your actions should be carefully considered and based on reasonable, independent judgment. You should not act dishonestly or for an improper purpose. To exercise proper purpose, you must use the power that has been given to you in accordance with the objective purpose of this power.

Broadly, an improper purpose arises when a director uses their position to gain an advantage for themselves or someone else to the detriment of the company. This does not mean that a decision cannot benefit you. A decision that benefits both you personally and the company generally is not necessarily one made in bad faith. Acting in good faith relates to your state of mind when you make a particular decision. At the time you made the decision, you must honestly believe it was in the best interests of the company. This belief also has to be reasonable.

3. Do Take Care

Directors must act with care and diligence in discharging their duties. The test to determine whether the correct degree of care and diligence is being exercised is what is known as a reasonable person test. A reasonable person is a person who is of average care, caution and consideration. This test means that the degree of care and diligence of a reasonable person in the position of the director of a Company would act in this way under the circumstances and if they occupied the office of the director of a Company. To ensure you meet these requirements, carefully consider and engage in the operations, finances and activities of the Company.  

As such, it is recommended that directors maintain comprehensive records about:

• board meetings; 
• shareholder meetings;
• corporate decisions;
• processes; and
• the financial and operational performance of the business. 

This will allow directors to periodically assess the company’s performance and strategic direction against the business plan. When necessary, you, as a director, can make the necessary adjustments to ensure the business meets its goals. When in doubt, you should seek professional advice. Engage with legal, financial, commercial and other experts to ensure that your decisions are informed.

4. Don’t Act in Situations Involving Conflicts of Interest  

As a director, it is your responsibility to be aware of any conflicts that may exist or arise between your interests and those of the company. You must disclose all material personal interests related to the company’s affairs. A material personal interest is an interest that may give rise to conflicts in the ability for you to act in your capacity as a director for your company. Further, you must notify the company’s board of directors as soon as any potential conflicts or concerns arise. Where a conflict arises, you may be required to abstain from voting on a particular matter or decision. You must not improperly use your position or the information that is available to you as a director. In the course of your business activities, you must not act in ways that counteract, divert or misappropriate your company’s business objectives.

As above, when in doubt, seek professional advice as to whether a conflict exists. Professional advisers can also help you determine how this conflict should be managed.  

For example, a common conflict of interest arises when a person is a director of two different competitor companies. A conflict of interest may also arise where one company is seeking to obtain goods and/or services from a contractor. As it happens, you as a director may engage this contractor due to your personal relationship with them. This is despite other contractors offering equivalent or superior goods and/or services for a better price. This is a clear conflict of interest scenario you need to avoid. Here, hypothetically, you have let your personal interests conflict with the best interests of the company. This is unacceptable, as you must act in furtherance of the company’s best interests at all times.

5. Do Keep on Top of Finances

As a director, you should regularly: 

• review the company’s books, records, financial reports and accounts as compared with the company’s budget, business plan and key performance metrics; 
• consult the employee, team and/or professionals responsible for maintaining those records, as they can help you interpret the data in a meaningful way; and
• keep in regular contact with your accountant and, if necessary, an insolvency advisor if you suspect that your company may be trading insolvent.

Directors, at all times, should be acutely aware of the company’s financial position. If you are aware of the company’s finances, you can appreciate what factors will impact the company’s performance. Further, you will be able to foresee the potential strategic outcomes of board decisions. Act quickly if you become aware of any suspicions that your company is trading insolvent by reviewing, investigating and getting advice.

6. Don’t Trade While Insolvent 

Directors must not trade while insolvent. Your company is trading insolvent as soon as it cannot pay its debts when they fall due and payable. When reviewing the company’s finances, you should consider the company’s “runway”. This refers to the length of time that the company can continue to operate before it exhausts its current funds. This metric takes into account your company’s cash on hand, its operating proceeds, and its expenses. 

For example, trading insolvent would mean that you were trading for months, and you could not pay your debts when they fell due before your company went into liquidation. This is a key example of why you should be up to date with all the financial affairs of your company and act with care and diligence. As soon as you become aware or suspect your company is trading insolvently, address the issue immediately to prevent further insolvent trading and complications.

Trading while insolvent may result in you having to pay a significant financial penalty due to breaching your directors’ duties. In the worst case scenario, you may even face a term of imprisonment if your conduct was fraudulent or dishonest. 

7. Do Maintain the Company’s Records

Companies are required to maintain and make available for inspection at their registered office, certain books, documents, reports and records. Some important types of records are:

• Register of Members: This is a record of all of the company’s shareholders and any transactions involving the company’s share capital. This includes share issues, transfers, divisions and conversions. The Register must include certain information under the Corporations Act. This information includes personal details about each member, such as their name and address. It also must include information covering the number and class of shares they hold. Further the register should also track the amount paid and unpaid on those shares. Whether the shares are being held for the benefit of a trust should also be reflected in the Register. 
• Minute Book of Members’ Meetings: Minutes refer to meeting notes that set out the critical items discussed at a meeting. Minutes of a meeting also include any motions proposed or voted on and activities to be undertaken as a result. As such, minutes of each meeting of the company’s shareholders must be kept and recorded in a minute book. This must be done within one month of the relevant meeting.
• Minute Book of Directors’ Meetings: Minutes of each meeting of the company’s board of directors must be kept and recorded in a minute book. This must be done within one month of the relevant meeting.
• Financial Records: Certain financial records in relation to your business’s income and expenses must be kept for a minimum of seven years. These financial records pertain to invoices, receipts, cheques and accounting ledgers. This seven-year period activates after the transactions covered by the records are complete.
• The Company’s Constitution.

Change of Company Details Obligation

In addition, the directors must notify the Australian Securities and Investments Commission (ASIC) of various changes to the company details, including: 

• changes to the company’s address; 
• appointing or ceasing company officeholders; 
• changes to the company’s share structure (including share issues or the creation of new share classes, share divisions and conversions); 
• transferring shares; and
• appointing or ceasing members. 

8. Don’t Miss Deadlines

As a director, you must ensure that the company meets all deadlines for payments and ASIC reporting dates. There are a number of annual reporting and repayment requirements applicable to companies. For example, the directors must ensure that the annual company fees are paid in full and on time. If you fail to meet these deadlines, you may receive a financial penalty. Furthermore, the company may be deregistered.

In addition, as a director, you should familiarise yourself with the regulatory and reporting obligations that apply to your company and operating industry. Certain government and administrative bodies regulate particular industries and may have different reporting obligations than others.

It is perfectly normal if you are unsure of the regulatory, reporting and compliance obligations applicable to your company. If you are unsure about this, you should speak to a lawyer who specialises in providing thorough regulatory advice. 

9. Do Be Ethical

In every action relating to the company, directors must act ethically and must not improperly use their position or acquired knowledge to gain a personal advantage or damage the company. 

10. Don’t Sign Director’s Guarantees Without Careful Thought

Be aware of the personal risk that comes with signing a director’s guarantee. A director’s guarantee means you agree to be personally responsible for certain debts if the company fails to pay them. In most cases, that responsibility lasts forever, even if: 

• you stop being a director for the company; or
• the company stops operating.   

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.

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Key Takeaways

There is no exhaustive list of all of the things you should consider when acting as a director of a company. Instead, navigating the role of a company director requires a careful balance of legal compliance, ethical conduct, and strategic decision-making. Some of your key responsibilities, which are critical to the success and sustainability of the business and compliance with Australian law, are as follows:

• acting in good faith in the best interests of the company and for a proper purpose; 
• avoiding situations involving conflicts of interest; 
• exercising care and diligence when making decisions; 
• not trading while insolvent; 
• monitoring the company’s finances and key business drivers; 
• maintaining the company’s books and records; 
• complying with regulatory and reporting obligations and deadlines;  
• being ethical in all your actions as director; and 
• don’t sign any director’s guarantees without careful thought. 

If you need any help understanding what directors duties you owe, contact our experienced business lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.  

Frequently Asked Questions