Directors duties are prescribed behaviours and rules that a person must follow when acting as a director (or shadow director) of a company. If you are a director of an Australian company, it is vital that you are aware of and understand your duties and obligations. You must also understand what happens if you fail to comply with your obligations. Breaching your duties can have serious consequences for both you and your company. This article explains the legal obligations and duties you must comply with in your capacity as a director and the consequences for breaching director duties.
Eligibility to be a Director
To be a director of an Australian company, you must:
- be at least 18 years of age; and
- provide written consent to take on the role and responsibilities of a director prior to your appointment.
Furthermore, you must not be deemed an ‘excluded person’ by ASIC, meaning:
- you are bankrupt; or
- you have been disqualified by ASIC from becoming a director of a company.
Before becoming a director of any company, you must ensure that you fully understand your role and legal obligations regarding the company’s management.
Your company must keep the written consent and update ASIC within 28 days (including non-business days) of the director appointment occurring.
Legal Obligations as a Director
Once you are appointed as a company director, it is important that you know your legal obligations and duties. These duties are set out in the:
- law;
- company’s constitution; and
- company’s shareholder agreement.
The consequences for failure to comply with these duties and obligations can be severe. Therefore, you must understand how to minimise all risks from the start.
First, it is crucial to understand that a company is a separate legal entity. This means that the company’s assets are the company’s and not yours personally. You must understand and treat the company as a separate legal entity. Doing so will ensure that you put its interests first above all else and subsequently comply with the obligations required by law.
Key legal obligations that a director must comply with include the following:
- duty to exercise reasonable care and diligence in the management of the company;
- duty to act in good faith in the best interests of the company and for a proper purpose;
- duty not to improperly use information or your position to gain an advantage for yourself or someone else or to cause detriment to your company;
- duty to notify other directors of material personal interest when conflict arises;
- duty to avoid any conflicts of interest between yourself and the company;
- duty to properly manage the finances of the company and ensure that the company does not trade while it’s unable to pay its debts (insolvent); and
- duty to assist in the winding up of the company.
Consequences of Breaching Your Duties
There are certain directors’ duties that attract civil penalties and certain others that attract criminal penalties.
In the event that the company is to be wound up, the liquidators of the company may commence legal action against the director. This action may be for a breach of the director’s duties, particularly if there are allegations of personal liability.
ASIC may also receive a report about the breaches of director duties and decide to conduct an investigation. Depending on which breach of duty is being investigated, criminal proceedings may also commence against you.
Personal Liability for Breaching Your Duties
Generally speaking, the debts of the company will remain with the company. However, there are circumstances where the company’s debts become the personal liability of the director. The key circumstances where a director may be personally responsible for the company’s debts include:
- when a director breaches their duties and causes a company loss;
- when the company becomes insolvent;
- where a director acts as a guarantor; and
- when the director registers a new company to take over the previously insolvent business (known as illegal phoenix activity).
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.
What if I Have Breached My Directors Duties?
If you believe you have breached your directors’ duties, you must obtain independent financial and legal advice as soon as possible. The consequences of a breach of these duties are serious, and it is important that you try to mitigate your potential liability quickly and efficiently. Going forward, you must also ensure you comply with the:
- law;
- company’s constitution; and
- shareholders agreement.
Key Takeaways
The consequences for a breach of director duties are serious and could leave you personally liable for the company’s debts. You could also have to pay severe financial penalties. To avoid this, you must understand your legal duties and obligations and have the right legal and financial team behind you.
If you require advice in understanding or managing your obligations or believe that you may have breached your duties, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Some of the legal duties and obligations that a director must comply with include the duty to:
- exercise reasonable care and diligence in the management of the company;
- act in good faith and the best interests of the company and for a proper purpose;
- not to improperly use information or your position to gain an advantage for yourself or someone else or to cause detriment to your company;
- notify other directors of material personal interest when conflict arises;
- avoid any conflicts of interest between yourself and the company;
- not improperly use information or your position;
- properly manage the finances of the company and ensure that the company does not trade while it’s unable to pay its debts (insolvent); and
- assist in the winding up of the company.
You could be personally liable for your company’s debts or criminal penalties, depending on your actions.
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