As a director, you have the opportunity to govern on behalf of a company and its shareholders. While the company enjoys its own legal identity, granting its directors and shareholders limited liability, you should always remember that you have certain duties to uphold as a director. This article will discuss some of your duties as well as the consequences of breaching them.
Definition of ‘Director’
The Corporations Act defines directors as individuals who satisfy the following criteria:
- validly appointed as a director;
- acts in the position of a director even if they have not been validly appointed; and
- gives instructions that other individuals within the company are accustomed to following.
General Duties
As a director, there are several duties that you owe to the company. We unpack these below.
Act With Care and Diligence
You are required to be reasonably careful and diligent when making decisions. This is an effective risk management strategy that ensures the company does not experience any inadvertent losses. An example would be making sure you thoroughly review financial transactions or financial reports before coming to a decision about company spending.
Act in Good Faith
As a director and representative of the company, you must strive to act with a proper purpose. This means working honestly and in the company’s best interests. For example, you should not enter into a financial transaction that would enrich yourself but cause the company serious risk.
Prevent Trading While Insolvent
You have a duty to prevent your company from trading if it is insolvent or if you reasonably suspect it is becoming insolvent. The best way to assess solvency is to determine whether or not your company can pay all debts when they fall due. If your company can pay debts on time, then it is solvent. However, if you are struggling to pay your debts in a timely manner, your company is likely insolvent or becoming insolvent. As a director, you must also consider if your company can repay a debt every time it enters into a new transaction.
Avoid Misusing Information
As a company director, you have access to information fundamental to the company’s operation, including:
- contracts;
- financial reports;
- share transactions;
- meeting records; and
- other documents outlined in the company’s constitution.
You cannot use this information to benefit yourself at the expense of the company and its shareholders.
Keep Books and Records
As a director, you also have a general duty to ensure your company maintains adequate financial and governance records. These include financial information that outlines all the transactions that your company is entering into, the company’s financial standing and any other related issues.
Disclose Your Personal Interests
When governing the company, you must disclose any personal interest you have regarding the company’s affairs. This is a serious obligation, as you cannot use your position to gain material advantage for yourself to the detriment of the company, its directors and its shareholders. However, sometimes it may be unclear if you need to disclose an interest that you may have. This is especially so for matters that do not directly relate to your company’s affairs. In such situations, you should act cautiously and disclose any information that you suspect may be relevant, even if such interest seems ambiguously related.
Continue reading this article below the formLodging Information With ASIC
The Corporations Act also places various general obligations upon directors to lodge certain information with the Australian Securities & Investments Commission (ASIC). You must lodge, for example, formal financial reports and records to ASIC on a regular basis. Financial records include, but are not limited to:
- the general ledger, which records your company’s transactions and balances;
- creditor (when your company loans money to other parties) and purchases records;
- cash records;
- debtor (when your company owes other parties) and sales records;
- deeds, contracts and agreements;
- tax returns and calculations;
- investment records;
- inventory records; and
- wage and superannuation records of staff
Consequences for Breaching Director’s Duties
There is a range of legal consequences that you may face if you breach your director duties. The consequences that apply will depend on the type and nature of the breach you have committed. Breach of your duties as a director is a serious matter, given the significant amount of authority you exercise in governing the company. Consequences for breaching your duties can include:
- criminal punishment that could include imprisonment;
- civil penalties (fines);
- disqualification as director; and
- commercial consequences such as reputation damage to your company.
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.
Key Takeaways
As a director, you are in a powerful position that you should take seriously and with reasonable care. It is very important that you have a thorough understanding of your duties under Australian law and your company documents. Some general duties may include a duty to:
- act with care, diligence and in good faith;
- prevent trading while insolvent;
- not misuse information;
- keep books and records; and
- disclose your personal interests.
If you would like assistance regarding compliance with director duties, contact our experienced business and commercial 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
While this question may seem straightforward, many of the director’s duties also apply to your company’s “officers”. Officers include any person who participates in or significantly affects high-level company decisions. An example could be a general manager who is not appointed as a director.
One defence you can raise if you have breached your director’s duties is the reliance defence. This arises if f you have breached one of your director’s duties because you relied on information from an employee or advisor that you reasonably thought was competent.. However, a court will ultimately determine this, and you must be able to show that you individually assessed the information, considering your overall knowledge of the business.
Not necessarily. Your duties compel you to cooperate with and assist the liquidator or the individual who sells your company assets when it becomes bankrupt (if one is appointed). You are also still obliged to maintain company records even after the company is wound up.
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