As a director, you have the exciting but challenging opportunity to govern a company on behalf of all the shareholders. It is useful to keep in mind that despite the fact that you are protected to an extent by the rules of limited liability, there are still certain duties that you must uphold under the Corporations Act 2001.
Who are directors?
The Corporations Act defines directors as those individuals who satisfy the following criteria:
- A person validly appointed as a director;
- A person who acts in the position of a director even if he/she has not been validly appointed; and
- A person who gives instructions that other individuals within the company are accustomed to following
There are four basic duties that directors must uphold. These are set out as follows:
- To act with care and diligence. A breach of this role would be to enter into risky financial transactions without any foreseeable benefit for the company.
- To act in good faith, in the best interests of the company and for a proper purpose. This duty is similar the fiduciary duties that are imposed on directors in common law and general legislation. Directors must avoid conflicts of interests and always disclose to the company when a potential conflict of interest may arise in a particular situation.
- To not use the position of director improperly. A breach of this duty would be to use your position of power and influence to take advantage of another party in the company or to act in the detriment of the company.
- To not use information that is gained during the course of your duties as a director improperly. Improper use would include gaining advantage for yourself or to act in a way that detriments the company or disadvantages other parties within the company.
Duty not to trade while insolvent
Directors have a duty to prevent their company from trading if it is insolvent or if you suspect that your company is becoming insolvent. The best way to assess insolvency is whether or not your company can pay all debts when they are due. If your company can pay debts on time then it is solvent however, if it cannot do this then chances are your company is becoming insolvent. So as a director you must also consider if your company can repay a debt every time the company enters in to a new transaction.
Duty to keep books and records
You also have a duty to ensure that your company keeps adequate records of financial information. Financial information includes records and books that outline all the transactions that your company is entering into, the company’s financial standing and any other related issues.
Disclosing your interests
You must also consistently disclose any personal interest that you may have in relation to any matter that relates to 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. However, sometimes it may be unclear whether or not you must disclose an interest that you may have in a matter since it may not directly relate to your company’s affairs. In such situations, it is probably to act cautiously and disclose any information that you suspect may relate to your company’s affair even it is indirectly.
Lodging information with ASIC
The Corporations Act also places upon directors the duty to lodge certain information with governmental bodies such as ASIC. It is a requirement that you lodge formal financial reports and records to ASIC on a regular basis. Financial records include, but are not limited to:
the general ledger which should record your company’s transactions and balances
- creditor and purchases records
- cash records
- debtor and sales records
- deeds, contracts and agreements
- tax returns and calculations
- investment records
- inventory records
- 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’s duties. The consequences that apply will depend on the type of breach committed and the severity of the breach. However, breaches of director’s duties are not taken lightly due to the enormous amount of power that you wield within a company that simply should not be abused under any circumstances. Some consequences are:
- Criminal sanctions that could include imprisonment for anti-competitive conduct, acting in bad faith or dishonestly;
- Civil sanctions such as fines;
- Disqualification from your position as director; and
- Commercial consequences that include placing at risk your company’s reputation and assets
As a director, it is very important that you have a thorough understanding of your duties under Australian law. For this reason, it may be a good idea for you to get legal advice about your role if you are in doubt or if you need to review your company documents.