When you invest in a company, you become a shareholder and own shares. As a shareholder, you are not personally liable for the company’s debts and have rights contained in the following:
- replaceable rules in the Corporations Act 2001 (Cth);
- common law (for example, the duty of confidentiality applies to any confidential information you receive);
- the company’s constitution (if the company has one); and
- any shareholders agreement.
If you are a shareholder and a director, it is important to understand that as you have additional duties under the Corporations Act 2001 (Cth) (the Act). Directors direct and guide the company. The Board considers key issues including strategy, direction and material issues. Executive directors (who work in the business) and non-executive directors (who don’t work in the business) make up the board. The replaceable rules, common law, company constitution and shareholders agreement set out their obligations, which include:
- exercising their power in good faith, in the best interests of the company, and for a proper purpose;
- exercising their powers and duties with the care and diligence that a reasonable person in a similar situation would;
- avoid conflicts of interests with the company;
- not improperly use their position as a director or information they obtain as a director to gain a personal advantage; and
- not cause detriment to the company.
A director also has financial duties, including:
- taking reasonable steps to ensure that the company maintains adequate financial records;
- exercising their power and duties with care and diligence, such as taking steps to ensure they are adequately informed about the company’s financial position; and
- taking reasonable steps to ensure the company doesn’t trade while insolvent.
Directors may be personally liable in certain circumstances, for example:
- debts incurred if the company trades while insolvent;
- losses you cause the company if you breach your director’s duties; and/or
- debts of the company that you guarantee as a director.
If you fail to perform or actively breach your duties as a director, you may be guilty of a criminal offence. This has a penalty of up $200,000 or imprisonment for up to five years or both. You may also be liable for a civil penalty provision, and the court can order you to pay up to $200,000 to the Commonwealth.
How Can You Manage Your Risk
Three key steps to managing both the company and personal risks as a director are as follows:
- Be across your rights and obligations under the Act, your company constitution and any shareholders agreement.
- Ensure there are regular Board meetings, actively seek information and ask pertinent questions and review the accounts regularly.
- Ensure the company has good comprehensive directors and officers insurance. Directors often seek a deed of access, indemnity and insurance to supplement this.
LegalVision has considerable experience incorporating companies and assisting founders. If you have any questions or would like to discuss directors duties and risk management, get in touch with our commercial lawyers on 1300 544 755.