A company director is responsible for the management of the business’ activities and, once appointed, owe various fiduciary duties to their company. They are obligated to follow the duties set out in the Corporations Act 2001 (Corporations Act), as well as those imposed by other laws. If a director is unable to fulfil these duties or acts dishonestly in discharging those duties, she or he may be exposed to personal liability, including civil and criminal penalties and liability for damages, while their company may suffer severe financial detriment. This article will briefly outline the scope of the duty, some significant general and specific duties of a director as well as the company responsibilities.
The Scope of the Duty
Directors must abide by laws applying to their company’s operations, and owe a primary duty to their shareholders. In instances of insolvency, or where there is a real risk of insolvency, those duties expand to include creditors.
1. Duty to Act in Good Faith
Directors must act in good faith, in the best interests of the company and for a proper purpose. This duty expands beyond general honesty and requires directors to exercise independent and considered judgment when assessing the best interests of the company.
2. Duty to Exercise Care and Diligence
A director must exercise his or her powers and duties with the care and diligence a reasonable person would have, including taking steps to ensure they are adequately informed about the financial position of the company.
3. Duty to Avoid and Disclose Conflicts of Interest
Directors must disclose all material personal interests related to the company’s affairs. Further, a director must notify the board of directors as soon as they become aware that a conflict of interest exists.
For directors of a proprietary company, provided the other directors are made acutely aware of the nature and extent of the existing conflict, there is no need to give notice.
4. Duty Not to Abuse a Corporate Opportunity
Directors must not take advantage of a corporate opportunity for personal gain and at the expense of the company. A director may pursue the opportunity independently after the company has considered and rejected it, and after meeting the necessary disclosure requirements.
5. Duty Not to Improperly Use Their Position or Information
A director, secretary, officer or employee must not improperly use their position or acquired knowledge to gain an advantage or to cause detriment to the company.
Improper use is an objective standard, and so a director may unintentionally act improperly. The director’s state of mind may be relevant if they reasonably, but mistakenly, believe they acted genuinely for the company’s best interests.
6. Duty Not to Engage in Insolvent Trading
A director must prevent the company trading while insolvent, or trade in a manner that would bring about insolvency. A director will breach this duty when he or she is aware that the company has incurred a debt and is unable, or will become unable, to pay its debts as and when they fall due. In this instance, a director exposes themselves to personal liability for the debt and may be ordered to compensate the company or its creditors.
7. Duty to Keep Proper Accounts and Records
Directors must ensure the company prepares a financial report and a directors’ report each financial year and must inform themselves of accounting and recording obligations of their company depending on its size and type.
Where the company is being wound up, directors have a duty to:
- Report to the liquidator on the affairs of the company; and
- Assist the liquidator in discharging their duties (this may involve providing the liquidator with the company books and any records the director has in their possession).
What are the Company’s Responsibilities?
Under the Corporations Act, directors must ensure the company complies with the following requirements:
- Registers an office in Australia and informs ASIC of its location;
- Has a principal place of business and informs ASIC where this differs to the registered office;
- Discloses personal details of directors to ASIC, including their names, dates of birth and current residential addresses;
- Maintains correct, up-to-date financial records that record and explain transactions and the company’s financial position. For larger companies, there may be additional obligations to lodge financial reports with ASIC;
- Notifies ASIC of any key changes to registered company information within a reasonable period;
- Checks the company’s annual statements on the ASIC register and ensure they are accurate and up-to-date
Failing to understand the extent of your duties as a director can result in severe consequences, and it’s important you take steps to understand your obligations to the company, shareholders and creditors. If you have any questions about discharging your duties, get in touch with our commercial lawyers on 1300 544 755.