Whether you’re already a director of a company, or if you want to be – as a director you have strict obligations to uphold. Further, it’s important to know what your duties are under the Corporations Act.
All Australian proprietary companies (Pty Ltd) are required to have at least one director. By having your company in a Pty Ltd structure, this shields your personal assets from liability. This is because a company is considered a separate legal entity in most circumstances.
Accordingly, it is vital that each director(s) understand their director’s duties under the Corporation Act (2001). Directors’ duties are designed to promote good governance and ensure that directors act in the interests of the company. Further, the Corporations Act 2001 (Cth) governs directors duties. It states that “the business of a company is to be managed by or under the direction of the directors”.
What are Director’s Duties?
Becoming a company Director allows you to play a role in governing the growth and operation of the business. However, all directors have certain basic legal duties and responsibilities that they must abide by.
The Corporations Act consists of four main duties which are:
- Care and diligence
- Good faith
- Proper use of position
- Proper use of information
Care and Diligence
As a director, you have a duty to act with the same degree of care and diligence that a reasonable person does. This includes taking steps to ensure you are properly informed about the financial position of the company. Further, you must ensure that the company doesn’t trade if it is insolvent.
The duty to prevent insolvency is a positive duty, therefore meaning you must be aware of company’s financial position. Further, you need to be aware of it at all times. At no point can you allow your company to continue trading when you cannot pay your debts when due. If you are found to be trading whilst insolvent, you may in fact be acting illegally. This is because it is likely to be in breach of the civil and criminal provision under the Corporations.
To assist in determining whether your company is trading whilst insolvent you should be familiar with:
The cash flow of the company
You need to determine whether your company’s anticipated current and future cash flow is sustainable. This depends on whether it is able to pay current and future debts as and well they fall due.
Assets and debts of your company
You should have a solid knowledge of the financial position of the company. This is mainly in terms of the assets and debts it has as a whole because these contribute to your company’s worth. Ask yourself if the company can liquidate (e.g. sell) sufficient assets to pay debts as and when the fall due.
The duty to prevent insolvent trading is not diminished by delegating responsibility. Directors are unable to hide behind ignorance of the company’s affairs, where that ignorance is of their own making.
Acting in Good Faith
Directors have a duty to act in good faith and for a proper purpose. This requires the Directors to avoid conflicts of interest, and to reveal and manage conflicts if they arise. Directors may breach this duty where they fail to give proper consideration to the company’s interests. This may occur where a director assumes the company’s interests correspond with their own interests. However, this is problematic because a director should consider the company’s interests as a separate entity.
Properly using your Position
Directors have a duty not to improperly use their position to gain an advantage for themselves or someone else or to the detriment to the company. This might include obtaining an advantage for themselves, or defeating the voting power of existing shareholders by creating a new majority (as the power to issue shares must be exercised in the interests of the company as a whole). A proper purpose could be for the raising of capital or taking advantage of a genuine commercially favourable opportunity.
Properly using information
Directors must not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else or to the detriment to the company. A director may be in breach of this duty for engaging in conduct with the purpose and intention of obtaining a benefit for anyone or causing a detriment to the company, regardless of whether it actually occurs.
Adhering to your constitution
In addition to the Corporations Act, a corporation’s internal management rules can also provide guidance on directors’ duties by specifically stating obligations in the company constitution.
It is important to note that even a minor breach of directors duties can attract serious criminal and civil penalties against the directors. Dishonest behaviour or trading while the company is insolvent can lead to maximum penalty of $200,000 or five years imprisonment. Other penalties include compensation to the corporation for damage resulting from the contravention or disqualification from managing corporations.
Being a director of a company is an important role in any company and a great way for you to broaden your skill sets. A Director of any company sets the tone from the top down, accordingly, it is vital that you act with due care and skill and meet the above requirements at a minimum whilst partaking in these activities. Importantly, if you are unsure or unclear about your duties to the company as a director seek legal advice from one of our trusted partners in our legal network.
Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.