All Australian proprietary companies (Pty Ltd) are required to have at least one director whom resides in Australia. By having your company in a Pty Ltd structure, this shields your personal assets from liability due to the fact 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 in Australia are designed to promote good governance and ensure that directors act in the interests of the company – including putting the company’s interests ahead of their own. The Corporations Act 2001 (Cth) (the legislation that governs Australian businesses) 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 and proper use of information.
The Duty of Care and Diligence
Directors have a duty to act with the degree of care and diligence that a reasonable person might be expected to show in the role. This includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent.
The duty to prevent insolvent is a positive duty meaning you must be aware of company’s financial position at ALL times, and, at no point allow your company to continue trading when you CAN NOT pay your debts when they become due. IF you are found to be trading whilst insolvent you may be acting illegally and in breach of the civil and criminal provision under the Corporations. To assist in determining whether your company is trading solvent:
- The cash flow of the company – You need to determine whether your company’s anticipated current and future cash flow will be sufficient to enable it to pay current and future debts as and well they fall due;
- the financial position of the company in terms of the assets and debts it has as a whole – Can the company 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.
The Duty to act in Good Faith
Directors have a duty to act in good faith in the best interests of the company 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, for example, a director assumes the company’s interests correspond with their own interests, and do not consider its interests as a separate entity.
The Duty to Properly use 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.
The Duty to properly use 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.
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 minumum 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 .
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