Most businesses in Australia are run through a company. Almost invariably then, if you’re a business owner, you will also be a company director.
You may even be a director of a company, but have little to do with running its business. For example, your spouse may have asked you to be a director.
Whatever the case, as a company director, you owe a number of strict legal obligations, known as director’s duties. If you fail to uphold these, the law can impose severe penalties, even jail in extreme cases. It is therefore essential to have at least a working knowledge of what these duties involve.
The rest of this article provides a summary of some of the main obligations of company directors in Australia.
The requirement to carry out your role as a director with due care and diligence
In layperson’s terms, as a director, you have a duty to take an active interest in company business.
While your position within the company is relevant to determining the extent of your obligations, there are certain minimum requirements. Even if you are appointed as a director at the behest of your spouse, for example, and have little to do with running the business, you are still expected to fulfil these requirements.
They include:
- A requirement to familiarise yourself with the fundamentals of the business and its operations;
- A requirement to keep yourself informed about the activities of the business (this is a positive obligation, meaning you must make regular inquiries about business operations);
- A requirement to be up to speed with the financials of the business (to meet this obligation you need to be able to read and understand financial reports);
- A requirement to have a reasonably informed opinion concerning the financial position of the business and its solvency;
- A requirement to carefully read and independently consider any financial report or director’s report the company is required to prepare under the Corporations Act (in particular, you must consider whether the reports you review are consistent with your own knowledge concerning the business and whether they include all material facts - if you are uncertain, you are expected to make reasonable inquiries); and
- A requirement to attend board meetings and to pay attention to what is being said.
Duties to act in good and faith and for a proper purpose and not to misuse company information or your position as a Director
While there are many facets to these duties that go beyond the scope of this article, the most important obligation you need to be aware of is that you must not use information, or opportunities, you come across in your capacity as a director for your own personal gain.
For example, as a director, you may become aware of certain profitable business opportunities. These are considered to belong to the company and taking advantage of them personally without company authorisation is a breach of your director’s duties that will leave you liable to the company and potentially open to prosecution by ASIC.
The duty to prevent insolvent trading
This is a big one. The reason being, if you fail in your duty to prevent the company from trading whilst insolvent and it incurs debts it cannot later pay, you may become personally liable for these debts, which can later be pursued by a liquidator.
Under Australian law, a company is insolvent if it cannot pay its debts as and when they fall due. To comply with your duty to act with due care and diligence, you must be aware of the company’s financial position and if it’s looking shaky, you are expected to turn your mind to whether the company is insolvent. If it is, it must cease trading.
It is a good defence to a claim for insolvent trading if you can honestly say that after making reasonable inquiries, you believed the company to be solvent.
The Disclaimer
Finally, the disclaimer! This article is not intended to be a comprehensive account of the legal obligations of company directors in Australia. As the title suggests, it is a layperson’s guide and provides no more than a brief summary of some of the main obligations of directors. We are not lawyers, and this article is not intended as, and should not be substituted for, legal advice.
If you are concerned about your position as a company director, you should engage a trusted corporate lawyer to advise you.