The Christmas/New Year period often gives us a chance to slow down a little and catch up on the things we have been meaning to do all year.
This can include brushing up on all those regulatory requirements involved in running a business, just to make sure you stay on the right side of the law in the coming year.
Along those lines, something that is often assumed, but not always known in detail, is the Duties of Company Directors, which are set out in the Corporations Act and at common law.
This can be challenging for many business owners, who often find it hard to draw the distinction between themselves and the Company they set up. Your thoughts may well be “After all, it’s my company, so surely I can do what I want with it?”. Of course, you can do what you want as a director, but some of those things have legal (and many times tax) consequences that you need to be aware of. For while you might think it’s your company (and therefore largely interchangeable with yourself), the courts and the ATO take the view that a Company is a separate legal identity, and therefore directors have a duty to look after it.
A selection of the key duties of directors include:
- Acting in good faith in the best interests of the Company.
In practice, this duty requires each director to:
- become familiar (and maintain familiarity) with the fundamentals of the business or businesses of the organisation;
- stay informed and make appropriate inquiries about the organisation’s activities;
- monitor, generally, the organisation’s affairs and policies;
- maintain familiarity with the organisation’s financial status by appropriate means, including review of its financial statements and board papers and make further inquiries into matters revealed by those documents where appropriate; and
- have an informed opinion of the organisation’s financial capacity and solvency.
In short, when something goes wrong, it is not sufficient for a director to say, “I didn’t know.” As a director, it is your job to know!
Even for companies that have only one (1) director, they will still have a variety of stakeholders, such as customers, employees, community and the environment. The best interests of all these parties must be considered in decision making.
There will also be certain circumstances where the interests of specific groups may be paramount – such as the interests of creditors where the company is insolvent or approaching insolvency, or the interests of shareholders in the context of a business sale.
- Not improperly using Information or Position
A director’s fiduciary duty exists to prevent conflicts of interests, and the obligation to act only in the best interests of the company. Where there are multiple directors, a director must disclose – to other directors of their company – the nature and extent of matters relating to the affairs of the company in which he/she has a material personal interest.
- Prevent Insolvent Trading
Directors will be personally liable for certain debts which are incurred if:
- they are a director at the time when the company incurs the debt;
- the company is insolvent at that time, or becomes insolvent by incurring that debt; and
- at that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.
Even if you are not an accountant, it is important to have at least some grasp of the financial position of the entity.
- Financial Record-Keeping and Reporting
Directors have an obligation to take reasonable steps to ensure that their company complies with its obligations under the Corporations Act in relation to the keeping of financial records and financial reporting.
While in practice this often involves outsourcing the work to an accountant, directors must still apply their own minds (rather than rely solely on advice) when reviewing financial statements, and they must satisfy themselves that this information is consistent with their knowledge of the company’s affairs.
- Financial services, consumer law, the environment and OH&S
There are a myriad of other laws and regulations that can impact directors duties. Realistically, directors will need to turn to other sources for advice on this.
As an example, the Australian Institute of Company Directors (AICD) publishes a Director Tool: Directors’ legal and regulatory environments.
- There are Penalties for Getting it Wrong
These can include:
- Criminal sanctions exist for breach of certain duties under the Corporations Act.
For example, contravention of the duty of good faith or improper use of information or position, if it involves dishonesty or recklessness, is punishable by substantial fines and potential imprisonment for up to 15 years. It is also illegal for a corporation to indemnify its officers against legal costs and any financial penalty for this behaviour;
- Civil sanctions can make a director liable to a substantial fine. Shareholders or others (for example, creditors) may also act against directors who have failed to comply with their duties;
- Disqualification: Both ASIC and the courts have the power to disqualify directors for prolonged periods of time for failure to comply with their duties under the Corporations Act; and
- Commercial implications include loss of reputation for directors and their businesses.
Being a company director comes with significant responsibilities that extend beyond simply running a business. Directors must navigate a complex web of legal, financial, and ethical obligations to ensure the company’s success while safeguarding its stakeholders’ interests. As the new year approaches, take the opportunity to reflect on these duties and ensure you are fully informed about your obligations.
By doing so, you can mitigate risks, make better decisions, and contribute to a sustainable and compliant business environment. Remember, knowledge is power – and in the realm of directorship, it’s also your best defence.
Should you need assistance in navigating these responsibilities, our team is here to help you empower success and ensure your business thrives.