Australian Company Directors have a number of duties imposed on them by not only the Corporations Act 2001 (“Corporations Act”), but also by other legislation as well as common law. It is important for Directors to understand their duties when conducting the business of the company and to whom these duties are owed. Each company has a myriad of laws and regulations to which it must adhere and which may relate to the specific industry in which it trades, however this piece deals only with the duties and obligations that arise under the Corporations Act as they apply to Directors.
Consequences of breaching Director’s Duty laws can include civil and criminal sanctions, disqualification and director banning and commercial and reputational issues.
The Corporations Act defines “Director” as:
- A person validly appointed as a director or an alternate director;
- A person, even though not validly appointed as a director, if that person acts in the position of a director (“De Facto Director”);
- A person, even though not validly appointed as a director if the directors are accustomed to act in accordance with that person’s instructions or wishes (“Shadow Director”).
Accordingly, when we discuss Director’s Duties, these apply to all of the above roles.
Primarily, Directors have a duty to the shareholders of the company. If the company is insolvent, or risks becoming insolvent, however, that duty extends to the company’s creditors.
The general duties specified under the Corporations Act include:
- Exercising powers and duties with the care and due diligence that a reasonable person would have. This includes being properly informed about the financial position of the company and ensuring that the company is not insolvent;
- Exercising powers and duties in good faith in the best interests of the company and for a proper purpose;
- Not to improperly use the position or information obtained through the position to gain an advantage for the director personally, or someone else, or to cause detriment to the company.
In addition, there is a positive duty on company Directors not to trade whilst insolvent. A company is deemed to be insolvent when it cannot pay its debts as and when they fall due. This is an important duty and will be expanded on in future pieces. To this end, it is important for Directors to understand the financial position of the company at all times and not just when signing off yearly reports.
Directors are also required to maintain adequate financial records to correctly record and explain transactions and the company’s financial position and performance. Mere ignorance is not a defence available to directors.
Additional responsibilities imposed on companies, and therefore Directors include:
- Having a registered office;
- Having a principal place of business;
- Disclosing personal details of directors;
- Notifying ASIC of key changes;
- Disclosing directors’ interests and potential conflicts;
- Paying relevant fees to ASIC; and
- Checking annual statements.
Interestingly, if a company fails to pay its annual review fee within twelve months of the due date, ASIC can initiate the deregistration of the company.
In order to best meet their duties, the Australian Institute of Company Directors make reference to Professor Baxt in suggesting that Directors consider the following to judge their actions:
“Taking account of all the circumstances, is what I propose to do in my honest belief in the best interests of all the shareholders (present and future) of the particular company of which I am a director. In the case of financial difficulty, ‘creditors’ could and perhaps should be substituted for ‘shareholders’. If the answer to the question is ‘yes’, then the director need not fear an action for breach of duty under either the statute or the common law’.
If you have queries with respect to Directors Duties or External Administrations in general, please do not hesitate to contact me on firstname.lastname@example.org
This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice, and should not be relied on as such.
Submitted by Alice Ruhe – Partner at Sellers Muldoon Benton.