What are my duties as a Company Director?

As a director of an incorporated company, you are subject to several duties under the common law and the Corporations Act 2001 (Cth).

Specifically, company directors have a duty to:

• Act in good faith in the best interests of the company and for a proper purpose
• Act with reasonable care and diligence
• Prevent insolvent trading
• Not improperly use of information or position
• Avoid conflicts of interest

 

Acting in good faith in the best interests of the company, and for a proper purpose

Directors are required to exercise their powers and discharge their duties in good faith in the best interests of the company, and for a proper purpose.

While companies’ interests will be necessarily diverse across industries, satisfying the interests of shareholders, customers, and employers will generally be seen as consistent with the company’s long term financial advantage.

A breach of the obligation to act bona fide in the interests of the company involves a consciousness that an action is contrary to the interests of company, and deliberate conduct in disregard of that knowledge.

A breach of this duty may further attract criminal liability where directors act dishonestly or recklessly, with the penalty being a maximum of fifteen years imprisonment.

 

Act with reasonable care and diligence

Directors are required to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director in the company’s circumstances, and had the same responsibilities of that director.

Whether a director has exercised a reasonable degree of care and diligence is to be determined by reference to the foreseeable risk of harm relative to the potential benefits that may reasonably have been expected to result from the conduct in question.

In practice, the duty requires that directors:

• Make business judgments in good faith and for a proper purpose
• Do not have a material personal interest in the subject matter of the judgment
• Inform themselves of the subject matter of the judgment to the extent they reasonably believed to be appropriate; and
• Rationally believe the judgment to be in the best interests of the corporation.

 

Prevent insolvent trading

Directors have an ongoing duty to ensure that the company does not trade whilst insolvent, or where they have reasonable belief that it might be insolvent.

To satisfy this duty, directors must consider the company’s solvency before allowing it to incur further debts and must satisfy themselves that it is objectively and reasonably likely that the company will be able to pay their debts as and when they fall due.

The duty may be breached if the company:

1. Incurs a debt whilst insolvent; or

2. Becomes insolvent by incurring the debt; or

3. Becomes insolvent by incurring that debt and other debts at the same time; and

4. There are reasonable grounds for suspecting that the company is insolvent or the company would become insolvent as a result of incurring that debt; and

5. Either the director is aware that there are such grounds for suspecting insolvency, or a reasonable director would be aware there are such grounds for suspecting insolvency.

If civil proceedings are commenced for a breach of the duty to prevent insolvent trading, several rebuttable presumptions will apply, including:

• A presumption that the company was insolvent through any period for which proper accounting records are not held; and
• Where it is proved that the company was insolvent on any day in the twelve months preceding the winding up, a presumption that the company was insolvent from that day until the winding up commenced.

A director found to have failed to prevent insolvent trading may be held personally liable for debts incurred by the company whilst it was insolvent.

 

Not improperly use information or position

Directors must not improperly use their position to gain an advantage for themselves or someone else, or cause detriment to the corporation.

Similarly, a person who obtains information by virtue of their position as director must not improperly use said information to gain an advantage for themselves or someone else, or cause detriment to the company.

Improper use of information or position may attract criminal liability where a director acts intentionally and recklessly, with a maximum penalty of fifteen years imprisonment available in respect of a breach of each of the duties.

Further, importantly, it is not a defence in proceedings for an offence in relation to these duties that the person used their position or information with the intention or consequence of gaining an advantage for the corporation.

 

Avoid conflicts of interest

Directors are required to avoid or appropriately manage any actual or potential conflict between their obligations owed to the company, and their personal interests or other interests they may be subject to.

It is common for a company’s constitution to permit the company to enter into a contract, agreement, or arrangement in which a director has an interest, but preclude the director from voting if the interest amounts to a material personal interest. A director is required to disclose to the board any material personal interest they may have in connection with the affairs of the company.

 

Key takeaways

As a director, it is important to be familiar with these duties to ensure you remain compliant when managing your company. Otherwise, the risk of criminal and civil penalties is significant, extending to fines, terms of imprisonment, and potential disqualification from holding a directorship.

This article was prepared with the assistance of Clea Philips.