There are numerous and important legal responsibilities imposed on directors of companies under the Corporations Act 2001 and other laws, including the general law.
Of these director duties, some of the most significant are contained in Chapter 2D of the Corporations Act:
- to exercise the degree of care and diligence that a reasonable person might be expected to show in the role – the business judgment rule (s.180).
- to act in good faith in the best interests of the company and for a proper purpose (s.181)
- to not improperly use their position to gain an advantage for themselves or someone else, or to the detriment to the company (s.182)
- to 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 (s.183)
- to lodge information with ASIC (s.188)
but there are others, including to:
- to avoid conflicts of interest between the interests of the company and their personal interests and to reveal and manage conflicts if they arise (s.191)
- to take reasonable steps to ensure that a company complies with its obligations in the Corporations Act related to the keeping of financial records and financial reporting (s.344)
- to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent (eg, if it is unable to pay its debts as and when they fall due) (s.588G)
- if the company is being wound up, to assist the liquidator and provide accurate details of the company’s affairs.
Directors can also be liable for unpaid taxation obligations and unpaid superannuation monies – for which the ATO can issue Director Penalty Notices.
Failing to comply with director duties can result in criminal sanctions, fines, disqualification from acting as a director and other consequences, such as breach of contract such as obligations under a Directors & Shareholders Agreement.
People can be responsible as directors even if not formally appointed
What many people don’t know is that the term “director” is defined in section 9 of the Corporations Act to include a person:
- who is appointed as a director (or alternate director), regardless of the name given to their position; and
- even though not validly appointed and recorded at ASIC as a director:
- who acts in the position of a director (also known as a ‘de facto director‘); or
- whose instructions or wishes the appointed directors are accustomed to act in accordance with (also known as a ‘shadow director’)
Commonly used terms for the titles of ‘director’ include ‘non-executive director‘, ‘executive director‘, ‘managing director‘, ‘independent director‘ and ‘nominee director‘.
Often, businesses give titles to employees rather than pay rises. Similar considerations apply to partnerships, where some partners are ‘salaried partners‘, not ‘equity partners‘ so they take home a salary rather then enjoy the fruits of the business. What these ‘salaried partners‘ (in the same vein as ‘non-executive directors‘) often fail to understand or appreciate is that they are holding themselves out as directors or partners of the business and can have full responsibility as “shadow directors“ if something goes wrong, such as an insolvency.
How to meet the responsibilities
Those with key roles in any business, regardless of its legal form, you should:
- understand your legal obligations and make compliance with them part of your business
- keep informed about your business’ financial position and performance, ensuring that it can pay its debts on time and keeps proper financial records
- give the interests of the business, its stakeholders/owners and its creditors top priority, which includes acting in the business’ best interests (even if this may not be in your own interests)
- use information you get through your position properly and in the best interests of the business
- get professional advice or more information if you are in doubt.
Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to Corporations Act or corporate governance issues or any business or commercial law matter, contact Craig Pryor on (02) 9521 2455 or email email@example.com
This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.