The role of a director in a company is vital to its success and overall governance. In Australia, directors are entrusted with a range of responsibilities and duties that ensure the Company operates ethically, in compliance with the law and in the best interests of its shareholders. Sometimes it can be tricky to balance director’s duties with other competing interests, but the result of not complying can be significant.
This article provides an overview of the Top 5 duties of a director in Australia.
1. Duty of Care and Diligence
One of the primary duties of a director is to exercise reasonable care, skill, and diligence in performing their role. Directors are expected to make informed decisions by staying informed about the company’s affairs, regularly attending board meetings, and actively participating in discussions. They should use their skills and experience to contribute to the company’s strategic direction, assess risks, and ensure appropriate systems are in place to monitor and manage those risks.
2. Duty to Act in Good Faith and in the Best Interests of the Company
Directors have a fiduciary duty to act honestly and in good faith, always prioritising the best interests of the Company. They should avoid conflicts of interest and make decisions that benefit the Company as a whole, rather than specific individuals or groups. When faced with situations where their personal interests may conflict with the Company’s interests, directors must disclose such conflicts and take appropriate steps to manage or eliminate them.
3. Duty to Prevent Insolvent Trading
Directors have a crucial responsibility to prevent the Company from trading while insolvent. They must monitor the Company’s financial position, including cash flow, debts and liabilities, and take prompt action if insolvency is reasonably foreseeable. If a director suspects insolvency, they should seek professional advice and consider appropriate strategies, such as restructuring or external administration, to protect the Company’s interests and minimise loss and exposure to creditors.
4. Duty to Maintain Financial Records and Reporting
Directors must ensure the Company maintains accurate and up-to-date financial records. They are responsible for preparing and lodging financial reports, including annual financial statements and directors’ reports, in compliance with relevant legislation and accounting standards. Directors should also ensure the Company’s financial statements present a true and fair view of the Company’s financial position and performance.
5. Duty to Comply with Laws and Regulations
Directors have a legal obligation to ensure the Company complies with all applicable laws and regulations. They should keep abreast of relevant legislation, industry standards and corporate governance guidelines, and ensure the Company’s activities, including its operations, contracts, and disclosures, comply with the law. Directors must also maintain appropriate internal controls and risk management frameworks to prevent illegal or unethical practices within the company.
What happens if you breach your duties?
The exposure and potential consequences may vary depending on the nature and severity of the breach. Here’ a flavour of the implications:
- Civil Liability: Directors can be held personally liable for any losses suffered by the Company or its shareholders as a result of their breach of duties. Shareholders or the company itself can take legal action against directors to seek compensation for damages caused.
- Fines: Fines can be imposed by regulatory bodies such as the Australian Securities and Investments Commission (ASIC) or the Australian Competition and Consumer Commission (ACCC). These penalties can be substantial and may vary depending on the specific breach and the applicable legislation.
- Disqualification: A director who breaches their duties may face disqualification from acting as a director. ASIC has the power to disqualify individuals from managing corporations if they are found to have engaged in conduct that indicates unfitness to be a director. Disqualification can be for a specific period or, in more severe cases, for an indefinite period.
- Criminal Charges: Serious breaches can lead to criminal charges being brought against directors. For example, if a director engages in fraudulent or dishonest conduct, they may be prosecuted for offences such as fraud, false accounting or insider trading. If convicted, directors may face fines, imprisonment, or both.
- Personal Liability for Company Debts: In certain situations, directors may become personally liable for the Company’s debts. If a director allows the Company to trade while insolvent or fails to prevent insolvent trading, they can be held personally liable for the debts incurred during that period.
- Reputational Damage: Breaches of director’s duties can result in significant reputational damage to the director personally. Negative publicity, loss of trust from shareholders and stakeholders, and damage to future career prospects are potential consequences of breaching director’s duties.
Being a director of a company in Australia carries significant responsibilities.
It’s important to note that directors’ exposure to liability and consequences may also depend on the specific legal structure of the company (e.g., public company, proprietary company), the industry sector, and the applicable legislation. Directors should always seek legal advice to fully understand their duties and obligations and take appropriate measures to fulfill them.
Adhering to ethical practices, maintaining accurate records, staying informed about legal requirements, and actively engaging in good corporate governance are essential for directors to minimise their exposure to potential breaches and associated consequences.
If you need assistance in understanding your obligations, reach out to our business lawyers.