Duties. Director. Your obligations and responsibilities. ebooks. What is a company director and what are director duties?

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1 Director Duties Your obligations and responsibilities What is a company director and what are director duties? ebooks Please consider the environment before printing this ebook. Copyright 2011 JK27 Pty Ltd

2 Introduction With power comes great responsibility. If you are a director of a company, the Corporations Act and the general law grant you significant powers, alongside a set of key responsibilities, known as directors duties. Directors duties in Australia are designed to promote good governance, that is, how the company is controlled and where the company is going, rather than how the company is managed. Essentially, directors have a paramount duty to act in the best interests of the company, including putting the company s interests ahead of their own. In addition, a director has a duty to act honestly, know what his or her company is doing, and to keep proper financial records. Being a director involves a special relationship based on trust and confidence. In exercising powers as a director, a director must not breach any of his or her duties, as this can bring dire consequences, including payment of compensation, or worse, being banned from being a director or going to jail. This e-book endeavours to assist you in fully understanding your role and obligation as a director of your company. It will outline directors duties, as well as the various consequences arising from breaching those duties. Are You a Company Director? You are a company director if: you are appointed to the position of director; or you act in the capacity of a director, regardless of the title of your position. In other words, a person may owe duties to the company, even if the person does not hold the position of director. For example, a Chief Financial Officer of a company who makes, or participates in making, decisions that significantly affect the business of the company, would owe certain directors duties to the company. 1

3 What are the Directors Duties? Care, Skill and Diligence As a director, you are required to exercise your powers and discharge your duties with care, skill and diligence. This standard is based on what a reasonable person would do if they were a director in a similar situation with the same company circumstances and same director responsibilities. You should at all times be familiar with the company s business and activities, and monitor and understand the company s financial status and financial capacity. If you choose to delegate any of your powers to another person, you must oversee what that person does, as you will be responsible for those decisions. You should ensure that a delegate is reliable and competent and will follow all the duties of a director. There may also be circumstances where you rely on advice or information from another director, an expert or an employee. You should only rely on this person after you have considered the information or advice in light of your knowledge of the company and its business. Good Faith and Proper Purpose Your obligation to act honestly as a director means that you have a duty to act in good faith in the interests of the company as a whole. The interests of the company include the continuing well-being of the company. The duty to act in good faith means you should never put the interests of yourself or a third party ahead of the company. If you become aware of something that is, or could be detrimental to the company, you have a duty to try and stop that conduct. The interests of the company will also be put at risk where other duties are breached, for example, if you enter into an agreement with a third party that you will vote in a certain way at a future board meeting. Such action is breaching your duty to retain your discretionary powers, that is, your power to make choices as a director. If you exercise your powers as a director to issues shares where the purpose is to maintain control of the majority shareholding, this is an example where you would be breaching your duty to exercise powers for proper purposes. Your powers should only be used for the purposes in which they are bestowed, as you have the duty to protect the company s interests. 2

4 Conflicts of Interest You are under a duty to avoid situations where there is a conflict of interest. This means that you must not place yourself in a situation where your duty to act in the interests of the company s affairs would conflict with your personal interests. When such a conflict arises you have a duty to disclose this information; otherwise it may amount to a breach of the duty. This duty prevents directors from acting in their own interests, whether acting with fraudulent intentions or not. Directors are also prohibited from improperly using their position, or any information obtained through their position, to gain advantages for themselves or for another person, or to cause detriment to the company. For example, if you acquire confidential information through your position, then misuse the information in competition with the company, you would likely breach this duty. Insolvent Trading Directors must prevent insolvent trading by the company. What this entails is a duty to prevent the company from incurring a debt at a time when there were reasonable grounds for suspecting the company was insolvent or would become insolvent. Debts may include purchasing goods or services on credit terms, borrowing money from a bank, or leasing business premises. A company may be deemed to be insolvent if it cannot, as and when the debt is incurred: produce timely and accurate financial information and make reliable financial forecasts; or pay Commonwealth and State taxes; or borrow further funds from banks. What happens if you breach a duty? If you breach a duty, the possible solutions or penalties will depend on the conduct and the circumstances. The seriousness of the breach will determine the severity of the penalty. Examples of possible solutions to breaches are where the company that you are a director of, claims compensation, an account of monies or the return of property from you. The company 3

5 can also cancel any contract that you have with it. In addition, a court may order that you pay fines or compensation, or ban you from managing a corporation for any period it considers appropriate. The Australian Securities and Investments Commission (ASIC) may also recover compensation or property on behalf of the company. Your breach could also result in criminal penalties under the Corporations Act if you have done something that is forbidden, fail to do something you are required to do, otherwise contravene the Act, or were reckless or intentionally dishonest. Conclusion Although circumstances vary, the general principle is that if you act honestly, and in the best interests of the company, and avoid insolvent trading, then it is unlikely you will be in breach of your directors duties. 4

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