You’re establishing your business and you’ve chosen your preferred structure, a company.
You have an existing company and you’re appointing a new director.
You’re an employee and you’ve been invited to become a director of a company.
Each scenario requires an understanding of the responsibilities of a director. This ensures the director makes an informed choice to become a director. It also allows the director and the company to access the right tools to protect the director.
Can I be a director?
Different types of companies have different requirements for the number of directors. An Australian proprietary limited company must appoint at least one director. The director must be a natural person, at least 18 years old, and not been disqualified from becoming a director of an Australian company. Directors do not need to reside in Australia, however at least one of a company’s directors must. A director must consent to their appointment.
I am a director. What responsibilities do I have?
- Exercise care and diligence. A director must act with the degree of care and diligence that a reasonable person in the role might be expected to show.
- Act in good faith. A director must act in good faith, in the best interests of the company and for a proper purpose.
- Not to improperly use position or information. A director must not make improper use of his or her position or information acquired through that position, to gain an advantage for themselves or any other person, or to cause detriment to the company.
- Avoid a conflict of interest and to disclose material personal interests. A director must disclose all personal interests that he or she may have in relation to the affairs of the company. Sometimes, it may be enough that the director discloses a conflict and refrain from voting on the issues. Other times, the director may need to resign.
- Not to engage in insolvent trading. A director has a duty to prevent the company from trading while insolvent and prevent the company from trading in a way that will make it insolvent.
- To keep proper accounts and records. A director must ensure that the company prepares the required reports, such as financial or directors’. Companies of different sizes have different reporting obligations – specialist accounting advice is usually necessary.
I am a director. Am I on the hook for the company?
Yes, in certain circumstances a director is personally liable for breaches of the law by the company. This is known as ‘vicarious liability’. This includes a breach of competition and consumer laws, occupational health and safety laws, and environmental protection laws.
What are the consequences of breaching directors’ duties?
Different breaches have different penalties. Some are criminal offences (such as dishonest or reckless breach of duty of good faith or improper use of information or position). Others attract civil sanctions, some may result in a disqualification from being a director in the future. However, often the consequence is commercial – that is, a decision is not made in the best interests of the company to the detriment of the company, or the company suffers reputational or market damage due to poor decision making or practices.
I am a director. What protections are there for me?
The director should:
- know his or her obligations and the touch points – obtain proper advice regarding the legislation governing the company’s activities and the obligations imposed on the company and the directors by that legislation; and
- know the company – ensure that the company has proper procedures and that they are followed to minimise the risk of the company breaching laws and the director becoming vicariously liable.
I am a company. What protections can I offer our director?
The company can:
- maintain directors’ and officers’ insurance. This insurance will cover a director for liabilities and legal costs in claims made by third parties for wrongful acts. This insurance will not cover a director’s fraud or dishonesty, or any act or omission that causes a claim; and
- enter into a Deed of Indemnity with the director to indemnify the director for any loss suffered by the director in acting as a director. A company can obtain directors’ and officers’ insurance to cover the company’s liability under the Deed of Indemnity.
Being a director of a company gives a person opportunity but carries with it duties and responsibilities. A prudent director should ensure he or she is aware of its responsibilities and how to best protect itself from potential personal liability. A company should ensure it has the appropriate structure and knowhow to best protect its directors.
If you or your organisation require any assistance with business structures or directors’ duties, please contact Alice Hoban or Michael Huelin from WGC Lawyers on (07) 4046 1172 for specific advice.