Let’s face it, having a business card with Company Director on it is a pretty nice thing to have – a bit like an office door you can walk out of that’s marked private, it’s something that carries a certain je ne sais quoi (as our French friends would say). However, being a company director carries with it some serious responsibilities and duties, not only to the business, but other directors, employees, and shareholders as well. And not taking these seriously can get you in trouble (a lot of it), as well as land you with fines of more than $1m.
Read on to find out more about being a company director, what it means and your responsibilities.
So, what is a company director?
Back to school for one moment, but it’s important to understand what the term ‘director’ actually means. The Corporations Act 2001 states: ‘A director is someone that is responsible for directing (and, in smaller companies, managing) the affairs of a company. For instance, a director is anyone who acts in this capacity – even if they have not been formally appointed’.
Ask yourself…
Are you the owner of a small or medium-sized company and a sole director, or one of a small number of directors in a company? Or have you been appointed as a director to the board of a small, medium, or large business?
If so, this definition of a company director applies to you.
Who oversees the Corporations Act 2001?
The Australian Securities and Investments Commission (ASIC) is the corporate body concerned with ensuring that companies comply with the Corporations Act 2001, and that individual directors carry out their responsibilities.
Are there different types of company director?
Yes there are – five in fact! Australian law recognises directors as the officers of the company but also defines the duties and powers of each type of director:
- Executive director
An executive director is involved in the daily running of a company, and involved in making decisions that affect daily operations. - Non-executive director
A non-executive director is not involved in the daily running of the company, but are tasked with bringing an independent third-party perspective to the decision-making process. Usually, the non-executive directors are experts in the industry. They offer advice on various aspects of the business. - The managing director (or CEO)
This executive director is appointed by the rest of the directors and is solely responsible for daily company operations. - De facto director
A de facto director has not been formally appointed as a director but acts in place of a director. Therefore, they have similar responsibilities/liabilities as an official director. - Shadow director
A shadow director is similar to a de facto director in that they don’t have an official title. However, they do have some influence on decisions made by the board of directors and are expected to uphold the obligations of the Corporations Act.
What rights does a company director have?
Directors generally enjoy the following rights:
- Participate in board meetings and decisions.
- Remain in office until validly removed.
- Access documents and financial records of the company.
- Right to delegate.
Company director responsibilities
As a director, you are responsible for overseeing the affairs of the company and you must comply with your legal obligations under the Corporations Act 2001. This is the case even if you appoint an agent to look after your company’s affairs.
Your responsibilities include:
Duty to act in good faith
Directors must exercise their powers and responsibilities in good faith and in the best interests of the company. Interests of the company include the interests of existing shareholders.
Duty to exercise powers for a proper purpose
Directors must exercise their powers and responsibilities for a proper purpose. A purpose is proper if it is in the best interests of the company.
Duty to drive and monitor business performance
Directors must ensure:
- Financial and non-financial performance is monitored;
- Accurate financial records are kept;
- An annual return with the details of all current directors and the primary business address is filed;
- Appropriate tax returns are filed;
- And the business is prepared for an annual audit by an independent auditor (a requirement for public and some large proprietary companies).
Duty to act with care and diligence
Directors must act with the degree of care and diligence that a reasonable person would exercise if they were in the same position as the director.
Duty not to improperly use position or information
Directors must not improperly use their position or information obtained from their position for their own personal advantage or to disadvantage the company.
Duty to disclose interests
A director with a material personal interest relating to company affairs must give other directors notice of the interest.
Duty not to trade while insolvent
Directors has a duty to ensure that the company does not trade if it is insolvent, or if there are reasonable grounds for suspecting that the company is insolvent.
What happens if a company director breaches their duties?
If you fail to comply with company director responsibilities and obligations under Australian law there are penalties and consequences – including civil penalties, compensation proceedings and criminal charges including:
- Serious consequences including being found guilty of a criminal offence – the current penalties are imprisonment of up to 5 years.
- Directors who are found to have contravened a civil penalty provision can be fined up to $1.05 million.
- Disqualification from managing any companies in the future; or held personally liable for any company losses caused by their breach of directors’ duties.
Common pitfalls to avoid as a director
Many problems can arise as a result of not understanding your company director responsibilities and obligations. Some of the most common pitfalls we see include:
- Conflicts of interests
This is one of the most common. For instance, a conflict of interest arises where a company engages the services of another business which a director has an interest in, or the company leases a premises which is owned by a director. In a situation like this, a director needs to give notice of the nature and extent of their interest. - Being a ‘de facto’ or ‘shadow’ director
As de facto and shadow directors have the potential to control the management of the company’s affairs, the Corporations Act 2001 (Cth) holds them to the same duties as appointed directors. Sometimes de facto or shadow directors may not realise they have these duties to the company. They are often unlikely to be notified that they are a director of the company unlike appointed directors. This exposes de facto and shadow directors to breaching their directors’ duties without even realising. - Trading while insolvent
Directors should check that the company is solvent before incurring any further debt. If directors do not take reasonable efforts to monitor the company’s solvency, they could potentially be personally liable for debts the company incurred whilst it was insolvent.
Common characteristics of company insolvency include:- ongoing losses,
- poor cashflow,
- unpaid creditors outside usual trading terms, and
- problems obtaining finance
And finally…
There are legal implications for acting in the capacity of a company director and it’s important you make yourself aware of these. Having good governance helps to fuel business growth, but often it’s difficult to find the time to balance the day-to-day with longer-term strategy.
Need help? Contact POP Business today on 1300 180 630 and let us show you how we can help you meet your company director responsibilities while also taking your business to the next level.
