Russell Kelly & Associates · Norwest NSW
Director’s Responsibilities
Company Directors’ Duties and Responsibilities in Australia
Becoming a company director carries significant legal responsibilities. A director is responsible for participating in the management and oversight of the company and must comply with duties imposed by the Corporations Act 2001 (Cth) and other applicable laws.
Directors cannot simply leave responsibility for the company’s affairs to other directors, managers, accountants or advisers. Each director should understand the company’s operations and remain appropriately informed about its financial position and significant risks.
Who Can Be Considered a Director?
A director is not necessarily limited to someone formally appointed to the board.
In some circumstances, a person who acts in the position of a director, or a person whose instructions or wishes the company’s directors are accustomed to follow, may also be treated as a director under the Corporations Act.
The legal responsibilities associated with directing a company should therefore be considered according to a person’s actual role as well as their formal title.
Director Identification Number (Director ID)
Company directors are required to have a director identification number (director ID). A person who intends to become a director under the Corporations Act generally must apply for their director ID before being appointed.
A director ID is issued by Australian Business Registry Services (ABRS), is unique to the individual and is retained permanently even if the person changes companies, changes their name or stops being a director.
Duty of Care and Diligence
Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the relevant circumstances.
This requires active involvement in the company’s affairs. Directors should obtain sufficient information to make informed decisions, appropriately question management and understand significant matters affecting the business.
A director should also have an appropriate understanding of the company’s financial position.
Act in Good Faith and for a Proper Purpose
Directors must exercise their powers and duties in good faith in the best interests of the company and for a proper purpose.
A director’s position should be used to advance the legitimate interests of the company rather than obtaining an improper personal benefit or benefiting another person at the company’s expense.
Improper Use of Position or Information
A director must not improperly use their position to gain an advantage for themselves or another person, or to cause detriment to the company.
Similar obligations apply to information obtained because of a person’s position as a director.
These duties can continue to be relevant even after a person ceases to hold office.
Conflicts of Interest
Directors should identify and appropriately manage conflicts between their personal interests and the interests of the company.
The Corporations Act contains requirements concerning the disclosure of material personal interests, and additional obligations may arise under the company’s constitution, shareholders agreements and general law.
Directors should obtain advice where there is uncertainty about whether an interest must be disclosed or how a conflict should be managed.
Financial Records and Company Finances
A company must keep appropriate financial records that correctly record and explain its transactions and financial position and performance.
Directors should ensure that adequate financial information is available to enable them to understand the company’s position and properly discharge their duties.
Depending upon the company, this may include regularly reviewing cash flow, liabilities, aged creditors and debtors, taxation obligations, financing arrangements and other indicators of financial performance.
Simply reviewing the company’s finances once a year is not sufficient where circumstances require more active monitoring.
Directors and Insolvent Trading
A director has a duty to prevent a company from incurring debts while it is insolvent in circumstances covered by the insolvent trading provisions of the Corporations Act.
A company is insolvent when it is unable to pay its debts as and when they become due and payable.
Directors should therefore remain alert to the company’s financial position and investigate warning signs of financial difficulty promptly.
Warning Signs of Financial Difficulty
Warning signs can include:
- continuing trading losses;
- poor or deteriorating cash flow;
- creditors remaining unpaid outside normal trading terms;
- overdue taxation or superannuation liabilities;
- difficulty obtaining finance;
- defaults under lending arrangements;
- suppliers requiring cash on delivery;
- legal demands or proceedings from creditors;
- inability to produce reliable financial information; and
- repeated reliance on future sales or funding to meet existing debts.
No single indicator necessarily establishes insolvency. However, directors should investigate warning signs rather than assuming that the company’s financial position will improve.
Safe Harbour from Insolvent Trading Liability
The Corporations Act contains safe harbour provisions that may provide protection from civil liability for insolvent trading in certain circumstances.
Broadly, safe harbour may be available where, after suspecting that the company may become or be insolvent, a director begins developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.
Safe harbour has specific requirements and should not be regarded as automatic protection simply because a director is attempting to rescue the business.
Directors concerned about insolvency should obtain appropriately qualified professional advice promptly.
Director Penalty Notices and Company Tax Debts
Directors can also face personal exposure in relation to certain unpaid company taxation and superannuation obligations.
The Australian Taxation Office may issue a Director Penalty Notice in relation to specified company liabilities.
A Director Penalty Notice is time-sensitive. A director who receives one should obtain professional advice immediately rather than ignoring the notice or assuming that the company’s limited liability automatically protects them personally.
Transactions Before Insolvency
Transactions undertaken when a company is experiencing financial difficulty can later be examined by a liquidator.
Depending upon the circumstances, issues may arise concerning unfair preferences, uncommercial transactions, creditor-defeating dispositions and other voidable transactions.
Directors should exercise particular care before transferring company assets, preferring particular creditors or restructuring transactions when insolvency is suspected.
Can Directors Be Personally Liable?
A company is generally a separate legal entity, but limited liability does not mean that directors can never be personally liable.
Personal consequences can arise in circumstances including breaches of directors’ duties, insolvent trading, certain taxation liabilities, personal guarantees and other statutory obligations.
The nature of any liability will depend upon the particular circumstances and applicable legislation.
Directors’ Duties During Financial Distress
When a company is insolvent or there is a real risk of insolvency, the interests of creditors become increasingly important to directors’ decision-making.
Directors should obtain accurate financial information, carefully consider whether further debts should be incurred and seek appropriate restructuring, insolvency, accounting and legal advice at an early stage.
Waiting until the company has exhausted its cash and creditors have commenced proceedings can significantly reduce the available options.
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If you are a director concerned about your duties, the financial position of a company or potential personal liability, early legal advice can help identify the issues and available options.
This information is general in nature. Directors’ duties and potential personal liability depend upon the particular circumstances and applicable legislation. Legal, accounting and insolvency advice should be obtained where appropriate.