Chapter 2D of the Corporations Act 2001 (Cth.) (“the Act”) sets out what are the essential duties of a director or officer of a company. The Act is a voluminous and dense piece of legislation which imposes stringent duties and obligations on directors and officers of companies, however the essential duties of a director or officer of a company are to act in an honest, competent and proper manner in good faith with care and diligence.
Whether you are a director of a small or medium sized proprietary limited company or a larger corporation, being appointed as a director places some very important responsibilities on you. From a personal perspective not only does it increase your personal day-to-day responsibilities, it also increases the responsibility and accountability that you have to the company, its shareholders and to a degree to its creditors.
Your role as a director
Your role as a director is generally to be responsible for the control of the company’s business. Usually the rules setting out the powers and functions of a director are found in the company’s constitution. The company’s constitution will usually be constructed to comply with the Corporations Act and also each company will operate slightly differently depending on the primary business of the company.
In particular a director should acquire knowledge of the company’s constitution and should become aware of its affairs and in particular its financial position. In order for a director to become informed of the company’s affairs and financial position the director should:
- take an active role in the overall running of the company’s operations;
- obtain advice from legal and accounting professionals;
- have access to up to date data on the company’s performance in both a financial and structural sense;
- ensure that the company is in a sound financial position to pay its debts;
- ensure that proper financial records are maintained; and
- inform themselves about the subject matter so that any decisions made are made subject to the appropriate information available.
Company directors are also personally responsible for maintaining proper company books and records and must ensure that the company keeps up-to-date financial records that detail the company’s financial position and performance and also correctly record and explain the financial transactions of the company.
Small proprietary companies (these are defined by the Act) may not have to prepare annual financial reports, but must retain financial records for managing and measuring the company’s progress, tax and financing capacity.
Large proprietary companies, public companies and non-profit public companies must prepare financial reports, have them audited and lodge them with ASIC.
In essence directors and other officers of companies must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.
In exercising their duties company directors are:
- prohibited from improperly using their position to gain an advantage for themselves or someone else or to cause detriment to the corporation; and
- prohibited from using information obtained as a consequence of their role with the company to gain an advantage for themselves or someone else or to cause detriment to the corporation.
The Act provides both civil and criminal penalties for breaches of the Act and therefore it is of the utmost importance that directors are familiar with the concept of corporate governance.
What is corporate governance?
Corporate governance may be defined as the process by which a company is directed, controlled and held to account for its activities, and which predominantly its directors are directly responsible.
Good corporate governance entails good planning and monitoring by its directors both in a financial, structural and legal compliance framework. A company must comply with the relevant legislation that applies to it, such as the Corporations Act, the Work Health & Safety Act, the Income Tax Act, Competition and Consumer Act, and other legislation. Furthermore the company should have processes in place to monitor its activities in these areas and also have in place processes to deal with any breaches that may occur in respect to its obligations and legislation.
Failure to fulfil your duties and obligations as a director
If you as a director are found to have been negligent in your duties and obligations, contrary to the Act, significant penalties can be imposed on you personally.
The Australian Securities and Investment Commission (ASIC) has statutory powers to investigate and commence legal proceedings, both in the civil and criminal jurisdiction, against directors who fail in their duties. Penalties can vary from substantial fines to damages payments, or even jail terms, depending on the offence.
In the case where a company is found to have been trading whilst insolvent (that is it was not able to make payments of its debts as and when they fell due) then directors may be found personally liable for the debts incurred to its creditors and liquidators. Accordingly it is imperative that a director is at all times informed of the company’s financial position and should seek accounting and/or legal advice when a company is experiencing difficulty in paying creditors, making loan repayments, experiencing cash flow problems or keeping within overdraft limits.
As the adage goes “prevention is better than cure” so make sure that you as a company director are well informed of the company’s business and operations and that it is operating in compliance with all the relevant financial and statutory obligations. Good planning and good monitoring are the foundations of good corporate governance and will let you to be a good company director.