Start-ups are on the rise, as is the number of young entrepreneurs taking on the role of company director. A company director, whether sitting on the board of an ASX-listed company or a small organisation, has to be clear on the duties and obligations that attach to this significant position.

Just who is a director…?

Under Australian law, a person is a director (or deemed a director) if that person:

  • is appointed to the position;
  • is appointed as an alternate director;
  • is not appointed as a director, but acts in the position of a director (also known as a ‘de facto’ director); or
  • is not appointed as a director, but is a person in accordance with whose wishes or instructions the directors of a company are accustomed to act (also known as a shadow director).

Did you know you could be deemed a director of a company even though you haven’t been officially appointed to that role?

Does the nature of your role in a business mean that you may be a ‘de facto’ or shadow director of the company?

Directors’ duties

Australian law imposes various obligations and duties on directors in exercising their powers. A company’s constituent documents will also impact the responsibilities and powers of directors. Generally, directors’ duties are owed to the company and the director is required to act in the best interests of the shareholders.

Did you know that your position as a director is a personal one and, unless you have appointed an alternate director, only you can perform the role (you cannot assign it to anyone)?

Key directors’ duties include (but there are others):

• duty to act in good faith and in the best interest of the company; • duty not to act for an improper purpose; • duty not to fetter discretions; • duty to avoid conflicts of interest; and • duty of act with reasonable care and diligence.

Did you know that you cannot use any commercial information that you receive in your capacity as a director of a company to advance your private interests?

Are you aware that a director is required to carefully review and understand the company’s financial reports?

Did you know that a director also has a responsibility to ensure that the company is not trading whilst insolvent?

Breach of directors’ duties

Breaches or failure to comply with directors’ duties may attract serious civil and/or criminal penalties, ranging from fines to payment of damages to the company, and in some cases jail terms (depending on the offence).

For civil penalty proceedings, if a court makes a declaration of contravention against a director, the Australian Securities and Investments Commission may seek a pecuniary penalty order, a disqualification order or a compensation order.

Did you know the maximum penalty amount payable is $200,000 if a pecuniary penalty order is made against a director?

Are you aware that a director may also be personally liable for debts incurred by the company if a company is found to have been trading whilst insolvent?

Are you aware that in making a disqualification order a court could impose on a director a lifetime ban from managing companies?

Whether you are new to the role of director or have been on the board of a well-established corporation for several years, directors’ duties apply equally. It is essential that you are equipped with a working knowledge of what is required, so that you do not breach those duties.