So you’re a Director – now what?

Company Directors have a number of obligations, which are important to keep in mind.

So, you’ve just formed a company, maybe on your own, or with business partners or family. But do you know what your obligations are as a director?

This article looks at the legal obligations of a company director in Australia.

You must ensure compliance with your legal obligations

As a director, you are obliged to ensure compliance with general and specific laws applying to your company’s operations. And of course, your primary duty is to act in the interests of the shareholders.

However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees with outstanding entitlements).

There are duties imposed on company directors and officers of companies by the Corporations Act 2001 (Cth).

These duties include:

• the duty to exercise your powers and duties with the care and diligence that a reasonable person would have. This includes taking steps to ensure you are properly informed about the financial position of the company. It also includes ensuring the company doesn’t trade if it is insolvent;
• the duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose;
• then, the duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company;
• and finally, the duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

It is vital you do not trade whilst insolvent

It is of fundamental importance that a director observes their duty to not trade while insolvent.

A director will have a positive duty to prevent the company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts as and when they fall due.

This means that before you incur a new debt, a director must consider whether they have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

You must always be aware of the financial position of the company

An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is not going to be enough.

You need to be constantly aware of your company’s financial position. It is not enough to delegate responsibility to your accountant.

Be sure and have a good accountant, but if you don’t know how to read a P&L and Balance Sheet, take the time to learn what they mean for you and your company, and monitor your company’s financial position on a regular basis. A good accountant should be able to help you with this.

Most start-ups teeter on the edge of solvency throughout their first few years. They need to be really careful as there are almost invariably more costs than originally anticipated.

Solid financial records will help ensure you don’t breach the Corporations Act

Your company also needs to keep adequate financial records. That is to correctly record and explain transactions and the company’s financial position and performance.

If a director fails to take all reasonable steps to ensure a company fulfills this requirement then they will have breached the Corporations Act.

The penalties for trading while insolvent can be severe and include civil penalties such as compensation orders, fines and disqualification from acting as a director, as well as criminal sanctions including imprisonment.

Contact us today if you require any assistance with preparing or reviewing your Shareholders’ Agreement.

(c) Progressive Legal Pty Ltd – All legal rights reserved (2019)

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