In Australia, the role of a company director is crucial in ensuring the effective and responsible management of a business entity. Directors play a pivotal role in decision-making, strategy formulation, and overall corporate governance. With such a significant role comes a set of duties and responsibilities, as well as potential liabilities, that directors must be aware of to ensure compliance with Australian corporate law.
DUTIES OF COMPANY DIRECTORS
Australian company directors are bound by a range of statutory and common law duties that are designed to promote the interests of the company and its stakeholders.
Some key duties in accordance with the Corporations Act 2001 (Cth) include:
Duty to Act in Good Faith in the Best Interests of the Company
Directors are obligated to act in good faith, in the best interests of the company, and for a proper purpose. This means making decisions that are intended to benefit the company rather than personal interests.
Duty to Act with Due Care, Skill and Diligence
Directors must exercise a reasonable degree of care, skill, and diligence in their roles. This duty requires directors to stay informed about the company’s affairs, participate actively in decision-making, and seek professional advice when necessary.
Duty Not to Improperly Use Your Position
Directors must not improperly use their position to gain any personal advantage or any advantage for someone else or to cause detriment to the company.
Duty Not to Improperly Use Information
Directors must not improperly use information for a personal or third-party advantage or to cause detriment to the company.
Duty to Prevent Insolvent Trading
Directors must take reasonable steps to prevent the company from trading while insolvent. This duty is crucial to safeguard the interests of creditors and maintain the financial integrity of the company.
Duty to Avoid Conflicts of Interest
Directors must disclose any material personal interests in transactions or matters that relate to the company’s affairs. They are required to avoid situations where their personal interests may conflict with the interests of the company.
Duty to Keep Proper Books and Records
Directors have a responsibility to ensure that the company maintains accurate and up-to-date financial records. This duty is essential for transparency, accountability, and compliance with financial reporting requirements.
LIABILITIES OF COMPANY DIRECTORS
A director will generally not be personally liable for company debts or losses because the company is a separate legal person. Nevertheless, failure to fulfil the directors’ duties may result in legal consequences for directors and reputational damage for companies. A director’s obligations may continue even after the company has been deregistered.
Some of the key liabilities in accordance with the Corporations Act 2001 (Cth) include:
Civil and Criminal Penalties
Directors can face civil penalties, including fines, for breaches of their duties. In serious cases, criminal charges may be brought against directors, leading to imprisonment.
Compensation Orders
Directors may be required to compensate the company or third parties for losses suffered as a result of a breach of their duties.
Disqualification as a Director
Courts have the authority to disqualify individuals from acting as company directors if they are found to be unfit due to misconduct or a repeated failure to fulfil their duties.
Personal Liability for Company Debts
In cases of insolvent trading, directors may become personally liable for the company’s debts incurred during the period of insolvent trading. Directors can be personally liable for unpaid tax (such as PAYG or superannuation), any personal guarantees he or she has been given for the company or any fraud he or she has committed.
LIMIT LIABILITIES OF COMPANY DIRECTORS
Note that it is the director’s duty to carry out his or her duty following the laws; thus, if any directors in your company need any legal advice concerning the above, please feel free to contact The IP House Lawyers.
We can advise you on how to use insurance to protect and reduce director’s personal liabilities, as well as how to prepare and negotiate a deed of indemnity to cover liability costs and provide certain liability protection to directors.
For any further information or queries on the above content, please contact us.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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