Understanding Directors’ Responsibilities

Directors often encounter the term “director’s duties” in communications from ASIC, but what do these duties entail, and what are the consequences for failing to uphold them?

What Are the Duties of a Company Director?

Company directors bear legal obligations to their respective companies. These duties are designed to ensure proper corporate governance, protect the company’s interests, and maintain transparency in business operations. Directors must adhere to several key responsibilities under the Corporations Act and other applicable laws:

1. Exercise Care and Diligence: Directors must act prudently and diligently in their roles.
2. Act in Good Faith: Directors must make decisions with the company’s best interests in mind.
3. Act Honestly: Directors must conduct themselves with honesty and integrity.
4. Avoid Conflicts of Interest: Directors must prevent conflicts between their personal interests and the interests of the company.
5. Prevent Insolvent Trading: Directors must ensure the company does not engage in trading when unable to meet its financial obligations.

It should be noted that external administration, a company’s constitution or other agreements may impose additional duties on a director.

Who Is a Director?

Per Section 9 of the Corporations Act 2001 (Cth), a director includes not only those officially appointed and listed with ASIC but also:

• Shadow Directors: Individuals who act in a directorial capacity without formal appointment.
• De-facto Directors: Individuals whose instructions or wishes are followed by the company (and validly appointed directors).

Shadow and de-facto directors are held to the same duties (and consequences for breaches) as validly appointed directors.

What Are the Consequences of Breaching Director’s Duties?

Directors, including shadow and de-facto directors, can face various consequences if they breach their duties:

• Criminal Offense: Directors may be found guilty of a criminal offense, with penalties of up to $200,000 in fines or imprisonment for up to five years, or both.
• Civil Penalty: Directors may face civil penalties for contravening the Corporations Act law.
• Liability for Compensation: Directors might be personally liable to compensate the company or others for losses incurred due to their breach, including instances of insolvent trading.
• Prohibition from Managing a Company: A breach of duties can lead to directors being prohibited from managing a company in the future.

Importantly, a director’s duties can persist even after a company’s deregistration.

As detailed above, shadow and de-facto directors are subject to the same duties as a validly appointed director including the requirement to prevent the company from trading while it is unable to pay its debts (also known as insolvent trading).

Failure of any director to prevent the company from trading whilst insolvent can leave that director personally liable to compensate the company for any loss or damage the company has suffered as a result of the insolvent trading. In many cases, the damages can be substantial.

What to Do When Suspecting Insolvency

An insolvent trading claim is a common claim brought against directors for the damages suffered by the company as a result of a director’s failure to prevent insolvent trading. Fortunately for directors, safe harbour legislation was introduced for directors to seek relief from insolvent claims if the company is in the process of restructuring.

If you or someone you know suspects insolvency or needs to assess a company’s solvency, consult a professional immediately to limit personal exposure. Our experts are available for confidential, obligation-free consultations to help you better understand your situation. Please reach out using the contact details below to get in touch. Your initial inquiries and meetings with us are confidential, free and no obligation.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.