For those of you who have just been promoted or offered a position as a company director… Congratulations!

After you have popped the bubbly and bought a new suit, it’s important to look carefully at what your director’s duties are once you take on the position.

In most instances your daily activity must be to ensure the company complies with general and specific laws regarding its operations. Furthermore, your duty as a director is to work in the best interest of the shareholders whom you represent. If you are starting to feel overwhelmed by the responsibility, or unsure what your job entails, the general duties are outlined in the Corporations Act and include:

1. You have a duty to exercise your powers with care and diligence that a reasonable person would have. This often includes taking steps to ensure you are properly informed about the financial affairs of the company and ensuring they don’t trade while insolvent.
2. You must exercise your powers and duties in good faith and in the best interest of the company for a proper purpose.
3. You must be aware of your company’s dealings at all times.
4. You must ensure that adequate financial records are kept.
5. You cannot improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to your company.
6. You must ensure you do not improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

Golden rule: DO NOT trade when the company is, or is at risk of being insolvent

If your company is insolvent, or at risk of insolvency then there are additional duties you must undertake. Insolvency occurs when a company is unable to pay all its debts when they are due. To be sure that this duty is not breach, you must consider whether you have reasonable grounds to suspect that the company will not be able to repay the debt if a new loan is made. This is an ongoing duty. It is not enough to understand the company’s finances as at the time you sign off on the annual financial statement.

Keep accurate books and records.

As part of your role as director you must ensure that your company is keeping adequate financial records that account for all transactions and provide an indication of performance. Although you may not personally oversee this step, a director is required to take reasonable steps to ensure that records have been maintained. This is of utmost importance if an action for insolvent trading. Where a company has failed to keep adequate financial records the company will presumed to be insolvent.

ASIC defines financial records to include:

1. General ledger, recording all the company’s transactions and balances or summarising transactions and balances detailed in other records.
2. Debtor and sales recordings.
3. Creditor and purchases recordings
4. Wages and superannuation
5. Inventory records
6. Tax returns and calculations
7. Any deeds, contracts and agreements

What kind of Work will you be expected to do?

You and any other directors will be in control of the company’s business. This means your will answer to stakeholders. Often a company’s constitution or rules will set out the powers and functions of your role. Common inclusions are:

1. Seeking out and personally assessing how your proposed action will affect your company’s performance. This is particularly important where a large investment is sought to be made.
2. Obtain professional advice from experts – although you are a hot shot director, you are not an expert in every field! An important part of your role will be to facilitate discussions with experts to ensure investments or new decisions are made on an informed basis.
3. Take a hands on approach to business – ask ground staff and management about how they perceive the business and its progress. Sometimes the high office and financial books will not be enough to gage how a business is doing.
4. Attend and actively participate in directors meetings. Be aware that as a director you will be responsible for decisions passed regardless of whether you actively participated or not. Being an informed and engaged director ensures you continue to follow through on your directors duties.

I am bankrupt… can I still be a director?

If you have become bankrupt or convicted by the law, the chances are things are about to go from bad to worse for you. Where your personal circumstances change, there may be instances when you cannot be a director without court consent. These include:

1. Undischarged bankrupt
2. You are the subject of a personal insolvency agreement or an arrangement under the Bankruptcy Act 1966.
3. You are covered by Part X of the Bankruptcy Act and final payment has not been made.
4. You have been convicted of various offences such as fraud or offences under company law including breaching your director’s duties or trading while insolvent.

Why should I care what I am supposed to do?

Chances are that if you have been a dishonest or reckless company director the Courts will not be kind. Depending on the severity of your breach you may be subject to:

1. Prison sentence;
2. Heavy fines;
3. Loss of employment opportunities; and
4. Damages.

Don’t get complacent, ASIC as a company watch dog is always investigating corporate crime. Anyone can call in to report dishonest company directors.

Being a Director of a company is more than just a salary increase. The rules and duties are complex, with loyalties owed to staff, other directors, the company and shareholders. If you are a director and are unsure as to your duties or you believe your company may be trading when it is insolvent, contact our team at Lynn and Brown Lawyers for assistance.

About the authors:
This article has been co-authored by Haley Graydon, law clerk, and Steven Brown who is a director at Lynn & Brown Lawyers. Haley is a currently in her final year of study at UWA and her keen interest lies within family law and estates. Steven is a Director and has over 18 years’ experience in legal practice and practices in commercial law, business law and estate planning.