The Role of a Director: Privilege or Burden?
25 July 2016
The role of a Director, whilst a privilege, also carries great responsibility. A Director should be aware of his/her obligations as mandated by the Corporations Act 2001. Once a company is in financial difficulty, or is insolvent, a Director's compliance
Who is a Director?
A Director is not only a person formally appointed to the role but may include a person who acts as a Director (including a person who directs the appointed Director).
What are a Director's Duties?
A Director has a duty to comply with general and specific laws applying to the company's operations. Additionally, a Director is responsible to shareholders of the company. Upon a company becoming insolvent (or impending insolvency), a Director's duties expand to include creditors of the company. There is often a conflict between a Director acting in his/her own best interests and acting in the interests of shareholders and creditors.
The Corporations Act 2001 imposes some general duties on Directors and Officers of companies, which include:
- The duty to exercise powers and discharge 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 and ensuring that the company does not trade whilst insolvent.
- The duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose.
- The duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company.
- Advising the Administrator of the location of any other company assets;
- 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.
Additionally, a Director has the following duties:
- A duty not to trade while insolvent. A company is insolvent if it is unable to pay its debts as and when they fall due. A Director should always have an understanding of the current financial position of the company and not allow the company to incur any debt that it is unable to pay.
- The books and records maintained should adequately record and explain all the company's dealings. The failure to maintain adequate books and records may cause a presumption of insolvency, if a Liquidator is appointed and commences an Insolvent Trading action.
What are the penalties?
There are serious consequences for a Director who fails to fulfil his/her duties. These consequences may affect a Director personally. A Director may face civil penalties for breaches of his/her duties. The Corporations Act provides some statutory defences for Directors, however these are unlikely to apply if it is evident a Director has not maintained current knowledge of the company's financial position.
In the event of insolvent trading allegations, a Director may face not only civil penalties, but compensation proceedings and criminal charges (if the Director is also found to have been dishonest).
In certain circumstances, a Director may also be disqualified from holding a position as a Director or managing a company for a period of time.
To fulfil your duties as a Director and avoid any penalties, civil or criminal charges or disqualification, it is important that you remain informed as to the financial position of your company and ensure that your company maintains adequate, timely books and records.
If you suspect your company is in financial difficulty, it is important to act immediately and obtain professional advice about the best course of action in your circumstances.
Acting promptly will not only ensure you fulfil your duties as a Director, but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company.
Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.