By Jackson McKinley
Directors hold an essential role in overseeing the management and shaping the decision-making process within companies. As companies are themselves individual and separate entities, the relationship of a director of a company is one of a fiduciary similar to a trustee to its beneficiaries. The director owes obligations to the company as an entity, and by extension, to the shareholders/members who constitute the company.
In accordance with this duty, directors are required to conduct themselves in a manner that prioritises the company’s interests and those of its stakeholders. The Corporations Act, the company constitution and any company shareholders agreement will set out the rights and obligations that directors must adhere to. This article sets out the general obligations that directs are subject to, irrespective of the specific written agreements that regulate them.
Duty of Care and Diligence
The duty of care and diligence requires directors to act with reasonable care, skill, and diligence in their roles. This involves making decisions based on comprehensive information, possessing a thorough understanding of the company’s functions, and contemplating the possible repercussions of their actions. Directors must maintain an engaged presence and keep themselves apprised of the company’s ongoing affairs.
Duty to Act in Good Faith and in the Best Interests of the Company
Directors are bound by a fiduciary obligation to act in good faith and in the best interest of the company as a whole. This means placing the company’s interests before personal interests and steering clear of conflicts that might compromise their impartiality. Directors, when faced with a decision, ought to meticulously evaluate its potential effect on the company and its stakeholders. The Corporations Act includes a regime for disclosing the personal stake that directors may have in related party transactions and possible conflicts of interests which should be closely followed when making decisions.
Duty to Avoid Conflicts of Interest
Directors must avoid situations where their personal interests conflict with those of the company. If a potential conflict arises, directors should disclose it to the board and, in some cases, abstain from participating in relevant discussions and voting. To ensure that decisions are made objectively and without undue bias, to act with transparency is essential. It is also paramount to ensure that those decisions are considered at arm’s length, when they may be subject to future scrutiny from third parties, for example, liquidators, administrators or Courts. Generally, liquidator transactions can be voided or wound back up to four years after they were made.
Duty to Prevent Insolvent Trading
One of the most critical duties of directors is to prevent insolvent trading. Directors must take reasonable steps to ensure that the company does not trade while insolvent. The general test of insolvency is the inability of a company to settle its debts as they become due. Meeting this threshold may subject the company to become insolvent. If the company continues to trade in that circumstance, the directors have breached their obligations.
The Corporations Act includes specific provisions which give directors an escape from prosecution for those matters if they are undertaking work to bring a company back to a solvent position. These provisions are known as safe harbour protections. However, a director should seek legal and accounting advice before undertaking a course of action in these circumstances, to ensure they meet the strict safe harbour requirements. Failure to comply with the insolvent trading duty might result in severe consequences, such as personal liability for debts incurred during the insolvency period.
Duty of Care with Financial Reporting
Directors bear the responsibility for the accurate, completeness, and compliance of the company’s financial documents with relevant accounting standards and laws. Transparent and reliable financial disclosure is vital for shareholders and investors to accurately assess the company’s financial stability and to make informed decisions. It is also a requirement to continue trading as a matter of compliance with ASIC.
Duty to Not Improperly Use Information
Directors are privy to sensitive and confidential information regarding the company. Directors have a duty not to misuse or improperly disclose this information for personal gain or to cause detriment to the company. This also overlaps with the fiduciary obligations and conflict of interest duties.
Duty to Monitor and Delegate
While directors can delegate certain tasks, they remain ultimately responsible for the company’s performance and compliance with the law. Directors should carefully choose skilled and reliable individuals for delegation and must ensure adequate supervision to avoid negligence or misconduct.
Directors’ duties in form the cornerstone of ethical and responsible corporate governance. These duties emphasise accountability, transparency and integrity, all qualities that are essential for upholding public trust and sustainable growth of companies.
If you have recently been appointed as a director, or are considering a proposal to do so, you may wish to seek advice on the general duties spoken about above, and further specific duties that may be imposed upon you by operation of company documents.
Foulsham and Geddes notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Foulsham and Geddes are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.