The current market turmoil around the globe has focused attention on the conduct of company directors and the obligations they have to their companies and stakeholders. Good governance is essential to any business, whether it be big or small and the governing bodies in Australia, especially ASIC, take this very seriously.
Directors need to be aware of what the responsibilities are and put in place measures to protect their business and stakeholders.
What to do
Firstly you need to understand a director’s responsibilities and how they are handled in business.
It is important to recognise that a company is a separate legal entity that is operated by individuals. A director of a company has a fiduciary responsibility to act in the interest of another, this being their organisation or shareholders, and not in his or her own interest.
In this respect a director must not allow conflicting interest or personal advantages override the organisation’s interest.
The organisation to which the director has been appointed must always come first.
Australia, generally, is acknowledged as having an effective world class system of corporate governance, and a comprehensive system of corporate law, and directors are generally aware that their responsibilities extend well beyond legal duties to include ethical, social and environmental.
The goal of a director is to grow a company and help it succeed and be profitable.
Historically small business does this well, but with the economy being more challenging and numerous companies becoming insolvent things change quickly in business, and directors need to be aware of changes to the Corporations Act in managing their business.
How the duties of a director of a private company differ from a publicly listed company
A private company director has the same duties and responsibilities under company law as a public company director.
Companies vary greatly in size, complexity, industry, and ownership structure, and therefore a director in one company may have very different responsibilities to another.
Clearly a public company director needs to deal with many more shareholders and often manage larger companies, increasing the responsibilities.
A range of other rules affect directors’ obligations such as:
- trade practices legislation
- environmental law
- workplace health and safety
- equal opportunity
The list of rules affecting directors is ever increasing simply because the list of rules for public companies is ever changing.
Public companies place risk management and corporate compliance ahead of many other divisions in their business and treat compliance by its directors and officers as critical to their organisation.
Key risks for directors if they mismanage a business
There are both civil and criminal charges that can be brought against a director.
Creditors, shareholders and employees have a number of ways of bringing legal action against directors under the Corporations Act.
The main director’s duties are set out in section 180-184 and Section 588 of the Corporations Act and include:
- Exercise care, skill and diligence s 180 CA
- Act in good faith s 181 CA – fiduciary responsibility
- Not to misuse the officer's position s 182 CA
- Not to misuse information s 183 CA – insider trading
- Not to act dishonestly s 184 CA
- Not to trade insolvently
- The last three represent criminal offences.
As we have seen in society, individuals doing the wrong thing equates to severe punishment. The consequences of breaching duties in business have the same ramifications for directors and range from civil to criminal actions.
The more serious breach may result in disqualification from taking part in the management of any company for up to 5 years and/ or five years imprisonment for criminal breaches.
Liability for creditor debts, such as the ATO and how best to manage your exposures
A director has an interest to the company and not to third parties; however in the insolvency context under Section 588 directors need to be extremely cautious when allowing their company to trade when close to insolvency.
A key rule is that you can only incur a debt as a director if you know that the company can meet that liability to its creditor.
For example with the ATO, if a business has not paid their liabilities and it receives a Section 222 notice, and the director does not respond within 14 days, then the director may be personally liable for this debt.
Many small company directors have been caught out by this Section 222 notice.
Simple steps a director can take to protect themselves
A director, as a minimum, needs to be aware of what their responsibilities are. This is about doing the right thing and going about your business in a manner which is not illegal.
Generally speaking directors are seen to be complying with their statutory duties if they use:
- the business judgment rule or;
- they rationally believe that the judgment is in the best interests of the corporation
A final word
A director is advised to seek advice from ASIC, their lawyers or accountants to better understand how to protect their personal interest against the organisation’s interest.
Ultimately, if you are managing your business in an ethical manner then your exposure will be minimal if any.
Where to go for help
Azure Group is a leading boutique chartered accounting practice offering short and long term solutions to your business through our unique technical and commercial service offerings. If you need help to monitor current and future cash flows and manage costs; manage increasing volume of complex tax compliance and corporate governance obligations; and make the right decisions at the right time, facilitated by accurate and timely financial information, planning and strategy, contact Natalie Jones on (02) 9238 1120 or email@example.com
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Editor: Charisse Gray firstname.lastname@example.org
Reviewed June 2013