Duties of Directors: What You Need to Know

As a director, there are a number of duties imposed on you. A director’s primary duty is to the shareholders of the company. Also, a director is required to ensure compliance with legislation applicable to the company’s operation. However, the company’s insolvency or the real risk of insolvency results in the duties as a director expanding to include creditors and employees who have outstanding entitlements. It is important for directors or those contemplating setting up a company to be aware of the duties of directors.

General duties

Directors and offices of the company have general duties imposed upon them under the Corporations Act 2001 (Cth) including:

  • The duty to exercise their powers and duties with care and diligence a reasonable person would have. This includes taking steps to ensure the director is properly informed about the company’s financial position and ensuring the company does not trade when insolvent;
  • The duty to exercise their powers and duties in good faith in the best interests of the company and for a proper purpose;
  • The duty not to improperly use their position as director to gain an advantage for the director or someone else, or to cause detriment to the company;
  • The duty not to improperly use information obtained through their position as director to gain an advantage for the director or someone else, or to cause detriment to the company.

Duty to not trade while insolvent

As well as the general duties of directors outlined above, a director also has a positive duty to prevent the company from trading while insolvent. Simply put, a company is insolvent if it is unable to pay all its debts when the debts are due. Therefore, before a new debt is incurred, the director must consider whether they have reasonable grounds to suspect the company is insolvent or will become insolvent as a result of incurring the debt.

It is not sufficient to merely have an understanding of the company’s financial position only at the time of signing off on the annual financial statements. Directors must know the company’s financial position at all times.

Duty to keep books and records

The company must keep adequate financial records to correctly record and explain the company’s transactions, financial position and performance. It may be presumed the company is insolvent throughout a period if the company has failed to keep adequate financial records.

If you would like to discuss the duties of directors further, please contact our Principal, Leigh Avuri on 0402 912 962 or by email: leigh@avurilawyers.com.au

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