A detailed understanding of the obligations of a director and the requirements for appropriate corporate governance are essential for any successful company. Failing to understand your obligations as a director (directors duties) and maintain appropriate corporate governance structures can be devastating for companies and directors at a personal level.
The legislative framework within which companies and directors have to operate can impose significant fines and even gaol sentences for any breach.
Corporate governance refers to the set of systems, principles and processes by which a company is governed and controlled. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. A company’s stakeholders include everyone ranging from the board of directors, management, shareholders to customers, employees and society.
When considering the corporate governance issues associated with your company or business you need to consider such issues as creating and delegating authority, developing clear policies and procedures and managing employees and ensuring accountability.
Directors have a duty to act in good faith and in the best interests of a company. Being aware of your duties as a director can help avoid this personal liability.
What are Directors Duties?
There are general duties imposed by the Corporations Act on directors and officers of companies which include:
- the duty to exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is 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, and
- 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.
- positive duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
Many of the businesses we advise have also utilised our Legal Business Health Check to assist the clients in meeting their obligations.
Contact our team today if you have any questions relating to Directors Duties or any business legal questions.