Directors - What are my duties as a director?
Generally, in addition to the requirement to ensure compliance with general and specific laws applying to your company’s operations, your primary duty is to the shareholders. However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees with outstanding entitlements).
General duties imposed by the Corporations Act on directors and officers of companies 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.
Duty to not trade while insolvent
As well as general directors’ duties, you also have a 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.
An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position.
Duty to keep books and records
Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfils this requirement contravenes the Corporations Act.
For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.