There are two important concepts that underlie all of the directors duties:
- To act in good faith & in the best interests of the company
- To meet a reasonable standard of care, diligence and skill when carrying out the duties
THE DUTIES
The following are the twelve key duties each director accepts when agreeing to be a director:
1.To act in good faith & in the company’s best interest
This is a subjective test of what the director believes to be in the company’s best interest. However, a director’s decision can be set aside if no reasonable person would make that decision.
2. Director’s power to be exercised for a proper purpose
Directors must not exercise their powers for a purpose different from that which the powers were conferred.
3. To comply with legislation & the company constitution (if any)
Directors must take actions that are required by legislation and any company constitution.
4. Reckless trading
Directors must not agree, cause or allow the business of the company to be carried on in a manner that is likely to create a substantial risk of serious loss to creditors of the company. For every transaction, a director must consider the ability of the company to pay its debts as they fall due. A breach of this duty may result in the company being liquidated and the director being held liable for losses suffered by the creditor.
5. Duty in Relation to Obligations
Directors must have reasonable grounds for believing that the company will be able to perform its obligation prior to the entering into those obligations. For example, directors must not give a guarantee on behalf of the company if the company has major cashflow problems.
6. Duty of care
Directors have a duty to exercise the care, diligence and skill that a reasonable director of a company of a similar nature would exercise. Directors must always ensure that they are informed of the company dealings, undertake inquiries to assess the company’s position and to clarify any matters, and seek competent advice where necessary.
To this end, it is not acceptable that a director merely sits in the background and signs papers when asked by other directors or shareholders. A director can not claim to be a “silent director” with no responsibility for the company. Every director has an obligation to be informed as to the company and its business dealings.
7. Use information and seek advice
Following on from the duty of care, directors must use information and seek advice when exercising their powers as directors. Such information may include reports, statements and financial data. Advice may be sought from a wide range of professionals including lawyers, accountants and banks.
Seeking advice and understanding company information will then allow the director to make informed decisions. This duty reinforces that directors cannot claim ignorance or a failure to make enquiries when making company decisions.
8. Disclose Director’s Interest in the Transaction
Directors must always disclose to the company if they will directly or indirectly derive a material financial benefit from a transaction the company is going to enter into. For example:
- The Company may purchase goods from a director’s business
- The Company guarantee a director’s personal lending from a bank
- The company borrows money from a director’s Family Trust
It is better to be prudent and disclose every potential interest, even if the director does not end up benefiting from the transaction.
9. Duty to Disclose Share Dealings
Every time a director acquires or disposes of company shares, he or she is required to disclose that information to the company and its shareholders. This includes the situations where shares are owned by another company a director is involved in, or the director’s family trust.
10. Restrictions on share dealing by directors
When directors are aware of information because they are a director or employee of the company, and that information is relevant to the value of the company shares, a director can only buy or sell shares for fair value.
This duty ensures that directors do not unfairly benefit from the confidential information they have received as a director. Two ways to ensure this duty is complied with is to arrange an independent person to value the shares, and/or release the confidential company information to the general public.
11. Duty to Supervise the Share Register
A company share register lists the name, details and number of shares held by each company shareholder. Each director must ensure that the share register is up to date, particularly at the time when shares are being sold and purchased.
12. Duty to keep proper accounting records
Directors must ensure that the company keeps proper accounting records. An accountant may assist the directors to keep records for the company.
Enforcement and liability
The Act sets out clear lines of accountability for directors who breach any of their duties. If directors breach their duties, they may be held personally liable. A director who takes his or her responsibilities as a director too lightly risks breaching their duties and faces potential liability and penalties.
If you have any queries or concerns over director’s duties or responsibilities, please contact a member of our commercial team to discuss.
