Guidelines for Conduct of Directors
The following should be used as a guide only and does not constitute legal advice nor does it fully set out all of a director’s responsibilities under the law. Directors requiring comprehensive advice regarding their position should obtain legal advice from a qualified legal practitioner.
The Corporations Act 2001
The Corporations Act 2001 sets out a lot of the responsibilities of directors and secretaries of companies. However, this statute is not the only source of their legal obligations, as the common law and equity also impose duties. Most of these impose obligations on directors to act honestly, in good faith and with reasonable care and diligence.
The company’s constitution (if any) or rules may also set out the directors’ powers and functions.
The Australian Securities & Investments Commission (ASIC) considers itself the “company law watchdog” and is responsible for administering and overseeing the corporations law regime and the companies (and their directors) that are a part of it.
ASIC has an information sheet on its website entitled “Your company and the law” regarding the legal obligations of directors which can be found here.
Some of these guidelines are taken from that fact sheet.
Directors acting together constitute the board of the company and each director is responsible as an individual for the actions of the board (as well as all of the directors collectively), even if they appoint an agent to look after the company’s affairs.
A company secretary (if the company has one) generally carries out administrative roles for the company but is also held to the same standards as the directors. Proprietary companies are not required to have a secretary.
Directors may be employees of the company (called executive directors) or may be outside people brought in due to special expertise or experience or to lend independence to the decision-making of the board (called non-executive directors). Since executive directors are also employees, they need to be more careful about ensuring their interests as employees of a company do not conflict with their
duties as directors.
Directors’ legal duties
The directors are responsible for managing the company, generally with the expectation of increasing the value of the company for the shareholders.
In doing this, directors, secretaries and other officers of companies must:
- be honest and careful at all times;
- know what their company is doing;
- not take advantage of their position to further their own needs, or those of a
- friend/associate/family member outside the organisation;
- exercise due care and diligence in carrying out their duties;
- take extra care if the company is operating a business because they may be handling other people’s money;
- make sure that the company can pay its debts;
- see that the company keeps proper financial records;
- act in the company’s best interests, not just in their own personal interests, even though they may have set up the company just for personal or taxation reasons;
- use any information they get through their position properly and in the best interests of the company (it is a crime to use that information to gain, directly or indirectly, an advantage for themselves or for any other person, or to harm the company, even if it is not confidential);
- keep confidential information, s uch as trade secrets, in the strictest confidence – such information should not be disclosed even accidentally without the authorisation of the company;
- provide adequate information to authorised persons or to members when requested and not mislead them in any way;
- obtain and follow professional advice as and when necessary and ensure that such advice is objective and impartial;
- retain their independence and not act in accordance with the wishes or directions of a third party or parties; and
- disclose personal interests that might conflict with their duties as a director and, if necessary,
refrain from voting on or otherwise participating in board discussions about a matter where a conflict of interest exists.
Directors also owe a “fiduciary duty” to the company, since they are in a unique position of trust in managing the assets of the company on behalf of the shareholders. T hey must “act with fidelity and trust” and in good faith and are effectively treated as trustees on behalf of the shareholders as a group. Therefore, they must not make decisions in accordance with their own agendas; they must act for the benefit of the company and the interests of the company must always come first.
However, although they owe a fiduciary duty to the members of the company as a whole, they do not necessarily owe a duty to individual members, nor to employees of the company. They also should not act in the interests of a particular section of shareholders but owe their duties to the shareholders as a group.
If there is any doubt about whether a proposed course of action is inconsistent with a director’s fiduciary duties then the course of action should not be supported. The director or directors should seek independent advice to clarify the issue as soon as possible.
Being a director can be hard work. Directors who fail to keep themselves adequately informed about the company’s affairs risk facing legal liability if the company gets into trouble. In this regard, ASIC states:
“Only be a company director or a company secretary if you are willing to put in the effort.”
A director must keep fully up-to-date on what their company is doing. T o achieve this, ASIC recommends that directors (among other things):
- find out for themselves how any proposed action will affect their company’s business performance, especially if it involves a lot of the company’s money;
- actively seek out and obtain sufficient information about proposals before making decisions;
- get outside professional advice when they need more details to make an informed decision;
- question managers and staff about how the business is going; and
- take an active part in directors’ meetings.
For this reason, a person should limit the number of directorships they hold depending upon the size and nature of the companies involved as well as any other commitments they have. They should also ensure that they do not have any conflicts of interest, or that they adequately manage such conflicts that do arise, when sitting on the boards of different, or even competing, companies.
Directors are personally responsible for keeping proper company records under the Corporations Act 2001.
Examples of records every company must keep include:
- registers of members (shareholders);
- registers of option holders (if it has them);
- minutes of general meetings;
- minutes of meetings of directors; and
- registers of charges created by the company over company property.
They must also ensure that the company keeps up-to-date financial records that:
- correctly record and explain its transactions (including any transactions as a trustee);
- explain the company’s financial position and performance; and
- enable true and fair financial statements of the company to be prepared if needed.
These financial records should be sufficient for financial statements to be prepared and audited (if necessary) for at least seven years after the transactions are completed They will also assist the company to obey the tax laws.
Even if a company is not required to prepare formal financial statements, they must still keep financial records, and will generally need financial reports for managing and measuring the company’s progress, for tax purposes or for raising finance. Attempts to hide or distort financial information may breach the director’s statutory and/or fiduciary duties.
Professional advice should be sought about the specific records required, because the financial records needed will vary from company to company, but they may include cash records, wages and superannuation records, asset registers, tax returns and deeds, contracts and agreements.
Financial records may be kept electronically, provided they can be converted into hard copy so they can be inspected. Electronic records should also be back up regularly.
See also ASIC’s fact sheet entitled “What books and records should my company keep?”
Directors have many responsibilities but some of their other duties include:
- Paying the company’s annual review fee each year and lodging t he Statement of Company Details (if necessary).
- Directors must stop their company trading if it is unable to meet its existing debts. They must also pass a solvency resolution each year. If they let the company trade while insolvent (i., if it can’t pay its debts) they are breaking the law and can be sued personally by a liquidator or creditors for their own assets, as well as facing the possibility of civil or criminal action.
- Keeping ASIC informed of various changes to the company’s details (such as changes of directors or their details, the issue of new shares, the creation of a charge over company property or a change in the company’s name) within the required time period.
- Proprietary companies are generally not allowed to raise money from the public by selling shares and should avoid anything to do with illegal fundraising.
- They should ensure that the company name is displayed at every place at which the company carries on business and that is open to the public, as well as on the common seal (if the company has one), every public document of the company, every negotiable instrument (e.g. cheque, promissory note etc.) of the company and all documents lodged with ASIC (along with the words ‘Australian Company Number’ (or ‘ACN’) or ‘Australian Business Number’ (or ‘ABN’) and the relevant number).
This guide is intended to be a guide only. You should not act solely on the basis of the information contained in this Guide because many aspects of the material have been generalised and the tax laws apply differently to different people in different circumstances. Further, as tax and other laws change frequently, there may have been changes to the law since the Guide was written.
Australian Business Structures Pty Ltd, its directors, employees, consultants and author expressly disclaim any and all liability to any person, whether a purchaser or not, for the consequences of anything done or omitted to be done by any such person relying on a part or the whole of the contents of this publication.
None of the comments in this Guide are intended to be advice, whether legal, professional or financial. Do not act on the information contained in this Guide without first obtaining specific advice regarding your particular circumstances from a tax or legal professional.
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The law is as stated 1 January 2018.