What are Company Directors?

A company director is a person validly appointed as director, or someone who has not been validly appointed as a director but is either acting in the capacity of a director (‘de facto director’), or someone whose instructions and wishes must be followed (‘shadow director’). You may therefore be considered a company director, even if you haven’t been officially appointed as one.

De-Facto Directors

There is no set test to determine whether a person is a ‘de facto director’, rather it depends on what tasks that person is carrying out, in what context and how that person is viewed by themselves, the company and others.

Shadow Directors

There are a number of factors to consider when determining whether someone is a shadow director.

  • Do they have a genuine interest in giving advice to the board?
  • Do they actively involve themselves in board meetings?
  • Do they have the potential to control the company?
  • Do they authorise financial transactions?
  • Do they manage the company’s business activities?
  • Do they give instructions to the appointed directors on how they should act?

If you answered yes to some of the above, you could be considered a shadow director. The more you answered yes, the more likely it is that you are a shadow director.

Do all companies need a company director?

The Corporations Act 2001 requires public companies to have at least three directors, two of whom must ordinarily reside in Australia and for private companies to have at least one director who must ordinarily reside in Australia.

What do company directors do?

Generally, the role of a company director is to oversee a company’s affairs on behalf of the members (e.g. shareholders) of that company. The director’s duty is to the company, not to other directors or shareholders and the director must put the company’s interests above their own interests.

The duties of a company director derive from many sources including legislation (the Corporations Act 2001 (the Act)), case law, and company documents, such as the company constitution (if the company has one -companies may have a written constitution or simply be regulated by the ‘replaceable rules’ found in the Act) or shareholder agreements (if the company has one).

These duties are vast and often overlap but can be broadly summarised into two main categories, ‘Loyalty & Good Faith’ which are essentially the personal responsibilities of directors and ‘Care, Diligence and Skill’, which are the professional responsibilities. These duties are summarised below:

 

Loyalty & Good Faith Care, Diligence & Skill
Act in the best interests of the company. Act with a level of care and diligence a reasonable person might show in this role.
Use powers for proper purposes. Always be informed about a company’s financial position, including whether the company is solvent (i.e. able to pay all debts as they fall due).
Not to fetter discretions (i.e. consider each decision on its own merits). Ensure the company is not trading whilst insolvent or where they may suspect to be insolvent.
Avoid actual and potential conflicts and disclose conflicts if they arise. Consider the company’s financial position before incurring new debt.
ASIC provides a guide to help directors understand and comply with this duty.
Not to misuse information or position to gain an advantage for themselves or for someone else, or to the detriment of the company. Take all reasonable steps to ensure the company keeps updated and adequate financial records and reporting.
Obtain approval of the public company’s members before giving financial benefits to related party transactions. Lodge information with ASIC. Disclose any personal interests in matters relating to the company’s affairs.
Notify other directors of any personal interest when conflict arises. This will depend on the type and size of the company.
Generally, small proprietary companies have less onerous reporting obligations than large, public or charitable ones.

What is the ‘Business Judgement Rule’?

The business judgement rule is the test that judges apply to determine whether a director should be held liable for breach of care, diligence and skill. The judge will consider what a reasonable business person might have done if they were in the director’s position, making the same decision, with the same information available to them.

The courts recognise that the founder of a start-up, for example, might be more comfortable taking risks than the average person because start-up businesses are inherently risky and founders take calculated risks all the time. As a director, you are not required to eliminate risks, but you are required to use your ‘business judgement’ and make decisions that you honestly believe are in the best interest of the business.

What are the consequences of breaching directors’ duties?

The level of consequence will depend on the type and seriousness of the breach. The possible consequences include:

  • Criminal penalties that may include up to 5 years imprisonment;
  • Civil penalties (substantial fines, up to $200,000);
  • Being disqualified from managing a company;
  • Commercial consequences such as placing your company’s reputation and assets at risk; and
  • Being held personally liable for the company’s debts.

Key Takeaways:

  • You may be considered a company director even if you haven’t been officially appointed as one.
  • Directors have wide-ranging legal obligations which carry civil and criminal consequences if breached.
  • Generally, directors must put the company’s interests above their own interests, act loyally and in good faith and use care, diligence and skill in all their dealings.
  • Private companies must have at least one director who ordinarily resides in Australia.
  • Public companies must have at least three directors, two of whom must ordinarily reside in Australia.

Next Steps…

If you have any questions regarding whether or not you would be considered a director or about your liability as a director, please do not hesitate to get in contact with Morrissey Law & Advisory.

You can contact our specialists directly: Sally Bates s.bates@morrisseylaw.com.au & Georgia Marjoribanks g.marjoribanks@morrisseylaw.com.au.

Or use the contact links or chat box below to get in touch.

 


 

Morrissey Law + Advisory communications are only intended to provide commentary and general information as at the date of publication. They are for reference purposes only, do not constitute legal advice and should not be relied upon as such. Formal legal advice should always be obtained about particular transactions, contracts or matters of interest before taking any action based on this communication. Authors and contributors may not be admitted in all State and Territories.