As a director of a company, your responsibilities are set out in the Corporations Law ("the Law"). Failure to fulfil your duties may lead to you being sued or prosecuted. This section outlines some of the major duties of directors and issues facing directors in running a company.
QUALIFICATIONS TO BE A COMPANY DIRECTOR
The Law does not lay down criteria as to skills or particular qualifications of persons who act as directors. There are however several negative qualifications that apply.
You must be 18 years of age or older to be a company director.
If you are older than 72 years and you are a director of a public company (or one of its subsidiaries), there are special formal requirements that must be met.
you are declared bankrupt and have not been discharged or you are subject to certain other provisions of the Bankruptcy Act;
you have been convicted of:
an offence against any law connected with the promotion, formation or management of a company; or
serious fraud (punishable by imprisonment for at least 3 months);or
certain offences against the Law including breaches of duties of directors and other offices and insolvent trading
you must not act as a director without consent of the Court.
If you have been convicted of offences under the above, you must not manage a company within 5 years of your conviction, or if imprisoned for one of these offences, within 5 years after your release from prison.
DIRECTOR'S DUTY TO ACT HONESTLY
A director must act honestly at all times towards the company. This is a statutory obligation as well as a common law obligation.
The majority of cases of dishonesty involve fraud, theft or other misuse of the company's property. The Courts have sent dishonest directors to prison and imposed very heavy fines.
Acting honestly means more than just avoiding outright dishonesty. If you take a decision knowing that it cannot be in the overall best interests of the company, you will not be acting honestly even if you did not intend to defraud anyone.
DIRECTOR'S DUTY OF CARE AND DILIGENCE
Directors should at all times employ a reasonable degree of skill, care and diligence in the exercise of their powers and the discharge of their duties.
To ensure that the appropriate levels of care and diligence are met, it is strongly advised that directors:
keep fully up to date on what the company is doing;
investigate the impact of any business proposal on their company's business performance and financial standing;
seek outside professional advice when they do not have sufficient information to make a properly informed decision;
question management and staff about how the business is going; and
take an active part in business transacted at directors' meetings.
It is unwise for directors to simply agree to proposals put forward by other directors without obtaining some information about the effect of the proposals on the company's business.
DIRECTOR'S DUTY NOT TO MISUSE INFORMATION OR POSITION
A director must act with the utmost good faith towards the company. This is a statutory obligation as well as a common law obligation.
A director may receive information in their role as director that will have a commercial value. A director must not use this information against the company or to advance the director's own private interests. The director must not make improper use of this information to obtain, indirectly or directly, a gain or advantage for the director or any other person, or to cause a detriment to the company.
A director's position must only be used for the company's interests. If a director has a personal interest that might give rise to a conflict of interest,that director must disclose the interest at the directors' meetings. For the case of a single director company, that single director must declare the interest in writing and keep it safely with the company's records. If you are the only director and only shareholder, you do not have to declare such an interest.
Your duty as a director is to look after the welfare of the company as a whole. The Law recognises the company as an entity in its own right, which has its own interests and needs. Since the company can act only through the directors and other company officers and employees who work for it, the company directors must take responsibility for what the company does and for what happens to it. A director must put the company's best interests ahead of their own personal interests.
REQUIREMENTS OF DIRECTORS
Directors control most aspects of a company's business. The company's constitution or replaceable rules will govern the powers and functions of directors. Directors are commonly involved in:
buying or leasing trading premises;
arranging finance so that the company can carry on business;
ordering goods and services;
operating retail outlets;
making sure the company's accounts are prepared properly;
making sure tax returns are prepared; and
meeting other legal and regulatory requirements.
Larger companies sometimes employ other persons to carry out the administrative functions. Directors of larger companies may be more involved with matters such as:
the appointment of executives;
maintaining good industrial relations with the company's workers;
long term business and financial planning;
looking at the overall performance of the company;
deciding whether the company should be moving into new lines of business; and
deciding how much of the company's profits should be paid to members as dividends.
Directors must ensure that the following requirements are met:
The company must set up a registered office in Australia. If the company does not occupy the same address as the registered office, then the directors must have written consent from the person who occupies the registered address.
The company must display its name prominently at every place at which the company carries on business which is open to the public.
The registered office of a public company must be open to the public:
each business day from at least 10 am to 12 noon and from at least 2 pm to 4 pm; or
at least 3 hours chosen by the company between 9 am and 5 pm each business day.
All companies are required to have a principal place of business within Australia, which may or may not be at the registered office.
The company must display the company name and the Australian Company Number("ACN") on the common seal (if any), on every public document issued,signed or published on behalf of the company, every negotiable instrument issued, or signed by or on behalf of the company and all documents lodged with the Australian Securities and Investments Commission ("ASIC").
NOTICE REQUIREMENTS FOR DIRECTORS
The directors of a company must ensure that the company lodges with ASIC all forms required of it within the prescribed period. Commonly lodged forms include:
Notification of Change to Officeholders (Form 304). Where there has been a change in directors or secretaries (new appointment or cessation or a change in their name or residential address). This is also applicable to alternate directors. The prescribed period for lodgement is within 14 days of the change.
Notification by Officeholders of Resignation or Retirement (Form 370).Where a director or secretary wishes to give notice of their own resignation or retirement they can lodge a Form 370 with ASIC. The prescribed period for lodgement is any time after the date of cessation. The company must still lodge a Form 304.
Annual Return of the Company (Form 316). A company must lodge a return for each calendar year. The prescribed period for lodgement is before 31 January of the following calendar year to which the return relates.
Notification of Share Issue (Form 207). Where a company issues or cancels shares. The prescribed period for lodgement is within one month of issue.
Notification of Change of Office Hours or Address (Form 203). Where there is a change with respect to the address of the registered office or office hours of the principal place of business. The prescribed period for lodgement is within 14 days of the change.
Change of the Company Name (Form 205). Where a company wants to change its name, it must pass a special resolution adopting a new name and lodge a copy of the special resolution with ASIC. The prescribed period for lodgement is within 14 days of the date of the meeting.
MAINTENANCE OF BOOKS AND FINANCIAL RECORDS
The Corporations Law requires a company to obtain a person's signed consent before appointing that person as a director of the company. The company must keep that director's consent, normally in the company register. It is standard procedure when resigning as a director of a company to lodge a notice of director's resignation which is placed in the company register. These forms are equally applicable to secretaries. The directors must ensure that the company keeps financial records that correctly record and explain the company's transactions (including any transactions as trustee) and which explain the company's financial position. No matter how small the company, the records must be kept so that the true and fair financial reports of the company can be prepared and the financial reports can be conveniently and properly audited if that becomes necessary.
In practice, the obligations outlined above mean keeping, in a systematic way, all basic records like receipts and bills, etc. The company must have these basic records to build up a picture of the company's affairs as well as for tax purposes.
DIRECTORS' DUTY TO PREPARE FORMAL REPORTS EACH YEAR
The Law imposes different reporting obligations on companies depending on their classification. The Law makes a distinction between "small" and"large" proprietary companies.
A company is a "large proprietary company" if it meets any two or more of these three tests:
Revenue. More than $10 million in gross operating revenue at the end of the financial year of the company and the entities that it controls.
Assets. More than $5 million in gross assets at the end of the financial year of the company and the entities that it controls.
Employees. More than 50 employees employed by the company and the entities that it controls at the end of the financial year.
With respect to a "small proprietary company" as defined by the Law, strictly speaking, it does not have to prepare formal financial reports each year. However, it is good practice to prepare them, so that the company is aware of how it is performing. A small proprietary company will have to prepare financial reports if it is asked to do so by members holding at least 5% of its voting shares or by ASIC.
A public company or a large proprietary company will have to prepare formal financial reports and have them audited. It is also a requirement that you prepare, sign and attach to the financial reports a director's report that includes statements on a "true and fair" view of solvency. Directors must take responsibility for financial statements prepared for members.
COMPANY INSOLVENCY AND DIRECTORS' LIABILITY
You must not allow your company to continue trading if the company is unable to meet its existing debts. A company must not incur more debts, if it would mean that the company is unable to meet its existing debts. Such a company is"insolvent" and by allowing the company to take on more debts, the directors are breaking the law against insolvent trading and would be personally liable to compensate the company (or in certain circumstances the creditor) for the debt.
It is a director's duty to prevent the company incurring a debt if there are reasonable grounds for suspecting that the company:
would become insolvent when the debt is incurred; or
would become insolvent by incurring the debt or a number of debts.
A director can avoid being found liable if:
the director took all reasonable steps to prevent the company from incurring the debt; or
the director expected, on reasonable grounds, that the company was solvent at the time that the debt in question was incurred and the company would remain solvent even if it incurred the debt and other debts incurred at that time; or
the director believed, on reasonable grounds, that someone competent and reliable was responsible for providing the directors with adequate information about the solvency of the company and that that person was meeting that responsibility; or
that the director did not take part in management of the company at the time the debt was incurred, because of illness or other good reason. Apathy or disinterest on the part of the director is not sufficient.
ISSUE OF SHARES OR OTHER SECURITIES
If you are a director of a proprietary company, you must not offer shares or other company securities to the public. Illegal fund raising is a serious offence. You can offer shares to existing shareholders of the company or employees of the company or a subsidiary.
If you are a director of a public company, and you wish to offer company securities to the public, you will in most circumstances need to issue a prospectus that is registered by ASIC.
In the past, it was thought that non-executive directors who were directors only in name had a substantially less onerous level of responsibility in regard to the affairs of the company. Silent directors could argue that they were na've in respect of the affairs of the company or did not possess sufficient business experience to perform the duties of a director.
There have recently been several important cases as to the standards of care for such directors. While it is unclear whether the duty required of a silent director is exactly the same as for an active director, it is clear that the standard of care required of silent directors is higher than originally thought.
It is common sense that a person who does not possess the skills to perform the duties of a director should either not consent to act as a director or should attempt to acquire the requisite knowledge. All directors must familiarise themselves with the activities of the company and attend the directors' meetings.
DUTIES OF NON-DIRECTOR EMPLOYEES OF A COMPANY
A non-director employee of a company has duties at common law, including the duty to obey directions of proper authorities and to show due care in the performance of duties. Failure to observe these duties can render the employee liable for damages to the employer.
In some circumstances, a senior employee of a company has duties and liabilities analogous to that of a director. The Law imposes personal liabilities in circumstances where persons involved in the management of the company were personally responsible for the insolvent trading of the company or involved in fraudulent conduct. There are also other provisions of the Law imposing personal responsibility on certain employees of a company for such things as failure to lodge documents, maintain company registers and minute books, audit requirements etc.
ASIC's POWERS AGAINST DISHONEST DIRECTORS
ASIC can take a number of steps against directors who fail in their duties including:
instituting civil penalty proceedings in certain cases where there has been misconduct. ASIC can apply to the Court for a civil penalty to be imposed upon those responsible;
civil action in cases of public interest to preserve property and recover damages from directors; and
criminal action to prosecute those who break the law.
This Information Outline is provided courtesy of Craddock Murray Neumann who are experienced in this area of law. They are located at Level 1, 255 Castlereagh Street Sydney NSW 2000 or call them on (02) 9283 4755if you would like more information on the legal topic, or you wish to obtain formal advice regarding your situation.
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