Directors Duties: Corporate law summary for small companies

Corporate law for small businesses in Australia is now about company directors duties, and not just company directors duties owed to shareholders, but company duties owed to other stakeholders as well. What are the duties of a director of a company? How have directors duties become stricter?

There was a time when many company directors came for the tax-deductible lunch, then for the cushy job. The age of the ‘sleeping director’ is over.

In the last decade or so the bar has been significantly raised on company directors duties.  Directors are expected to be way more familiar with the company’s business than they used to be, even if it involves stuff they have no clue about.

Many big companies have celebrity directors, for instance a tennis star on the board of a racquet maker. That tennis star is now expected to have a good general grasp of the company’s activities, and even a basic financial understanding of the company. Topspin won’t be enough if they end up in the other kind of court.

So, what are the company directors duties these days? The main ones are-

  1. The duty of care and diligence. The Corporations Act outlines a ‘reasonable person in that position’ standard, so just because you are under par will not be a good excuse. This duty covers a wide range of company activities, as appropriate to that company, and includes the duty to take care with public statements of important business or financial matters. A breach of this duty can lead to a ‘stepping stones path’ of directors personal liability for the company’s breaches of the law, where the directors could reasonably be expected to stop the company’s illegal activity but failed to do so. (For more information on this point, please see our earlier Blog article.
  2. The duty to make business judgements in good faith for a good reason without feathering your own nest. Again a ‘reasonable person in that position’ standard applies.
  3. The duty not to feather your own nest by using confidential company information. This one got Steve Vizard a fine of almost $400,000 and a ten-year directorship ban, because he had inside info on upcoming Telstra contracts while on the Board and used it to trade Telstra stock to avoid a loss. The court held that even though Vizard’s actions did not harm Telstra, and did not even make him a profit, he had breached the Act by doing it at all.
  4. The duty to disclose any conflict of interest which means your personal interests will be affected by a company decision.
  5. The duty to make your own reasonably thorough assessment of a business situation and not just rely on employees. Saying that Joanne in Accounts told you what to do, so it’s all her fault, won’t work.
  6. The duty not to allow the company to trade while insolvent. This one is so complicated that we have done a  whole article on insolvent trading. Suffice it to say here that the Titanic defence (‘I never saw that iceberg’) will not work. You will be expected to look for that iceberg!

There are also extra, even stricter duties which fall upon Board Secretaries and Chairpersons, mainly regarding reporting of financial and other information to the relevant authorities.

These duties arise under the Corporations Act 2010 (Cth), and corporate law generally. Other more specific responsibilities may be set out in the company’s constitution – if there is one. Many small business do not have a company constitution, in which case the Replaceable Rules would set the rules for the company’s processes.

At some point, you may wish to access the corporate governance resources provided by the Australian Institute of Company Directors, to its members.

Contact us for an initial obligation-free and confidential discussion, when you find yourself in a dispute about company directors duties, or even earlier.