Running a company can be tricky and it is important to be legally compliant. Company directors have specific duties under the law and can face significant penalties if they do not comply. This article sets out a summary of some directors’ duties and responsibilities to help inform your business.
Who is a director?
Company directors manage the affairs of a business on behalf of shareholders. They make decisions about the company and must comply with their directors’ duties under the law. Directors are generally appointed, but some people can be considered ‘shadow’ or ‘de-facto’ directors even without appointment if they have a high level of control and influence over the company’s affairs. Directors’ duties apply to all directors, whether appointed, shadow or de-facto directors.
What is a Director Identification Number?
Recent changes to company law mean that directors must now have a Director Identification Number (‘DIN’ or ‘Director ID’). This is a unique 15-digit number used to identify a director. It is similar to a tax file number, in the sense that you can apply for it once and keep it forever. The easiest way to apply for a DIN is online.
What are directors’ duties?
As a director, you have specific duties under the law, including to:
- Make company decisions in the best interests of the company;
- Be fully aware of the ongoings of your company, including its financial position and current business performance;
- Not use your position as a director to harm the company, gain personal advantage, or gain advantage for someone else;
- Not use information you have gained as a director to harm the company, gain personal advantage, or gain advantage for someone else;
- Disclose any personal conflicts of interest you may have;
- Get professional advice if you need help making an informed decision about your company;
- Keep your company and personal assets separate;
- Not to trade when your company is insolvent; and
- Lodge certain information with ASIC, including share issues, financial reports and records.
What is the corporate veil?
Directors should be aware of the ‘corporate veil’. The corporate veil is the limited liability you obtain from incorporation. Because a company is a separate legal entity, directors are generally not personally liable for debts and losses of the company. However, the corporate veil can be ‘pierced’ in some circumstances, and directors will be personally liable for the actions of the company if this is the case. This can happen where:
- Your company is a sham, or used for fraud;
- You knowingly and fraudulently breach your duties to act in the best interests of the company;
- You engage in insolvent trading; or
- You fail to prevent insolvent trading.
What is insolvent trading?
The directors’ duties include a responsibility to not trade when your company is insolvent. This duty is particularly important as you can be personally liable if it is breached. A company is insolvent when it cannot pay its debts when they are due.
You can help prevent insolvent trading by:
- Keeping informed about the company’s financial position at all times;
- Undertaking regular reviews and auditing records;
- Investigating further if you are concerned about your company’s solvency; and
- Getting professional advice where necessary.
What happens if I don’t comply with my directors’ duties?
Failure to comply with directors’ duties can result in a breach of civil or criminal provisions. Consequences of these breaches include:
- Imprisonment of up to five years;
- A $200,000 penalty;
- Personal liability for the loss or damage suffered by the company; and
- Prohibition from managing a company.
Failure to lodge the required documents with ASIC can also result in prosecution of the company secretary or director, and deregistration of your company.
- Directors make decisions about the company and must comply with their directors’ duties to avoid significant consequences.
- Directors must have a Director ID under recent changes to the law.
- There are a broad range of directors’ duties, including the duty to act in the best interests of the company and lodge certain information with ASIC.
- Directors can be personally liable for the debts and losses of the company in some circumstances, including where they have engaged in insolvent trading.
Gladwin Legal are experts in corporate law and advise many businesses, from start-ups to established companies. If you need help understanding your legal obligations or require drafting of corporate documents, please contact us at or 1300 033 934.