A directorship role is associated with a range of responsibilities, from setting an organisation’s vision and long term goals to implementing the strategy to achieve that vision. In Australia, ‘Directors’ Duties’ are regulated by law to ensure directors act in the company’s best interests. Breaching these duties may result in a director being personally prosecuted or subject to hefty financial penalties. Hence, a company directorship should not be taken lightly.
If you plan to be a Director of an Australian company, you’ll need to be aware of the requirements for the role, the duties the law imposes on you, the potential liabilities if you breach these duties, and what you can do to protect yourself.
Directors’ qualifications
To qualify as a director in Australia, you need to fulfil the following requirements:
- Be at least 18 years old
- Not have been bankrupt or failed to fully comply with personal insolvency agreement under the Bankruptcy Act 1966
- Not have been banned by ASIC or a court from managing corporations
- Not have been convicted of fraud
- Be financially literate
- Provide signed consent in writing on taking on the role and responsibilities of a director.
The number of directors and residency requirements depends on the type of company you set up in Australia:
- Proprietary company (Pty Ltd) : 1 director minimum, with at least one director who resides in Australia
- Public company (Ltd) : 3 directors minimum, with at least two directors who reside in Australia
A slightly different rule applies to a proprietary company with crowd sourced funding – a minimum of two directors is required with the majority of directors resident in Australia.
Directors’ duties
All the following duties must be upheld by both foreign and Australian directors.
The principles of directors’ duties
Three different laws govern Directors’ duties in Australia – the Corporations Act, common law, and statutory duties such as Work Health Safety, consumer regulation, anti-bribery and corruption, taxation. There is a significant overlap between these laws but overall, the basic principles of directors’ duties are:
- Use care, skill and diligence in directing the company to achieve its goals
- Act in good faith and in the best interests of the company
- Exercise power and use information for a proper purpose (not for personal profit)
- Prevent insolvent trading (i.e. trading while the company is unable to pay its debts as and when due) and report and assist liquidators in the event of insolvency
- Avoid situations which may undermine the director’s impartiality to the company’s detriment (known as conflict of interest)
- Ensure financial records are accurate.
Directors’ duties for disclosures
Directors in Australia must also disclose their interests and lodge information with governing bodies, primarily the Australian Securities and Investment Commissions (ASIC). Additionally, directors of a listed company must continuously disclose any developments about the company’s affairs.
Directors’ duties under statutory law
Australian statutory law requires directors to:
- Ensure minimal hazards in the workplace through compliance with workplace health and safety regulations
- Refrain from misuse of market power, product safety breaches and false representations in relation to supply of goods
- Avoid any bribery conduct by establishing or reviewing company’s policies in respect to the giving of gifts and entertainment and regularly scrutinise gift registers
- Ensure the company meets its Pay-As-You-Go (PAYG) withholding and superannuation guarantee charge (SGC) obligations. Failing to meet these obligations will attract personal liability on directors.
Penalties for breach of directors’ duties
In the event of a breach of duties, a director could be found guilty of criminal or civil offences and suffer penalties which may include:
- Imprisonment of up to 5 years or a fine up to $340,000
- Prohibited from managing a company
- Personal liability for any debts or losses the company has suffered
- A penalty payment to the Commonwealth of up to a maximum of $200,000.
Depending on the governing Act, there are additional penalties involving statutory duties.
Key takeaways for directors
1. Directors should act in the best interests of the company in all circumstances. This also applies for a foreign-owned subsidiary, as directors are required to prioritise the interests of the subsidiary even if its interests do not align with the parent company’s interests. Remedies include expressing authorisation in the subsidiary’s constitution, including related party transactions provisions, or establishing a related party transaction committee.
2. As directors in Australia are exposed to personal liability with severe penalties, they should be familiar with the company’s activities and its financial position, and continuously maintain adequate knowledge of laws and regulations.
3. Directors should ensure they protect themselves by entering into a deed of indemnity, having Directors & Officers insurance in place, and employing personal asset protection strategies.
Performance of directors’ duties is a fundamental part of good corporate governance. As outlined in our earlier article, good corporate governance is necessary to enable companies to operate more efficiently, mitigate risk and safeguard stakeholders. It is essential to have an advisor who understands Australian regulations and has solid knowledge on good business practices.
Contact your local Accru office if you have any questions regarding corporate governance, directors’ duties, or risk minimisation strategies.
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