01 Jul Business & Advisory Boards
Whether you are a small business, start-up or multi-national, incorporated companies at some stage of the business cycle, will need to consider the duties of the company’s Corporate or Advisory Board.
Directors, formally appointed or not, exercise a degree of control over the company’s affairs and are responsible for several decisions relevant to the company’s trajectory, including whether a dividend will be paid in any given year. Nominating the right person(s) and personalities to your Board, whether that Board is comprised of one or several members, will be critical to the future success and direction of your business.
Directors form the back-bone and directing mind and will of a company and are formative to the company’s strategic direction.
But directors are not only empowered with decision making responsibilities, they are also endowed with duties critical to protect the interests of the company and shareholders generally.
In essence, directors are required to ensure compliance with general and specific laws applying to the company’s operations, and the primary duty is to act in the best interests of the company. However, if the company is insolvent, or there is a real risk of insolvency, the scope of this duty may extend to creditors.
Under the Corporations Act 2001 (Cth) director duties imposed on company directors and officers include, but are not limited to, the following:
- Duty to exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company does not trade if it is insolvent (and also attempts to avoid insolvency, where possible);
- Duty to exercise powers in good faith in the best interests of the company and for a proper purpose;
- Duty not to improperly use the position of director/officer to gain an advantage, or to cause detriment to the company;
- Duty not to improperly use information obtained through the position of director/officer to gain an advantage, or to cause detriment to the company; and
- It is of fundamental importance that a director observes their duty to not trade while insolvent. A director will have a positive duty to prevent the company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, a director must consider whether they have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is not going to be enough. You need to be constantly aware of your company’s ongoing financial position and this responsibility can not be delegated.
Your company also needs to keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. If a director fails to take all reasonable steps to ensure a company fulfils this requirement then they may be in breach of the Corporations Act.
The penalties for trading while insolvent can be severe and include civil penalties such as compensation orders, fines and disqualification from acting as a director, as well as criminal sanctions including imprisonment.
Ensuring your Board is appropriately informed and aware of their duties is important. Contact us at Artstein Legal today to provide educational seminars to the members of your business or advisory Board.
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