michael-derin By

Michael Derin

CEO, The Azure Group

Good governance is essential to any business, whether big or small, and company directors must uphold their obligations and responsibilities and have in place measures to protect their business and stakeholders.

Acting in the company’s best interests

The role of a company director includes a serious commitment because you play an essential role in overseeing the company’s activities, and implementing good corporate governance. 

You also have obligations under the Corporations Act 2001. You’re required to act honestly, in good faith, and exercise care and diligence. You must act in the company’s best interests and avoid conflicting interests between those of the company and your own. You must prevent the company trading while it’s unable to pay its debts. 

There are also laws administered and enforced by ASIC with which you must comply, including: 

  • maintaining financial and other records

  • passing solvency resolutions

  • lodging annual statements

  • keeping them informed of certain company changes. 

If you operate as a registered company, you have general legal obligations under the Corporations Act. You, personally, must comply with their obligations and ensure the company meets its obligations.

And you may have additional legal obligations if you operate in certain industries such as the financial services or credit industry.

Things change quickly in business, and you must keep up to date with relevant changes to the Corporations Act.

It’s important to be aware civil and criminal charges can be brought against a director. And creditors, shareholders and employees can bring legal action against directors under the Corporations Act.

Corporate governance principles

The organisation to which you’ve been appointed as director must always come first. You must never allow conflicting interests or personal advantages to override the organisation’s interest. With your goal being to grow the company and help it succeed and be profitable, your responsibilities extend well beyond legal duties to include ethical, social and environmental.

A private company director has the same duties and responsibilities under company law as a public company director.

Companies vary greatly in size, complexity, industry, and ownership structure, and, therefore, a director in one company may have very different responsibilities to another.

A public company director needs to deal with many more shareholders and often manage larger companies, increasing the responsibilities.

A range of other rules affect directors’ obligations such as:

  • trade practices legislation

  • environmental law

  • workplace health and safety

  • equal opportunity.

The list of rules affecting directors is ever-increasing simply because the list of rules for public companies is ever changing.

Public companies place risk management and corporate compliance ahead of many other divisions in their business and treat compliance by its directors and officers as critical to their organisation.

Corporate governance structures are constantly evolving to reflect the current corporate, economic and legal environment.

However, best practice handling of your duties would always see you acting within a values framework of integrity, leadership, fairness, commitment, confidence, respect, accountability and transparency.

Practise good business judgment

Your responsibilities as a director involve doing the right thing and going about your business in an ethical manner. 

Generally speaking, you’re seen to be complying with your statutory duties if you use the business judgment rule, or you rationally believe the judgment is in the best interests of the organisation.

The main director’s duties are set out in section 180-184 and Section 588 of the Corporations Act. The consequences of breaching duties range from civil to criminal actions. The more serious breach may result in disqualification from taking part in any company’s management for up to five years or five years imprisonment for criminal breaches.

Your interest is to the company and not to third parties. However, in the insolvency context under Section 588, directors need to be extremely cautious when allowing the company to trade if close to insolvency.  

Many small company directors have been caught out by Section 222 notice. For example, with the ATO, if a business has not paid their liabilities and it receives a Section 222 notice, and the director does not respond within 14 days, then the director may be personally liable for this debt. 

You’re advised to seek advice from ASIC, your lawyer or accountant to better understand how to protect your personal interest against the organisation’s interest. Ultimately, if you are managing your business in an ethical manner then your exposure will be minimal.