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The 4 Duties Every Director Must Know
The incorporated structure of a business or a Not-for-Profit (NFP) enterprise, gives directors a degree of personal protection from liability, but that shelter relies on directors meeting their basic duties.
Most directors play an active role in their organisations, but there are those who fill a token role on the board or who aren’t aware of how they could become personally liable for company debt.
Directors duties can be found in a lot of legislation, but there are four main obligations set out in the Corporations Act 2001 that directors must be aware of. Directors of incorporated charities are governed by the requirements of the Australian Charities and Not-for-profit Commission (ACNC) which are effectively the same. A relevant article for NFP’s that includes a link to the ACNC duties is my previous Smallville article How healthy is your not for profit board? These 10 questions will give you the answer.
What are the 4 general duties of a director?
1. To act with care and diligence.
This includes decisions made by the board of directors that affect the company’s financial standing. Informed decisions can’t be made if you aren’t aware of the facts. Obtain financial statements and make sure you are across the relevant information before ‘signing off’ on a deal supported by the rest of the board.
2. To act in good faith.
Acting in good faith means keeping the company interests foremost. If you have a conflict of interest, it must be declared to the board and managed appropriately. Keep in mind that conflicts can arise at any time, and the obligation to disclose is ongoing.
If for example, the company has decided to outsource its cleaning and your partner runs a cleaning business, your inability to be impartial should be disclosed. Conflicts of interest are about public perception, so even if you know you could remain impartial you’re obliged to inform the board.
3. No improper use of position.
Essentially this duty means you can’t use your position on the board to your advantage or the disadvantage of others. This could also extend to bullying behaviour by senior board members over those new to the board. Directors should be able to fulfil their duties without undue pressure or influence from other board members.
4. No improper use of information.
An example of improper use would be one through which the director gains an advantage, or the information is shared to the detriment of the company. This could be any type of information from an impending restructure, to the proposed acquisition of land.
Breaches of these obligations attract civil and criminal penalties depending on the action (or inaction) of the director. Significantly though, breaches will compromise the usual financial protection offered by a company, and directors can become liable for the debts incurred as a result of their breach.
Most board members will be aware of these duties and have nothing to worry about. But for those who hold voluntary positions or consider themselves more of a figurehead, it is important that they know what risks they take by being a passive director.
Visit the Australian Securities & Investments Commission (ASIC) website to learn more about directors’ duties and make sure you have all the information you need to do your job well, and limit your personal liability.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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