Directors' Duties

By Lopich Lawyers

1. Introduction

Over the last two decades Australia has witnessed a number of major corporate failures. Cast your mind back to the collapses of Quintex, Pyramid, the Bank of South Australia, and Bond Corporation; and more recently to HIH, Ansett, and OneTel. ‘Debacle’ is an apt description of each of these failures.

The incompetence or mischief of some directors is the stuff of legend. Undoubtedly amongst these companies were directors who were competent and ethical, yet the worrying reality is that others were not.

Even more distressing is the fact that there have been many more instances of corporate and company failure. We don’t hear about the hundreds of companies that have gone bust in recent decades; there are too many, and they are too small. But their impact adds up - shareholders, lenders, regulators, and the community ‘burnt’ time and time again.

To be the director of a company is a position of privilege and responsibility. The aim of this article is to provide a brief overview of the duties of directors. Directors’ duties are not a failsafe measure that will prevent corporate collapses; nevertheless one wonders whether a greater attention to these duties may have prevented some of the more notorious corporate failures of recent decades.

2.  Honesty, care, and competence

The essential duties of a director are to be honest, careful, and competent in their role as a director. This means that directors must ensure that the company is solvent and that financial records are properly maintained.

Directors have what is called a ‘fiduciary’ duty to act in the best interests of the company. If they don’t, the Australian Securities and Investments Commission (‘ASIC’), who is the primary regulator of companies and directors in Australia may prosecute them.

ASIC has summarised the basic role of a director:

  • Knowing what the company is doing
  • Knowing how various courses of action will impact upon the companies performance and profitability
  • Seeking professional advice where appropriate eg. the services of a lawyer, auditor, or management consultant
  • Regular questioning of the company’s operating staff about the state of the business
  • Active participation in directors’ meetings 

3.  Financial records

Financial record keeping is a must – simple as that. Directors are personally liable if their company’s financial records are not kept and prepared properly.

A company must ensure that there are systems in place to collect the company’s financial data so that they can be audited; therefore there is a need for appropriate financial statements and records, such as:

  • Cash records
  • Creditor and purchases records
  • Debtor and sales records
  • General ledger
  • Inventory records
  • Investment record
  • Legal records
  • Register of property, plant and equipment
  • Tax records
  • Wages and superannuation records 

4.  Insolvency

It is a fact of business life that, even despite the management and directors’ best intentions, businesses can go bust. Insolvency is when a company cannot meet its debts.

The message that must hit home to you is that it is illegal to allow a company to trade and operate while it is insolvent. There are serious implications if directors allow this to happen, including:

  • Personal liability for the debts of the company
  • Criminal prosecution by ASIC
  • It is imperative that at the earliest sign of financial trouble you seek the advice of an accountant and lawyer. 

5.  Reporting requirements

ASIC has very stringent reporting requirements. The following is a checklist of some of the more important and common forms and reports that ASIC requires of company directors and officers:

  • Annual returns of companies must be submitted by January 31 (form 316)
  • Changes of company name must be lodged with ASIC after a special resolution of the company (form 205)
  • Changes of office address must be notified within 14 days (form 203)
  • Changes to directors, secretaries, and other officeholders must be notified within 14 days (form 304)
  • Financial statements and reports must usually be submitted within three months of the end of the financial year (form 388)
  • Share issues or cancellations must be notified within one month (forms 207 and 284)
  • Charges, and variations of charges, on company property must be notified within 45 days (forms 309, 311 & 350)
  • Division or conversion of shares into different classes must be notified within 14 days (form 211)

NB. It is important to bear in mind that there are penalties for failing to report to ASIC or for reporting late.

6. Conclusion

The Corporations Law is an immense and dense piece of legislation. It imposes stringent duties upon directors of companies. This article is an introduction to these duties, and alerts you to some of the more important duties of a director.

In light of this it is important when accepting the role of a company director that you fully appraise yourself of your duties. We advise that you seek the advice of a legal practitioner with expertise in Corporations Law.



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