Company directors play a critical role in the running of a company.
They are appointed by shareholders to act as their representatives on an organisation’s board and are typically given power over different aspects of the business and company’s affairs, such as signing off on major transactions or approving budgets for new projects.
Beyond that, they are responsible for ensuring that the company complies with legislation and government regulations and guiding it to success through their leadership.
If you’re looking to take on this vital leadership role, we recommend starting by ensuring that you have the relevant qualifications and skills required for this position.
Having said that, here’s everything you need to know about the role of a director in a company.
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Who Can Be a Company Director?
A company can appoint a director at any time in its life, and existing company directors or shareholders may do so when they see fit. However, a company will typically appoint its first director(s) when it registers the company with the Australian Securities and Investments Commission (ASIC).
All companies must have at least one director, but larger companies may have a board of directors who collectively manage the business of the company:
- proprietary companies must have at least one director (sole director) who ordinarily resides in Australia, and
- public companies must have at least three directors, of which two ordinary reside in Australia (they typically also have a company secretary).
According to ASIC, in order to be appointed a director of a company, you must be over the age of 18 years old and be able to provide written consent indicating the intention to take on the responsibilities of a director and adhere to the company’s constitution.
Who Can’t Be Company Directors?
While most people above the age of 18 years old can be appointed a director of a company, there are a few categories of people who are not eligible, including those who have:
- previously been declared bankrupt (for the period of your bankruptcy),
- entered into a personal insolvency agreement and failed to comply with its terms,
- been banned by ASIC or a court from managing entities that fall under the Corporations Act 2001
- previously been convicted of dishonesty-related offences such as fraud.
What Are a Director’s Duties and Responsibilities
Directors of Australian companies are required to take on a range of different responsibilities. For example, they may be involved in the day-to-day management, strategic planning and decision making for their company.
It is important that directors understand their role and what the directors duties entail when taking on this position.
According to Australian law, in fulfilling their role, company directors must adhere to the following five director duties:
1. Duty of Care and Diligence
Because a company director is responsible for its operation, they need to ensure that the company complies with all relevant legislation and meets its financial obligations. Directors also have an active role in shaping strategy, setting objectives, maintaining proper company records, adhering to the company constitution, identifying risks and ensuring compliance with corporate governance practices.
In exercising these duties and legal obligations, directors are responsible for acting with a degree of care and diligence that a reasonable person would be expected to show in that role. Essentially, this means that directors must take reasonable steps to ensure the company is protected from risk.
If a director fails to take reasonable steps to protect the company from foreseeable risk, they are likely to breach their duty of care and diligence.
2. Duty of Act in the Best Interests of the Company’s Business
In addition to acting with care and diligence, a director is responsible for acting in good faith in the company’s best interests. The duty of acting in good faith requires directors to act in a manner they honestly believe is best for the company. This includes avoiding conflicts, as well as revealing and managing them if and when they arise.
For example, while it is not recommended to enter into a contract with your relative’s company without exploring alternatives, if you must do so because they are the only manufacturer for a certain product, then we recommend asking someone else from head office or another director to negotiate the deal.
Should a director be found in breach of their duty to act in the company’s best interests, they may be required to pay a penalty fine and could end up on the disqualified director’s list.
3. Duty to Prevent Insolvent Trading
Directors have a positive duty to ensure that the company remains solvent before incurring more debt.
Insolvent trading is when a company has insufficient assets to pay its liabilities but nonetheless continues trading and incurring debts.
To learn more, make sure to check out this essential guide to trading insolvent (and what you should do).
4. Duty to Not Use Position Improperly for Personal Gain
Closely linked to the duty to act in the company’s best interests, is the duty to not use your position as director to improperly gain something that benefits only you.
For example, using confidential information for personal gains such as insider trading and influencing business transactions involving other third parties where certain ties may exist between you and the other company’s business relationships.
If your actions result in a benefit for yourself and not the company, you’re likely to be in breach of this duty. If there is a situation where you plan to do business with a company that you have a personal connection with, it’s important to disclose this to the other directors of the company.
5. A Company’s Financial Position: Financial Reporting Duties and Responsibilities
Part of a directors role is to maintain the company’s financial records and prepare accurate reporting. The reporting must reflect the company’s financial position and performance throughout the financial year. Beyond that, they must also ensure that the financial records are effectively stored for at least seven years.
Key Takeaways
Directors play a big role in the success of any company. But with that success comes a great deal of responsibility – they have several duties to fulfil in their role as a director.
They are responsible for ensuring that the company complies with all applicable laws and regulations as well as managing the day-to-day operations of the business. Directors also have fiduciary duties to act in good faith when making decisions on behalf of their companies.
Navigating your company’s success shouldn’t be something you do alone – it pays to have a trusted financial advisor and accountant in your corner to give you professional advice.
At Box Advisory Services, we believe that there’s a better way to do accounting: a more valuable, rewarding method to the madness of running a business. So entrust our small business accountant team and get back to being a business owner or director and running your company. Our mission is to help guide you in making better decisions for their companies future success.
Get in touch today!
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
