Directors have various duties under the Corporations Act 2001 (Cth) (Corporations Act) to act in the best interests of the company.
Usually, this means acting in the best interests of the shareholders, but these duties can also require directors to take into account the interests of other stakeholders like employees and creditors. The duties include acting with care and diligence, exercising their powers in good faith and for a proper purpose and preventing the company from trading when insolvent. The problem is that directors often have to make difficult decisions that involve judgement calls with limited information in circumstances in which the stakeholders have conflicting interests, so it’s not always clear whether they have properly discharged all of these duties.
A company director is generally not liable for the company’s debts unless the director:
- causes the company to trade whilst insolvent,
- fails to comply with tax/super obligations,
- provides a personal guarantee of the company’s liabilities, or
- commits serious breaches of the Corporations Act.
Although directors may be held personally liable in some instances, there are essentially three ways of mitigating the risk:
- exercising a high level care and attention to duties and obligations. This includes understanding the legislation (both at State, Federal and international levels) which impacts the company in which the officer operates and familiarising yourself with the Company Constitution. A Company Constitution is a corporate governance document that sets out the company management’s rules;
- deeds of access and indemnity from the Company (subject to legal constraints and capacity to pay); and
- director’s insurance.
A Deed of Access and Indemnity is designed to help directors defend themselves from personal liability that may arise from their conduct as directors. It ensures that they are given access to
the books and records of the company and also indemnifies them from such personal liability. It will typically also require/permit the company to take out, and pay for, directors and officers
(often abbreviated to “D&O”) insurance on behalf of the director – this is a special type of business insurance policy that insures against such liabilities and costs.
If you need assistance in understanding your responsibilities as a Director, contact the Commercial Team at Nevile & Co. today!
Disclaimer: This publication contains comments of a general and introductory nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional legal advice. You should always speak to us and obtain legal advice before taking any action relating to matters raised in this publication.
