Things to Consider Before Accepting That Director Position

Updated: October 01, 2010

A simplified definition of director is that "A director is an individual who is tasked with the stewardship of a company. They are often appointed based on their expertise in the industry that the company operates and advise management on behalf of the shareholders (Carew, 1996). Further, the corporations act (2001, s9) also states that anyone who is involved in the management of a company may be regarded as a director, even if that person has not formally been appointed as such.

What differentiates an officer and a director?
Under the act an "officer" is an individual whose position of power enables them to participate in the decision making of the company. Even if not considered a director, should others within the company be used to complying with that individuals request, they may be deemed an officer and as such, many of the obligations of a director would apply to them also.

So why appoint directors anyway?
Other than for governing the company on behalf of the shareholders, a legal requirement exists to appoint directors to companies. In the case of a public company the act requires that at least three directors are appointed, whereas for a proprietary company, the legal requirement is for one. The act also provides clarification on who is permitted to act in the role of director and lays down certain criteria that these individuals must meet. They are that;

a) The appointee must be an individual - not a body corporate.

b) The appointee must meet the age requirement - 18 years of age or older.

c) The appointee may not be one who is disqualified from managing corporations (unless specific permission is granted by ASIC to appoint such an individual). In appointing a director it is a requirement that the appointee provides written acceptance of the position.

Certain individuals are excluded from acting in the position of director. These are people who have been convicted of certain offences or become bankrupt during their term of office. (Austin, Ford, Ramsay; 2003).

Duties of Directors
The duties of a director fall under three categories. Those being Common Law duties, Equitable Fiduciary duties and Statutory duties. I think that it is important to mention here that there is a legal hierarchy that exists in that the laws of equity override common law. Further, legislative law overrides both the laws of equity and those of common law. In addition, specific responsibilities and rights of the director are outlined in the company's constitution. I will explain the legal duties below;

The general Common Law duties of directors are to exercise their powers and discharge their duties with due care and diligence (Corporations Act 2001; s180). Duties must also be discharged for a proper purpose and for what is in the best interests of the company. They are not to make any personal gains or make decisions that may disadvantage the company. They are to act bone fide for the benefit of the company. The Equitable duties of a director go along the same lines as the common law ones in stating that the director has a fiduciary relationship (one of trust) with the company. This is to be expected as the actions (or inactions) of the director could have a negative impact on the company, thus disadvantaging the shareholders to whom the director owes a fiduciary duty.

The act also states that the director must act for "proper" purposes. I understand "proper" purposes to be those purposes benefit the company whilst not contravening any section of the act. Statutory duties of a director include the duty not to misuse information. My understanding is that this relates to using information gained in the position of director for personal profit. This runs along the lines of the duty not to misuse the officer's position and my understanding is that this relates to acting in a manner that would enable the director to personally profit from their position. Further to this, directors may not contract their way out of the statutory responsibilities laid out in the act.

Conflicts of Interest
Directors are mandated to avoid conflicts of interest. A director cannot make use of an opportunity that arises in the course of business, to profit personally at the expense of the company. In addition, a director cannot compete with the company commercially, use the company's assets for personal purposes or enter contracts to provide goods or services to or on behalf of the company without acting with complete transparency.

Trading whilst Insolvent
Under section 588G of the act, it is an offence for a company to continue to trade whilst insolvent. Further, it is also an offence to enter into an agreement where doing so would result in the company becoming insolvent. The law states that should a company be unable to pay its debts, then the directors should be personally liable for those debts incurred after the date that the company became insolvent.

What if a director doesn't fulfil their duties?
Where a director fails to fulfil their duties under common or equitable fiduciary law, the shareholders may pursue civil action against the individual. The Australian Securities and Investments Commission may prosecute a director for breaches if they fail to adhere to the mandatory statutory responsibilities laid down in the act if it sees fit. The penalties for non compliance can be severe and include a period of imprisonment.

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