Who is a director?

A director does not have to be formally appointed to the position in order to take on the responsibilities of the role. The person may act as the director or they may act in accordance with their instructions.

General duties of the director

In addition to the requirement to ensure compliance with general and specific laws applying to your company’s operations, a director's primary duty is to the shareholders. However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees with outstanding entitlements).

General duties imposed by the Corporations Act on directors and officers of companies include:

• The duty to exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent
• The duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
• The duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company
• The duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company

As well as general directors’ duties, you also have a duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position.

Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfils this requirement contravenes the Corporations Act.

For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.