The company you keep: Seven tips to keep you out of trouble as a company director
Earlier this year, the team at LegalVision gave us some helpful tips on the legal basics of starting a new business.
Over the coming weeks, we’ll look at legal matters that can arise for a new business once it’s up and running.
Here, Ursula Hogben, managing director of Hogben Group: Business Law & Consulting, and a member of the LegalVision network, considers what directors of start-ups need to keep in mind when it comes to their duties to the company.
Many founders of start-ups become directors of the company without fully understanding the responsibilities and requirements of the role.
As a director, your primary duty is to the company shareholders. You have duties under common law and the Corporations Act. Penalties for breaching these duties include a fine of up to $200,000 or five years in jail.
This article briefly summarises seven key issues to help you understand your duties and have a successful career as a company director:
1. First, do no harm
You must not use your powers for an improper purpose or to the detriment of the company.
Right: Vote in the interests of the company. Help the company take advantage of commercially favourable opportunities.
Wrong: Vote to give yourself an advantage, or (if you’re in the majority), vote to favour the majority over the minority.
Example: If you’re a director who is remunerated on the basis of annual revenue, it is improper to approve a transaction that influences annual revenue to boost your director’s fee, but is not good for the company in the medium to long term.
2. Act in good faith
You must exercise your powers and duties in good faith in the best interests of the company. You must use business judgement, which includes informing yourself about the topic and making decisions in the best interests of the company.
Failing to inform yourself about the issue being voted on, not giving proper consideration to the company’s interests and acting dishonestly or in bad faith would be grounds for improper behaviour as a director.
Example: Rodney Adler, director of HIH, was found to have breached this duty by lending money from one company to buy shares, without board approval, in another company (ASIC v Adler and Ors).
3. Care and diligence
You must be informed about the financial affairs of the company, including whether it is solvent. You must review and discuss financial information and question whether it really represents the company’s position.
You cannot simply accept the information provided to you by company staff, without question, review or analysis.
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4. Avoid conflicts of interest
You have a ‘fiduciary duty’ to the company. This means you must put the interests of the company ahead of your own. You must fully disclose any personal interest in a contract with the company. You must either vote on behalf of the company, or abstain from voting.
Generally you cannot have a personal interest in a transaction with the company, unless the interest is fully disclosed, and you do not vote on it.
5. It’s all about the company – not all about you
You have a duty to avoid conflicts of interest and not to make improper use of your position.
You must not use your position with the purpose of gaining an advantage for yourself or someone else, or causing detriment to the company.
6. Top secret information – handle with care
You have a duty not to make improper use of information (as outlined in Section 183 of the Corporations Act).
It would be wrong if, as a director, you were to hear about a business opportunity for the company and, instead, pursue it yourself.
Example: Steve Vizard, a director of Telstra, was convicted in 2005 of using confidential information about Telstra to buy and sell Telstra shares on his own behalf. He was fined and disqualified from being a director for some time.
7. Keep the books – don’t cook them
You must be properly informed about the financial position of the company and ensure the company doesn’t trade if insolvent. You have a positive duty to prevent this.
It would be wrong to:
- Agree to incur a debt if you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
- Only reviewing the company accounts to sign off once a year.
Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. You need to be constantly aware of your company’s financial position.
In summary, there are consistent messages about how to fulfil your duties as a director, particularly informing yourself about the company’s affairs and acting in good faith in the company’s interests. If you want to speak to a lawyer about your duties as a director click here.
Ursula Hogben, Managing Director of Hogben Group: Business Law & Consulting is a lawyer in the LegalVision network. Please contact LegalVision with any questions on 1300 544 755.
Important: This information is a summary and an overview. It is not intended to be comprehensive and it is not legal advice. Your use of this information is not intended to create and does not create a solicitor-client relationship between you and Hogben Group Pty Ltd. © Hogben Group Pty Ltd 2013.