If you’ve been asked to become a director of a company where you have little or no involvement, take a moment to consider the full scope of responsibilities that come with the position. This situation often arises when spouses are appointed as co-directors in their partner’s business, but they may not fully understand their obligations as a director. Commonly referred to as a ‘silent director’, such appointments may seem harmless, but they come with significant legal duties.
Directors’ Duties and Responsibilities
Becoming a director may seem like a prestigious title, but it’s crucial to understand the weight of responsibility attached. Directors, whether involved in the day-to-day operations or not, must meet several duties, and failure to do so can lead to personal liability and legal consequences.
- Duty of Care and Diligence: Directors must act honestly and carefully in the best interests of the company. This involves understanding the company’s operations and implications of business decisions.
- Duty to Prevent Insolvency: Directors must ensure the company does not trade while insolvent, meaning they should have a basic understanding of the company’s financial standing and ensure it can pay its debts when due.
- Duty to Maintain Proper Records: Directors must ensure the company maintains accurate financial records and complies with the Australian Securities and Investments Commission (ASIC) regulations.
- Ongoing Oversight: Even if you’re not actively managing the company, as a director, you remain personally responsible for ensuring that these duties are met.
Personal Liability for Directors
Certain breaches of a director’s duties can result in personal liability, even if you are a ‘silent director’. Key areas of risk include:
- Trading While Insolvent: If a company trades while insolvent, directors can be personally liable and face civil or criminal penalties.
- Company Losses: Directors may be held liable for company losses linked to a breach of their duties.
- Tax and Superannuation Liabilities: Directors may be personally liable for unpaid taxes or superannuation contributions under the ATO’s director penalty regime.
Laws Impacting Directors
In addition to the Corporations Act 2001, directors must be aware of various other legislation affecting companies, such as:
- Competition and Consumer Act 2010: Directors may be held personally liable under this Act, which governs product liability and competition law.
- Workplace Health and Safety (WHS) Legislation: Directors can face penalties if they fail to demonstrate due diligence in managing the company’s compliance with WHS regulations.
- Fair Work Act 2009: Directors may face penalties for failing to meet employment obligations under this Act.
Legal Precedent: No Excuses for Lack of Involvement
Courts are unlikely to accept a director’s claim of ignorance about a company’s business operations. In the case Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, the court found that directors cannot avoid their responsibilities by distancing themselves from the company’s operations. Simply relying on advice from others won’t suffice if it leads to neglecting a director’s duties.
Key Takeaways
If you’re considering accepting a directorship in a company, especially if it’s for a spouse or loved one, it’s essential to seek legal advice before agreeing. Being a director involves significant legal duties and personal liability, and you must be prepared to meet these obligations.
If you need advice or more information, don’t hesitate to contact us at 03 9670 7440 or email [email protected].