Tag: company

Director’s Duties

No matter the size of your company, if you are a director of a company, you have a number of duties and responsibilities to both the company and the public. These duties are primarily imposed by the Corporations Act 2001 (Commonwealth). In addition to their duties under the Corporations Act, directors have a number of other duties set out in various other legislation as well as the common law.

It is important to understand and comply with these duties. The failure to comply with these duties may result in directors being personally responsible for any loss caused by the breach of these duties, or even criminal prosecution by the Australian Securities and Investment Commission (ASIC).

The most significant duties of directors are:

To act in the best interest of the company

A director must act in the best interests of a company and to its shareholders as a whole, ahead of their own personal interest. This can get confusing especially in a situation where the directors and the shareholders are one and the same – a common scenario in small businesses. It is important to remember that the company is considered a separate legal entity, has its own interests, and these interests may not be the same as the director’s interests.

To act with care and diligence

A director must perform their duties with the same care and diligence that a reasonable person would have should they be in the director’s shoes.

To act in good faith

A director must perform their duties in good faith, and dishonestly or fraudulently.

To use their position as a director for the proper purposes

A director has an enviable position that allows them to control the company’s business. It is important that they do not abuse this position to act in their own interest, or the interest of someone else. In addition to this, a director would commonly come into information as a result of his or her position. A director cannot use this information to act in their own interest or the interest of someone else.

To avoid conflicts of interest

Directors also have a duty to avoid any actual or potential conflict between their interests and the interests of the company. This arises from the duty of a director to act in the best interests of the company.

To prevent the company from continuing trade if it is insolvent

A director has a duty to prevent the company from incurring additional debt if there is a reasonable suspicion that the company cannot pay its debts when it falls due. This duty is not exercised for the benefit of the shareholders, rather it is exercised for the benefit of the creditors.

Other duties and responsibilities

There are numerous other laws affecting trade practices, taxation, environmental protection, and occupational health and safety that apply to companies. A breach of those other laws may give rise to a director being held liable for the breach.

Summary

If you are a director of a company, it is important to be aware of the core responsibilities and duties that have been imposed upon you by the law. While your primary duty is towards the company, you also have duties towards the shareholders, creditors, and the public. The failure to comply with these duties may result in directors being held personally liable for breaches of these duties. If you are unclear about the duties you should comply with or you are unsure of where you stand, you should seek legal advice as soon as possible.

Shareholders and Partnership Agreements

Starting up a business can be challenging. While it is important to try to get the business up and running as soon as possible, a lot of entrepreneurs fall into the trap of not paying attention to matters that, if left unattended, may cause problems in the future. An example of these sorts of matters is matters that involve legal documentation, such as confidentiality and non-disclosure agreements, terms of trade, and partnership or shareholder’s agreements.

One of the commonly missed steps in setting up a business is a shareholder’s or partnership agreement. This is used in a situation where there are two or more entrepreneurs working together in a business. Whichever agreement is used depends on the structure of the business, however the best time to prepare the agreement is right at the start of the business, before any disputes arise between the parties.

One of the matters that a shareholder’s agreement deals with is in regard to exiting the business. This may happen due to retirement, disability or even death. In the instance of a shareholder retiring, the shareholder’s agreement may give the other shareholders the option or first right to purchase the shares.

In the instance where a shareholder has passed away, the shares may be of little value to any other party other than the other shareholders. This can result in the shares being sold to other parties at a fraction of what they may be worth. In such a circumstance the shareholders agreement may specify that the other shareholders must compulsorily purchase the shares.

As many of the matters that a shareholder’s agreement covers is typically not covered by the company’s constitution, a shareholder’s agreement operates as a supplement to the company constitution. An ideal agreement deals with issues that have a distinct possibility of arising during the life of a business. It can also provide for a mechanism which resolves those same issues without the need of court intervention.

A shareholder’s agreement can include provisions regarding:

  • Direction and type of business undertaken
  • Meeting Procedures
  • Policies, Management, and Structure
  • Procedures of appointment of directors or executives
  • Voting rights and what decisions require votes
  • What decisions are considered major decisions and what percentage of votes are required to pass these decisions
  • The rights of minority voters
  • Breaking deadlocks
  • Shareholder’s exit strategies (including what happens if a shareholder passes away)
  • Shareholder’s warranties
  • Confidentiality agreements
  • Restraint of trade
  • Dispute Resolution

In summary, a shareholder’s agreement can deal with a wide variety of matters that may arise in the life of a business. The failure to address these issues can lead to expensive litigation or even to the failure of the business itself. It is therefore very important to have these matters dealt with early. Don’t leave these matters to chance or ignore it just because there are no problems at this point in time. You never know what is around the corner.