Are you are an officer in your company by appointment or by conduct?

Published 22 Jul 2015
Jessica Diep

A director is not just a person appointed to that role and registered with the Australian Securities and Investments Commission. Under the Corporations Act 2001 (Corporations Act), a person may also be a director if they are not formally appointed but act in that role, or if the directors of the company act in accordance with their instructions or wishes.

Whether you are a director or secretary by appointment or by conduct, you are required to ensure compliance with general and specific laws applying to your company’s operations. Your 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 director's duties

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, and

• 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.

Specific director's duties

As well as general directors’ duties, you also have a positive duty to prevent your company trading whilst 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.

You need to make the necessary enquiries and be constantly aware of your company’s financial position.

Your company must also 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.

The take home message is that all directors appointed by appointment or conduct must make the necessary enquiries and take the necessary steps to ensure that both their general and specific duties are met.