A director is a key role within a company and very important to understand given the responsibilities and risks. Not only does it increase your day- to-day responsibilities, but it also increases your accountability and exposure.
Directors are responsible for controlling a company and to ensure it operates at the highest possible standard, complies with relevant legislation, and attends to ‘housekeeping’ tasks appropriately.
A director has a duty to the company, including its shareholders, employees and creditors, as well as to regulators to act honestly, remain solvent, ensure proper records are keep and to act in the company’s best interests amongst others. Directors are also responsible to ensure the business complies and reports to the relevant regulators as required by the Corporations Act, the OH&S Act, the Trade Practices Act and the Income Tax Act etc.
While it is typically the role of a shareholder to fund the business and appoint the board, the directors are the individuals responsible and contactable regarding the affairs of the company.
Shareholders are rewarded through dividends whereas directors aren’t necessarily a shareholder as well and therefore aren’t entitled to profits, but often receive a wage or director fee commensurate to the services provided.
Although there are a few cases where it is illegal to act a director (bankruptcy or various offences), most individuals can legally take up the role. There does however need to be careful consideration given to the appointments and clear understanding as to what the individuals are responsible for. A directorship is not recommended for the likes of a stay-at-home spouse, a junior employee, or others with limited business exposure or financial literacy – a director is a serious responsibility, not just a badge. In contrast, it needs to be noted that someone can’t act as a director without having the formal appointment and be exempt from obligations. The courts can determine persons are ‘shadow’ or ‘quasi’ directors for persons who may not be appointed to the position, but effectively act as though they are. Being a shadow director may mean that you are still civilly or even criminally liable for breaching director’s duties, despite not being an official company director.
If a director is found to be negligent in their duty or dishonest, significant penalties can be imposed on such a director personally. For directors who have This makes a company director personally liable for debt and once those letters are sent, the ATO can issue garnishee notices and pursue legal action and asset seizure.
Risk Management is a key element of a director’s role, and a good corporate governance program is essential. Time and resources spent in ensuring compliance now can save considerable costs and resources spent in defending court action later.