Directors’ Duties Generally
A company director has a fiduciary duty to act in the best interests of the company.
Essentially, a company director must: - be honest at all times; and
- be careful and prudent in managing the company’s affairs or participating in that management.
Where the company is a single shareholder and single member company, the company is still a separate legal person from the person who is the director/shareholder. While the practical effect may be that the individual and the company are one and the same entity and it may be considered there are conceptual absurdities in the company being owed a duty by the director, nevertheless the law makes a distinction and directors need to be aware of this. Where a company has more than one shareholder, unless all shareholders are also directors, the fact that the company and the shareholders are separate legal persons is more likely to have practical consequences. For example, it will be possible for shareholders to sue directors in the name of the company. Where a company is established to carry on a business, the directors have a general duty to do what is required to ensure that the business runs profitably and that the assets and property of the company are not depleted or permitted to run down. A company director is expected to have his or her “finger on the pulse” and know what is going on at all times. To the extent that this requires a director to be pro-active in making sure that he or she is so fully informed that is a positive obligation imposed by law upon the director. If a director does not know what is happening but ought to have known, the director will be answerable to the shareholders and possibly to ASIC. Conflict of interest
If a director of a company which has more than one director has interests or commitments which might be inconsistent with his or her capacity to make objective decisions in the best interests of the company, the director must tell the other directors. Where a decision is being made by the board, that director should, as a matter of course,: - declare his or her interest; and
- not participate in the discussion or the decision-making process.
Misuse of information
It is a criminal offence to use information acquired about a company in the position of a director for personal gain or advantage or at the expense of the company. This applies to all information, regardless of whether it is confidential information. Proper professional advice
A company director must ensure that, if professional advice is needed, as part of a decision making process, that advice is obtained to ensure that a fully informed decision can be made by the director or directors in the best interests of the company. If this involves questioning employees and managers and actively participating in directors’ meetings then the director must do it. Financial records
A company director has a duty to ensure that the company maintains current and up-to-date financial records that correctly record and explain transactions and the financial performance and position of the company. Insolvent trading
A company director is under a positive duty to cease trading if the company is unable to meet existing debts. This extends to situations where, if it is possible that a company may not be able to meet the requirements of a new debt, that that new debt not be entered into. There are significant penalties for company directors who participate in “insolvent trading”. Records
Company directors must ensure that the company keeps the following: - a register of shareholders;
- a register of any option holders;
- minutes of general meetings;
- meetings of minutes of directors;
- a register of any charges or securities created by the company over the company’s property;
- and financial records which must be held for at least 7 years after the transactions are completed.
IT Consulting Business
IT consulting, like many professions and businesses, involves a level of expertise in relation to which the consultancy is being carried out. Companies which hold themselves out as having expertise which they do not have are potentially in breach of the misleading and deceptive conduct provisions of the Trade Practices Act. Company directors are expected to act in the best interests of the company and enabling a situation to arise in which the company is in danger of being sued could expose the director to personal liability. This risk can be mitigated by the directors actively ensuring that: - the company has the requisite expertise; and
- the company does not, in its marketing etc, make claims about the business’s expertise that are not sustainable or correct.
Where a company enters into a contract with a client for the provision of IT services, the contract will be executed either by a director (or several directors) or by an authorised employee of the company. Directors should ensure that they are familiar with the terms of contracts they execute on behalf of the company. They also owe a duty to the company to ensure that employees who are authorised to sign for the company are sufficiently astute and can be relied on not to incur inappropriate legal liabilities or obligations. For example, if a director did not realise but ought to have known contracts were being signed by a junior employee who did not know what he or she was doing and the company lost money under the contract, or was successfully sued under it, the director might be sued the company (ie, by the shareholders) for negligence even though he or she did not actually know. Directors of IT companies must, therefore, assess the areas of risk to the company by ensuring that they do not do anything (or allow it to happen) which could expose the company to risk of liability through litigation or exposure through inappropriate contracting arrangements. IT companies are, generally speaking, under no greater risk or subject to more onerous obligations than other specialist services providers. For what it is worth, ASIC (the corporations watchdog) says in its advice to company directors:
“if you are: - honest
- open with colleagues
- do all the required homework
- get advice or more information when you are in doubt, and
- put the interests of the company, its shareholders and its creditors as top priority, you are unlikely to get into trouble.”
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