Just sign here… ‘silent’ directors beware

If you have been asked to accept a position as a director of a company in which you have little or no involvement, think again. All too often spouses are appointed as a co-director of their partner’s company without understanding their full responsibilities as a director. This is commonly known as a ‘silent director’. While there is no general rule that prohibits this, it is important to understand the duties and obligations that arise if you have been appointed a director of a company. Think before you accept…

Directors’ duties

While it might be tempting to accept a directorship in somebody else’s company – let’s face it, the title sounds important – you should know what you are really signing yourself up for first.

Directors of companies, whether involved in the day-to-day business of a company or not, have responsibilities that they must meet. Failing to meet those obligations can result in legal ramifications, including personal liability, which will be discussed further below.

The duties of directors are numerous but include the duty to act honestly and carefully, and to act in the company’s best interests. Clearly, in order to act in the company’s best interests, it is necessary to know what it is the company does and what the implications are of any business dealings.

Another of the important duties of a director is to ensure that the company is able to pay its debts, as and when they fall due, so that it is not found to be trading while insolvent. Again, this duty requires some understanding of the company’s business, accounts, and dealings.

There are also duties requiring that proper financial records are kept and that the Australian Securities and Investments Commission (ASIC), the corporate watchdog, is kept apprised of particular information.

The duty to maintain proper company records is a personal duty, attaching to each director. This means that you cannot rely on having limited involvement with a company’s business if managing directors fail to ensure proper records are kept.

Personal liability

Some duties and obligations of directors can result in personal liability, under particular circumstances. One of the main circumstances in which a director will be held personally liable is where the director has allowed the company to trade while insolvent. In addition to personal liability, this conduct can also lead to criminal and civil penalties.

Directors may also be personally liable for company losses if there is a link between a breach of a director’s duty and that company loss. Such breaches might also result in civil or criminal penalties.

Another area which may result in personal liability for directors is where a director has breached laws of other agencies, such as under the ATO’s director penalty regime. This regime may make a director personally liable for a tax liability, or where superannuation is owing to employees. Accordingly, if a company has any employees, it is a good idea to ensure that the employees are receiving their entitlements.

Laws affecting companies

In addition to the Corporations Act 2001, which affects companies and details how they are to be established, there are numerous other acts and laws that affect companies and directors.

For instance, the Competition and Consumer Act 2010 affects numerous aspects of a company’s day to day business, from product liability to policies on competition. Depending on the circumstances of contraventions, it is possible for directors to be held personally liable under such legislation.

Similarly, and subject to Work Health and Safety (WHS) legislation in each state, directors might be found to be in breach of the WHS legislation unless they are able to show the court that they used all due diligence. This should be of particular concern if you are not aware of the company’s business.

Directors may also be joined personally to proceedings under the Fair Work Act 2009 and face pecuniary penalties under such legislation if they have failed to meet their obligations.

No absolution from the courts

Although you might think you have a good excuse for not knowing about a company’s business because you are only a director “on paper”, is unlikely to satisfy a court. Failure to involve oneself in company management is arguably inconsistent with the application of a director’s duties, as found in Deputy Commissioner of Taxation v Clark [2003] NSWCA 91. Further, it is questionable that a reliance on advice from other directors would be sufficient to satisfy a director’s duty to act with the otherwise required care and diligence.

Takeaways

If your spouse or a loved one is asking you to be a director of their company, it is  a good idea to obtain legal advice before you agree and ensure that you are willing and able to meet all of your obligations.

If you or someone you know wants more information or needs legal help or advice, please contact us on 08 9336 6300 or email [email protected].

This information is for general purposes only and it is important to obtain professional advice relevant to your circumstances. To ensure you understand your rights and responsibilities as a director we recommend you speak to one of our experienced lawyers.

What is an Agreement to Lease?

When renting commercial property it is important for both landlords and tenants to understand the relationship they are entering into and the rights and obligations that they each have. The document that governs this relationship is usually a Commercial Lease. A...

Do-It-Yourself Business Contracts – Should You Do It?

Contracts are fundamental to the operations of a business and set out the reciprocal promises made between parties to a commercial transaction. It is virtually impossible to do business without some type of a business contract. Over time, your business needs are...

What to Know When Buying An Existing Business

If you are thinking about a new venture, expanding an existing business or entering a new market, one option you might consider is to buy an established business. There are advantages and disadvantages when buying an existing business compared with starting your own....