Setting up a company to run a business can be a relatively straightforward process. Most people know that shareholders and directors are the key components of a company.
However, few people understand that shareholders and directors have very different roles and so they have different rights and obligations. As experts in dispute resolution, Slater and Gordon has seen the problems that arise when directors do not fully understand their rights and obligations.
What is a director?
A director is a person who is responsible for the management of the company’s affairs. All companies must have at least one director.
You are considered to be a director if you have been validly appointed as a director of the company. Even if you have not been validly appointed as a director of the company, you are still considered to be a director if:
- you act as if you are a director of the company (known as a ‘de facto director’); or
- the company’s directors and staff usually act in accordance with your instructions or wishes (known as a ‘shadow director’).
What rights do directors have in a company?
Directors generally enjoy the following rights:
Right to participate in board meetings and decisions
A company’s constitution will generally give directors the right to attend and vote at board meetings. Directors should consult the company’s constitution so that they are fully aware of their rights in the management of company affairs.
Right to remain in office until validly removed
Directors can be removed by a resolution1. In some cases, a company’s constitution may also provide other ways for a director to be removed, for instance, by majority vote of the other directors.
Right to access documents and financial records of the company
A director is allowed to inspect the company’s books and accounts, and take copies of such documents, if they are acting for a proper purpose. This is to enable directors to carry out their functions in a timely manner.
Right to delegate
A director can delegate any of their powers to another person, provided that it is recorded in the company’s minute book and is not in breach of the company’s constitution.
What duties does a director owe to a company?
Directors owe a number of duties to the company. These duties include:
Duty to act in good faith
A director must exercise their powers and responsibilities in good faith in the best interests of the company2. Interests of the company include the interests of existing shareholders.
Duty to exercise powers for a proper purpose
A director must exercise their powers and responsibilities for a proper purpose. A purpose is proper if it is in the interests of the company. For example, a director would be acting for a proper purpose if they issued shares to raise capital for the company3. On the other hand, a director would not be acting for a proper purpose if they issued shares in order to destroy the existing voting majority or create a new majority .
Duty to act with care and diligence
A director must act with the degree of care and diligence that a reasonable person would exercise if they were in the same position as the director .
Duty not to improperly use position or information
A director must not improperly use their position  or information obtained from their position  for their own personal advantage or to disadvantage the company.
Duty to disclose interests
A director with a material personal interest relating to company affairs must give other directors notice of the interest .
Duty not to trade while insolvent
A director has a duty to ensure that the company does not trade if it is insolvent, or if there are reasonable grounds for suspecting that the company is insolvent . A company is considered to be insolvent if it is unable to pay its debts when they are due.
What happens if a director breaches their duties?
Directors who breach their director duties may face serious consequences including being:
- found guilty of criminal offence – the current penalties are imprisonment of up to 5 years and/or a fine of up to $200,000;
- being found to have contravened a civil penalty provision – the current penalty is a fine of up to $200,000;
- disqualified from managing any companies in the future; or
- held personally liable for any company losses caused by their breach of directors’ duties.
Many problems can arise as a result of directors not understanding their rights and obligations. Some of the common pitfalls include the following:
Being a ‘de facto’ or ‘shadow’ director
As de facto and shadow directors have the potential to control the management of the company’s affairs, the Corporations Act 2001 (Cth) holds them to the same duties as validly appointed directors. De facto or shadow directors may not realise they have these duties to the company as they are unlikely to be notified that they are a director of the company unlike validly appointed directors. This exposes de facto and shadow directors to breaching their directors’ duties without even realising.
Failing to disclose interests
There have been countless examples of conflicts of interest. For example, a conflict of interest arises where the company engages the services of another business which a director has an interest in, or the company leases a premises which is owned by a director. In a situation like this, a director needs to give notice of the nature and extent of their interest.
Trading while insolvent
If a company has ongoing losses, poor cashflow, unpaid creditors outside usual trading terms and problems obtaining finance, directors should check that the company is solvent before incurring any further debt. If directors do not take reasonable efforts to monitor the company’s solvency, they could potentially be personally liable for debts the company incurred whilst it was insolvent.
How we can help
Slater and Gordon can help you by:
- Providing you with advice about your rights and obligations as a director in a company
- Assisting you to negotiate a resolution regarding an existing dispute within a company
- Representing you in any legal proceedings relating to a company or director dispute
 Corporations Act 2001 (Cth) ss 203C and 203D
 Ibid s 181(1)(a).
 Howard Smith Ltd v Ampol Petroleum Ltd  AC 821.
 Corporations Act 2001 (Cth) s 180(1).
 Ibid s 182.
 Ibid s 183.
 Ibid s 191(1).
 Ibid s 588G.