The modern business environment requires a high level of skill and ethics to be practised by directors and officers of any size company. Tough economic conditions impose stringent obligations on directors and officers.
Directors and officers who ignore these obligations quite often find themselves facing significant fines, liability, and/ or prohibition from holding the role of director.
General obligations imposed by the Corporations Act 2001 (Cth)
on directors and officers ofcompanies
- Exercising powers and duties with the care and diligence that a reasonable person would exercise. This includes the director taking steps to ensure he/she is properly informed about the financial position of the company.
- Exercising powers and duties in good faith in the best interests of the company and for a proper purpose.
- Not to improperly use the position as director to gain an advantage personally or for someone else, or to cause detriment to the company.
- Not to improperly use information obtained through the position to gain an advantage personally or for someone else, or to cause detriment to the company.
As well as these general duties, directors have a positive duty to prevent a company from incurring a debt if the company is insolvent or will become insolvent by incurring that debt. A company is insolvent if it is unable to pay all its debts when they are due and payable. This means that before the company incurs a new debt, the director must consider whether he/she has reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
A company must 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 complies with these requirements contravenes the Corporations Act.