Company director duties: A 6-point checklist

The article is relevant to members in Australia and was current at the time of publication.

Australian law requires company directors to act honestly, trade in good faith and make decisions for the benefit of the company. If they fail to meet these obligations, they can face serious penalties, such as compensation proceedings, civil penalties and criminal charges.

Carmela Ayliffe CPA, Client Director Pitcher Partners, is an insolvency professional who encourages practitioners to speak to their clients about their director obligations.

“In my experience, when directors encounter liability issues, it is not always due to intentional wrongdoing,” she says.

“More often, they believe they are acting appropriately but lack a clear understanding of their legal obligations. That’s why it is critical for directors to be well-informed from the outset.”

Has your client become a company director? Here is a six-point checklist to help guide the conversation about their new responsibilities.

1. Are you acting in the best interests of the company?

This is the overarching legal requirement of company directors. It involves acting honestly and carefully, understanding and following all the laws that apply to the company — not just the Corporations Act 2001 — and avoiding conflicts of interest. It also includes putting the interests of the company ahead of your own. 

Zak Hablas CPA, Founding Principal Assuris Financial Independence Group, says practitioners should remind clients that their company is a separate legal entity. 

“The Corporations Act does not set different responsibilities for a director, whether they’re looking after a small private company with a turnover of half a million dollars, or they’re the director of a multi-billion-dollar company. 

“That’s something a lot of directors in the small business world don’t always understand,” says Hablas, adding that the practical application of these responsibilities is influenced by a company’s size and complexity.  

“I like to think of a company as a separate imaginary person with its own bank account and its own legal rights, and you can’t just crack into its bank account,” Hablas says. 

Elisha Huke CPA, Director HTA, says this is a mistake many directors make. 

“There are Division 7A loans that directors can take, but they can be risky and have higher interest rates, and you have to put a loan agreement in place,” she says. “Also, if you’re found to be insolvent, the money that you’ve taken out of the company can become a personal liability.” 

2. Are you meeting your ASIC obligations?

Directors are responsible for some of a company’s obligations related to Australian Securities and Investments Commission (ASIC). These include: 

• paying relevant ASIC fees
• checking and responding to ASIC’s annual company review statement 
• telling ASIC about changes to the company
• passing an annual solvency resolution
• deregistering a company when it closes. 

“It’s important for directors to understand that they sign off on anything to do with the company, report changes to ASIC and confirm annually that the company not insolvent,” Huke says. 

“If documents are going to be lodged with an authority, directors need to make sure they’re confident in the accuracy of those numbers, whether they have personally prepared the documents or not.” 

3. Can your company pay its debts on time?

Directors are responsible for ensuring that ASIC fees, tax debts and superannuation liabilities are paid on time. 

“If you don’t pay your ASIC bills, it will attract penalties, and they are tougher than your local council with parking tickets. They’re not just going to waive it for you,” Hablas says. “The responsibility of directors needs to be taken seriously.” 

Failing to pay a tax debt is seen as a breach of a directors’ duties. 

“It is essential that directors understand their statutory legal duties,” Ayliffe says. “For instance, failing to pay a tax liability may constitute a breach of duty, which a liquidator will investigate during the insolvency process. And if a director receives a director penalty notice, for example, for the company’s unpaid superannuation — they may become personally liable if they fail to act promptly.”  

Huke notes that paying debts on time requires a good understanding of the company’s cashflow position. 

“Helping clients with cashflow forecasting and an ongoing review of their numbers can help them meet their directorship obligations,” she says. 

4. Is your company keeping proper records?

Under the Corporations Act, directors need to ensure their company keeps adequate financial and corporate records that correctly explain its financial position and transactions, and to enable accurate financial statements to be prepared. 

“Good record-keeping is fundamental,” Ayliffe says. “Directors must know who is responsible for maintaining records and should regularly review financial and operational information, regardless of whether it is prepared internally or by an external accountant.  

“Even with a bookkeeper or accountant in place, directors remain accountable for understanding the company’s financial position,” she says.  

5. Is your company in financial difficulty?

Directors need to monitor the company’s financial health and seek expert financial and legal advice to avoid trading while insolvent and exposing themselves to personal liability.   

“Under the Corporations Act, directors are required to cease trading if the company becomes insolvent,” Ayliffe says. “Failure to do so can result in personal liability for company debts and, in more serious cases, may lead to bankruptcy or even criminal prosecution if unlawful conduct is established.”  

6. Do you have Directors and Officers insurance?

Directors and Officers (D&O) insurance covers risk exposure for breaches or situations that can result in personal liability and expense. 

“It is important for new directors to understand the ongoing obligations of having a company,” Huke says. “Directors should have directors’ insurance, but they should also consider the other types of insurance they may need, such as professional indemnity insurance.”