Startup Lawyer Explains Directors Duties

Becoming the founder of a startup can be the beginning of something new and exciting, and along with the glitz and glamour of becoming a director of your own company, you will also be faced with certain duties that are pivotal to your role as a director.

Understanding and appreciating the responsibility of your duties as a company director will be vital to both ensuring the smooth sailing of your startup and that you personally meet the legal standards required of you as a director.

What is the responsibility of a company director?

The director is first and foremost required to act for the benefit of the ‘company as a whole’ when making decisions. The Corporations Act 2001 (Cth) (Act) sets out specific requirements for directors to ensure that the director acts in the lawful interests of the company and its shareholders.

Who is considered a director?

• Director: A director is a person who is validly appointed to that role to carry out the day-to-day management and operation of the company.

• De facto director: A person who is acting in the capacity of a director even if they have not been formally appointed.

• Shadow director: A person who acts under the specific instructions of a director even if they have not been formally appointed.

What are your basic Directors’ Duties?

The directors’ duties are derived from the fiduciary duties owed to the company as a whole, common law duties and statutory duties (much of which overlap with each other).

Under general Australian common law, directors are required to exercise reasonable care, diligence and skill in performing their duties as directors.

Some of your key duties as a director are:

• The duty to act in good faith in the interests of the company as a whole

You are obliged to do what you genuinely believe is in the best interests of the company. This is an objective test so an honest belief is not sufficient to satisfy a failure to act in the best interest of the company.

• The duty to act with care and diligence

You must act with due care and diligence when exercising your powers. You must demonstrate that you understand a range of factors to establish this duty, such as financial affairs, stakeholders, potential risks, and other operative factors.

• The duty to avoid conflicts of interest

You must disclose all material personal interests to other directors of the company.

• The duty to not abuse corporate opportunities

You must not take unfair personal advantage of corporate opportunities of which you are aware due to your position as a director. You may pursue such opportunities if the company has decided to forgo the opportunity in good faith and you meet all the disclosure requirements. You must not influence the company’s decision to forgo the opportunity solely for the purpose of independently seeking the opportunity.

• The duty to not use their position or information for an improper purpose

You must not use information that you have obtained in the course of the role within the company to pursue personal interests or that of someone else or use that information in a way that is detrimental to the company.

• The duty to not engage in insolvent trading

You have a duty to avoid insolvent trading and ensure the company does not incur debts while insolvent or incur debts that would lead to insolvency.

• The duty to keep accurate company books and records

A company is required to keep accurate and up-to-date financial records, and directors must ensure that the company meets this obligation.

Note: Some of these duties live on even after you resign from your role as a director of a company.

What happens if a director breaches their duties?

Breaching your directors’ duties can result in serious repercussions for you as the director and for the company as a whole. A breach of directions duties can result in civil penalties, damages, and in serious cases, criminal charges.

Under the Act, a breach that involves both dishonesty and recklessness can constitute a criminal offence. Of course, these are for the most serious of breaches, but it is certainly worth noting.

Courts may also impose financial penalties including having to pay compensation for civil breaches and enforce other penalties such as disqualification from their position as director.

Should we have directors’ or officers’ insurance?

Often companies will have directors’ and officers’ insurance (D&O insurance) to protect directors in a case where a director may be sued for personal liability. This is potentially something you should consider if you are a director for your startup and you should review the terms of the policies to ensure adequate cover is provided.

If you are a director, it is recommended that you enter into a Director’s Deed of Indemnity, Access and Insurance with the company, that requires the company to indemnify and hold adequate insurance to protect the director. Usually D&O insurance will only cover a director for claims made while they are in office, therefore this is a very important feature to implement for yourself as a director.

What is a Director's ID and do I need one?

Yes! Any person appointed on or after 1 November 2021 must apply within 28 days of appointment.

Appointments on or before 31 October 2021 have until November 2022 to apply.

Check out our guide on applying for a Directors ID!

Final note:

There are multiple duties imposed on directors of a company and it’s important to be aware of your duties when making business decisions or carrying out day-to-day operations. In the case of a company director, ignorance is not a valid excuse.

If you have founded a startup and set yourself up as a director of the company, just remember that with great power comes great… directors’ duties.

Biztech Lawyers

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