Director's Duties 

 
Dukesons Business Law - 3 July 2012

There have been several high profile cases over recent months, both here and in Australia, as to whether directors have complied with their duties.  It might be thought that this is of little relevance to most companies, where companies are not listed on stock exchanges or don't issue prospectuses and so on.

To some degree, that is true, it is a timely reminder that directors of all companies have duties under the law and there will be times where one way or another, they are held to account.  For many companies, this could occur where the company has failed, leaving a trail of unpaid creditors, often including the IRD. Where directors have acted imprudently, they could find that they have to dig into their own pockets to pay creditors.

Directors of every company must be active.  A director who is passive runs the risk that they will be liable for the actions of their fellow directors.

Directors must be able to understand financial accounts.

Directors must understand their business.

Directors must exercise independent thought. For example, reports from managers or advice from outsiders must still be considered, questions must be asked when appropriate.

Directors must act in the best interests of their company. That does not necessarily mean in the best interests of the directors.

Directors must act in good faith.

Directors must not cause the company to take on obligations or debts that they know the company will not be able to pay or most likely will not be able to pay.

This is not a complete list of duties. I simply wish to reiterate comments that have been made in many previous updates. The comments will fall on deaf ears in relation to directors who are dishonest or reckless.  However, for the rest, it is important to understand that there can be serious repercussions in not fulfilling directors' duties.

When a company is in difficulty, it is often tempting for the shareholders/directors to put more and more money in, often to no effect - the debts keep mounting.  There are two obvious issues. First, the shareholders/directors are throwing good money after bad. It's not easy to stop trading but it may be necessary.  Secondly, by allowing debts to build up when the company can't pay, the directors may face personal liability.

One final comment. Every shareholder should consider whether to take security from the company for the monies that the company will owe to the shareholders. In my view, this should be done at the outset. Sometimes, the biggest unpaid creditors are the shareholders, who have invested lots of money in the company. It may not always be possible for shareholders to take security.  For example, if there is bank lending, the bank may not be happy for the shareholders to have security but that is a matter that would have to be discussed with the bank. The point is that it would be beneficial to take security if and when possible.

This update provides general information only and does not constitute legal advice.  If you want legal advice on any of these issues, please feel free to contact Steve at Dukesons Business Law.

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