Do you understand your duties as a Director?

Apr 19, 2021

The founders of well-loved, Australian accessories label The Daily Edited are soon to be in Court over an alleged misuse of company funds.

One of two founders of The Daily Edited has been granted leave by the New South Wales Supreme Court to bring an action on behalf of the company against her business partner Alyce Tran, for breach of directors’ duties, after she allegedly applied company funds for her own personal benefit.

As a director of an Australian company, Ms Tran has a duty to act in good faith in the best interest of the company and for a proper purpose. This duty applies to the use of company funds, and directors of Australian companies must always use their power to spend company funds in the interest of the company and not for their own personal purposes.

The dispute at The Daily Edited should be a timely reminder for directors of Australian companies of their legal duties. To assist, we have briefly outlined the wider obligations of company directors below:

Duty to avoid insolvent trading

Directors must ensure that the company for which they are a director does not trade whilst insolvent or whilst that director suspects that the company may be insolvent. Directors will have breached this duty if:

  1. they have failed to prevent the company from incurring a debt;
  2. they are aware that there are reasonable grounds for suspecting that the company is insolvent or would become insolvent by incurring the debt (or a reasonable person in the same circumstances would be so aware); and
  3. the company is insolvent, or becomes insolvent by incurring the debt.

Duty of care and diligence

Directors must, at all times in performing their role as a director, act with a level of care and diligence that a reasonable person would exercise if they were a director of the company. Generally, in order to meet this duty, directors should:

  1. before making any decisions in respect of the company, ensure that they possess an understanding of the business, and that they actively inform themselves about the business and the subject matter of the decision;
  2. gain and maintain an understanding of what external factors (including for example, changes in the economy) might impact the business; and
  3. monitor the business’ affairs and policies and take reasonable steps to guide and monitor business management.

Duty not to misuse information or position

Directors must not use their position, or any information gained by them by virtue of their position, to gain an advantage for themselves or to cause detriment to the company.

Directors will have breached this duty where, for example, a director is aware (because of the information gained by them by virtue of their position as a director) that the company might be insolvent and takes steps to pay some preferred creditors of the company ahead of others.

Duty to avoid conflicts of interest and to disclose material personal interests

Directors must avoid conflicts between the interests of the company for which they are a director and their own personal interests. In practice, it is not unusual for conflicts to arise. Where they do, directors must ensure that they make clear disclosures to the company in relation to those conflicts.

Duty to keep proper accounts and records

Directors must keep themselves informed of the accounting position of the company, as well as the company’s mandatory financial records and reporting obligations. These include that the company must keep written financial records that correctly record and explain its transactions, financial position and performance to enable true and fair financial statements to be prepared and audited.

If you need advice or assistance regarding your obligations as a director, the KKI Commercial Team is here to help.