Ten tips for directors

We recommend directors ensure they do the following:

1. General duties required of directors

Directors should be familiar with the general duties set out in the Corporations Act, particularly sections 180 to 184. There’s a specific provision allowing directors to rely on information and advice provided by others (section 189) but that reliance must be reasonable. The reasonableness of that reliance will depend on the circumstances of the individual company and the individual director. Directors should make sure the Board minutes adequately set out the information being relied upon and the basis of their decisions.

2. Employment contract

Directors should ensure they have a proper employment contract in place with the company as this will normally set out their duties and obligations, and their entitlements from the company.

3. Deed of indemnity and access

It’s also good practice to have in place a separate deed dealing with the right of indemnity and the right to access the books and records of the company. Those rights are intended to continue in place after the directorship ends, in case the director needs to defend themselves from court proceedings or other claims.

4. Director’s and officer’s insurance policy

Directors should check the director’s and officer’s insurance policy each year to ensure it adequately protects them.

5. Financial reporting

Chapter 2M of the Corporations Act deals specifically with financial reporting. Directors are personally liable for the company’s failure to comply with the financial reporting requirements if they don’t take reasonable steps to get it to comply. All directors (of public companies at least) must have a minimum standard of financial literacy to enable them to sign the director’s declaration required by section 295(4) of the Corporations Act. Before signing off on the financial accounts, directors should pay particular attention to that part of the company relating to their special skills and experience and ask questions about its operation.

6. Investigation of specific issues

Directors should investigate specific issues they are aware of or ought to be aware of. Directors should consider whether there are special circumstances relating to the company which mean they ought to further investigate an aspect of the company’s financial position. In the well-known Centro case, the size and complexity of the corporate structure, and the precarious debt position the companies were in, meant the difference between non-current and current liabilities were significant. The directors were aware of the particular liabilities and the court said they should have considered whether the way those liabilities were represented in the financial accounts was correct.

7. Australian Accounting Standards

Directors must understand the basic concepts in the Australian Accounting Standards in order to comply with the Corporations Act. Sections 296 and 297 of the Corporations Act require directors to state that, in their opinion, the financial accounts and notes are in compliance with those standards and are a true and fair view of the financial position and performance of the company.

8. Specialist advice

Directors should obtain specialist advice where necessary and consider it with a critical mind. However, they should not adopt the specialist’s advice as part of their opinion. Directors should form their own view. If a director doesn’t understand something in the financial accounts or other Board papers, they should ask questions and obtain information so they comprehend the reports presented to them.

9. Business judgment rule

Be conscious of the effects of the business judgment rule, which might provide a defence to an allegation of breach of duty. A court will want to see evidence showing the director believed his or her judgment was in the best interests of the company, and that the belief was supported by a reasoning process sufficient to warrant describing it as a rational belief. This highlights the importance of directors recording the thought process involved in making various decisions and recording it either in the Board papers or the minutes.

10. Develop systems

It’s important to develop systems and appoint people to keep the directors informed about the fundamentals and any special circumstances of the business.

Please contact us if you have any questions in relation to directors’ duties. We can provide specialised legal advice in relation to directors’ duties and corporate governance issues.