The company you keep: Seven tips to keep you out of trouble as a company director

Earlier this year, the team at LegalVision gave us some helpful tips on the legal basics of starting a new business.

Over the coming weeks, we’ll look at legal matters that can arise for a new business once it’s up and running.

Here, Ursula Hogben, managing director of Hogben Group: Business Law & Consulting, and a member of the LegalVision network, considers what directors of start-ups need to keep in mind when it comes to their duties to the company.

Many founders of start-ups become directors of the company without fully understanding the responsibilities and requirements of the role.

As a director, your primary duty is to the company shareholders. You have duties under common law and the Corporations Act. Penalties for breaching these duties include a fine of up to $200,000 or five years in jail.

This article briefly summarises seven key issues to help you understand your duties and have a successful career as a company director:

1. First, do no harm

You must not use your powers for an improper purpose or to the detriment of the company.

Right: Vote in the interests of the company. Help the company take advantage of commercially favourable opportunities.

Wrong: Vote to give yourself an advantage, or (if you’re in the majority), vote to favour the majority over the minority.

Example: If you’re a director who is remunerated on the basis of annual revenue, it is improper to approve a transaction that influences annual revenue to boost your director’s fee, but is not good for the company in the medium to long term.

2. Act in good faith

You must exercise your powers and duties in good faith in the best interests of the company. You must use business judgement, which includes informing yourself about the topic and making decisions in the best interests of the company.

Failing to inform yourself about the issue being voted on, not giving proper consideration to the company’s interests and acting dishonestly or in bad faith would be grounds for improper behaviour as a director.

Example: Rodney Adler, director of HIH, was found to have breached this duty by lending money from one company to buy shares, without board approval, in another company (ASIC v Adler and Ors).

3. Care and diligence

You must be informed about the financial affairs of the company, including whether it is solvent. You must review and discuss financial information and question whether it really represents the company’s position.

You cannot simply accept the information provided to you by company staff, without question, review or analysis.

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