As a company director, there are very important responsibilities and duties placed on you under the Corporations Act, and enforceable by ASIC should you fail to carry out your duties in the best interests of the company. The same rules apply to a small company with a sole director, as a large corporate organization with a board of directors.
At a basic level, ASIC has summarised some responsibilities and expectations of a director personally.(1) This includes:
- being honest and careful in your dealings at all times
- know what your company is doing
- take extra care if your company is operating a business because you may be handling other people’s money
- make sure that your company can pay its debts on time
- see that your company keeps proper financial records
- act in the company’s best interests, even if this may not be in your own interests, and even though you may have set up the company just for personal or taxation reasons, and
- use any information you get through your position properly and in the best interests of the company. Using that information to gain, directly or indirectly, an advantage for yourself or for any other person, or to harm the company may be a crime or may expose you to other claims. This information need not be confidential; if you use it the wrong way and dishonestly, it may still be a crime.
If you have personal interests that might conflict with your duty as a director, you must generally disclose these at a directors’ meeting. This rule does not apply if you are the only director of a proprietary company.
As a director you must be fully up-to-date on what your company is doing:
- Find out and assess for yourself how any proposed action will affect your company’s business performance, especially if it involves a lot of the company’s money.
- Get outside professional advice when you need more details to make an informed decision.
- Question managers and staff about how the business is going.
- Take an active part in directors’ meetings.(1)
In today’s litigious and regulatory environment, Directors and Officers are held personally liable for the management of the affairs of the company. That is why it is necessary for Directors and Officers to have a very real appreciation of their duties and responsibilities as they take on their onerous role.
Innocent mistakes and/or the potential to be joined by another party in an action against another Director or the Corporation may be potentially expensive.
If you were to inadvertently breach one or more of the legal responsibilities of a director under the Corporations Act and have a claim made against you by a third party such as a government body, customer, supplier or competitor, how will you finance the possible large legal costs to defend yourself and also the damages if awarded against you?
As a company director you are personally responsible for the debts of the company, so your personal assets are exposed to being called on to meet the debts. Would you wish to see your house, car, life savings, investments being liquidated to meet defence costs and damages?
A simple and effective solution to consider in helping protect yourself when acting as a company director , would be a Directors and Officers Liability or Management Liability Policy incorporating Directors and Officers cover.
A Directors and Officers Policy (D&O) is designed to protect the personal assets of Directors and Officers by providing indemnity for any loss arising from a claim as a result of a ‘Wrongful Act’ committed whilst they are carrying out their duties and obligations in their position as a Director or Officer.
For most private companies, there is an advantage in considering a Management Liability policy over a solely Directors & Officers policy, as it provides some additional sections of cover to protect the company directors and the company entity itself. The coverage varies between insurers, but the sections generally include:
- Directors & Officers (alleged or actual wrongful acts by the directors or officers of the company)
- Company/ Entity Cover (alleged or actual wrongful acts by the company/entity)
- Employment Practices (alleged wrongful employment actions brought against the company by employees).
- Statutory Liability (fines & penalties for breach of statute laws)
- Occupational Health & Safety (fines & penalties for breaches of WH&S legislation)
- Crime Cover (theft of money or goods by employees & third parties)
- Taxation Investigation Costs (eg. the professional fees incurred to prepare records for the ATO or other government body who audit your accounting books and tax returns)
Did You Know:
There are more than 700 state and territory laws that impose personal liability on individual directors for corporate mis-conduct.
Some recent statistics have shown;
- There has been a 17% increase in management liability claims over the past 12 months with a continuing trend of increasing severity particularly in D&O and Statutory Liability claims.(2)
- In NSW alone – the NSW Fair Trading prosecuted 410 individuals and businesses for breaches of which 390 were successful. The total number of prosecutions was up 27% from the previous year.(3)
- In excess of 30% of companies with employees between 1 and 500 experienced fraud against their company in 2012.(4)
- In 2013-2014 in excess of 9,000 external administrators were appointed to businesses. There were 9,459 instances of unpaid taxes and charges reported.(5)
- Directors & Officers are seeing increased regulatory activity, including Tax Penalties for Directors, Workplace Health and Safety fines and penalties, Tax Audit.(2)
- Employment Practices is seeing increases in Adverse Action, Mass Action and Bullying claims.(2)
- Increase in Statutory Fines & Penalties for the company following WH&S Investigations and prosecutions.(2)
- Crime (Fidelity) increases from Internet Banking Fraud and Weakness in Authorization Controls.(3)
Directors and Officers legal liability or Management Practices liability insurances are very reasonably priced. We recommend these insurances as an integral part of your assets and liabilities protection. Please contact one of our Advisers on (07) 3217 9015 for an obligation free discussion and quotation.
(2) Chubb Insurance Company of Australia Limited, Claims Trends 2012-2013
(3) Department of Fair Trading. 2012-2013 A Year in Review http:www.fairtrading.nsw.gov.au
(4) KPMG A Survey of Fraud, Bribery and Corruption in Australia and New Zealand 2012
(5) Australian Insolvency Statistics www.asic.gov.au/
This article and any accompanying material does not consider your personal circumstances as it is of a general nature only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances and considering the Product Disclosure Statement.