Help! I’m a Director – How can I avoid breaching my duties? Part 2

“Help! I’m a director, and I’m worried I might breach a duty… How can I avoid this?”

Following on from Part I in this series, if you are interested in some helpful tips on how to avoid breaching your Director’s Duties, read on…

1. Business Judgment Rule

• As we know, directors often make decisions with imperfect information, which can sometimes result in a financial loss for the company.
• Mostly, where a director has made a business decision that turns out to be wrong, they will not ordinarily be in breach of their directors’ duties.
• This is true even if another director would have made a different decision.
• However, sometimes a director makes a poor decision that results in a financial loss for the company and may have breached their duty of care, skill, and diligence.
• To protect yourself in this situation, you should be able to show that you can justify any of the risky decisions you have made on behalf of the company.

Some ways of ensuring this include being able to show that you:

• Researched and asked questions about the decision’s impact beforehand;
• Believed that the decision was in the Company’s best interests; and
• Were not influenced by a personal benefit that they would have received from the decision.

For example, if you, as a director, have decided that the company should acquire a competitor because you believe the acquisition will have a positive return but there are risks associated with the purchase, before making a decision, you should:

• Research the business you seek to acquire, do your due diligence, and create financial models.
• Document why you think the acquisition is a good idea for your company, and
• Avoid acquiring businesses that you have a personal interest in.

2. Steps to avoid trading insolvent

• You should stay informed of the company’s financial position. If the company misses the due date for making a payment, its director must take note and act accordingly.
• You should not accept the role of director in a company unless you have visibility and control over the company’s accounting.
• You should maintain adequate financial records and make sure you personally understand them.
• You should, when in doubt, engage professional accounting and legal advice to help understand or address the company’s financial difficulties.

3. Steps to ensure directors act in the best interests of the company:

• Consider how the decision will impact the company.
• Disclose any personal interest in the decision to its shareholders and other directors.
• Consider whether this will benefit you or someone you are close to personally.
• Notify the other directors if you have a connection with somebody whom the company plans to do business with.

4. Steps to ensure directors keep proper records

• Ensure the Company has appropriate accounting policies and processes, such as an
  expenditure approval policy.
• Understand how the finance team, accountant, or financial advisor prepares and audits the company’s reports.
• Ask questions about the company’s financial position where something is unclear to you (e.g., clarifying why the CFO has not paid a particular invoice, etc).
• Ensure you have a level of financial knowledge to understand the Company’s business and
  transactions.

5. Appoint individuals in your Company who can make day-to-day decisions in place of a director

There is such a provision under Section 126 of the Corporations Act 2001 (Cth) that allows you to empower individuals in your company to be in a position of power to make, vary, ratify, or discharge a contract. This is particularly helpful if the Board of Directors is not readily available to action on day-to-day requests.For example, in a school, the person appointed might be the finance officer or business manager.

To learn more about how you can implement this in your company, contact one of Streeterlaw’s commercial lawyers today.

If you are facing a legal issue as a director of a company or have some follow-up questions about how these methods can assist you in avoiding a breach as a director, contact Streeter Law today (02) 8197 0105

Written by Jamal Bakalian

After studying a double degree in Law and International & Global Studies at Sydney University, Jamal completed her GDLP at the College of Law. She is currently undertaking her Masters of Law (majoring in Commercial Litigation). Jamal has been practicing Law for 5 years. With a passion for resolving disputes, Jamal is a valuable member of the Commercial Litigation team at Streeterlaw.

Call us on 02 8197 0105 to book an appointment with Jamal Bakalian!