Company directors

What you need to know

• Who cannot be a director?
• Notifying director changes
• How many directors should a company have?
• The solvency test
• Case study: directorships

What is a director?

Directors are responsible for managing the company’s day-to-day business and may or may not be shareholders.   Directors owe duties to the company, to its shareholders, and to others dealing with the company.

Directors must act honestly in what they believe to be the best interests of the company and with such care as may reasonably be expected of them in all the circumstances.

Directors must not carry on the business in a manner likely to create a substantial risk of serious loss to the company’s creditors (also called “reckless trading”).

Who cannot be a director?

A person cannot be a director of a company if he/she is:

• under 18 years of age
• an undischarged bankrupt
• prohibited from directing/promoting/participating in the management of a company under any statutory provisions.  This includes (but is not limited to) people who have been convicted of a crime involving dishonesty in the last 5 years or have been prohibited from managing a company by the Registrar of Companies.  It also includes people who have been prohibited from being a director or promoter of, or being concerned or taking part in the management of, an overseas company under an order made, or notice given, under the law of a prescribed overseas jurisdiction [Australia] in accordance with section 151(2)(eb) of the Companies Act 1993;
• subject to a property order made under sections 30 or 31 of the Protection of Personal and Property Rights Act 1988
• not qualified pursuant to the constitution of a particular company.
  

Notifying director changes

Any changes in the director(s) of a company or information relating to the director(s) must be notified to the Registrar.

New director appointments or resignations must be notified within 20 working days of an appointment being made or a resignation taking effect.  The other changes (e.g. new directors address) must be notified within 20 working days of the company first becoming aware of the change or event.  It is an offence under the Companies Act 1993 if these requirements are not complied with (section 159).

A new director must consent to act as a director and certify that he or she is not disqualified from being appointed or holding office as a director.

How many directors should a company have?

A company must have at least one director.  However, when you form a company you can choose to appoint as many directors as you like.  It is worth bearing in mind that people who accept directorships should be aware of the responsibilities that go with directorships.  They need to know in particular what is meant by reckless trading.

The solvency test

The Companies Act requires directors to abide by a two-step test at all times:

1. The company must own more assets than liabilities
2. The company must be able to pay all its accounts as they fall due.
   

Case study: directorships

These comments from an experienced business coach may be of help:

“Company directors are much more accountable now than in the past.  I see many people that make their life partners directors of a company, even when that person will have little to do with the running of the business.  Many people associate some prestige with being a company director, or think that it looks good on a business card! 

However, by inviting a person to become a director of your company you are also potentially exposing him or her to the risks of the business and especially to the responsibilities that go with a directorship. 

I advise the businesses I work with to avoid inviting people to become directors unless they are clearly capable of adding value to the business and know what they are in for.  Similarly, I would never personally accept a directorship of a company unless I felt fully confident in the values and integrity of the other directors."

Further information on director responsibilities